Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act.
|
Yes: x No: o
|
|
Indicate
by check mark if the registrant is not required to file reports
pursuant
to Section 13 or Section 15(d) of the Act.
|
Yes: o No: x
|
|
Indicate
by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter
period that the Registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90
days.
|
Yes: x No: o
|
|
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the
best of the Registrant’s knowledge, in definitive proxy information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. x
|
|
Indicate
by check mark whether the registrant is a large accelerated
filer, an
accelerated filer, or a non-accelerated filer. See definition
of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large
accelerated filer: x Accelerated
filer: o Non-accelerated
filer: o
|
|
Indicate
by check mark whether the registrant is a shell company (as
defined in
Rule 12b-2 of the Exchange Act)
|
Yes: o No: x
|
|
The
aggregate market value of the Registrant’s Common Stock held by
nonaffiliates was $1,383,871,739 based on the closing price
of $50.05 per
share on March 31, 2007.
|
|
The
number of shares outstanding of $2.50 par value Common Stock
as of
December 7, 2007 was 27,753,340.
|
|
DOCUMENTS
INCORPORATED BY REFERENCE
|
|
Portions
of the Registrant’s definitive Proxy Statement for the Annual Meeting of
Shareowners (Proxy Statement) to be held January 23, 2008,
to be filed on
or about December 21, 2007, are incorporated by reference into
Part I and Part III of this
report.
|
|
|
1
|
PART I
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
3
|
|
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|
|
3
|
|
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4
|
|
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4
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5
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|
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7
|
|
|
|
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7
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|
|
|
|
8
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|
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|
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9
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|
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|
10
|
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11
|
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|
11
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|
|
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18
|
|
|
|
18
|
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|
19
|
|
|
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21
|
|
|
|
21
|
PART II
|
|
|
|
|
25
|
|
|
|
26
|
|
|
|
27
|
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|
56
|
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|
|
60
|
|
|
|
60
|
|
|
|
62
|
|
|
|
110
|
|
|
|
110
|
|
|
|
112
|
PART III*
|
|
|
|
|
113
|
|
|
|
113
|
|
|
|
113
|
|
|
|
113
|
|
|
|
113
|
PART IV
|
|
|
|
|
114
|
|
115
|
|
117
|
|
118
|
* Portions
of Item 10 and Items 11-14 are Incorporated by Reference from the
Proxy
Statement
INFORMATION
CONCERNING FORWARD-LOOKING
STATEMENTS
Certain
statements contained in this report, including, without limitation, statements
as to management expectations and beliefs presented in Item 1.—Business
Segments, under the captions “Natural Gas Distribution—General;—
Throughput;—Seasonality of Gas Revenues;—Gas Supply;—Regulation and
Rates;—Competition”; “Energy Services”; “Retail and Other”; “Environment,” and
Item 3.—“Legal Proceedings,” and in Part II including “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
Item 7, and “Quantitative and Qualitative Disclosures About Market Risk” in
Item 7A are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
can also be
identified by the use of forward-looking terminology such as “may,” “intend,”
“expect,” “believe” or “continue” or comparable terminology and are made based
upon management’s expectations and beliefs concerning future developments and
their potential effect upon New Jersey Resources Corporation (NJR or
the
Company). There can be no assurance that future developments will be
in
accordance with management’s expectations or that the effect of future
developments on the Company will be those anticipated by
management.
The
Company cautions readers that the assumptions that form the basis for
forward-looking statements regarding customer growth, customer usage,
financial
condition, results of operations, cash flows, capital requirements, market
risk
and other matters for fiscal 2008 and thereafter include many factors
that are
beyond the Company’s ability to control or estimate precisely, such as estimates
of future market conditions, the behavior of other market participants
and
changes in the debt and equity capital markets. The factors that could
cause
actual results to differ materially from NJR’s expectations include, but are not
limited to, those discussed in Risk Factors in Item 1A, as well as the
following:
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, 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
|
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
|
fluctuations
in energy-related commodity prices;
|
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, in particular,
the
base rate case filing;
|
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
Part
I
RESTATEMENT
OF PRIOR YEAR FINANCIAL
STATEMENTS
During
fiscal years 2007, 2006 and 2005 the Company used what is commonly referred
to
as “critical-terms-match” (CTM) criteria to qualify its derivative instruments
used in energy transactions at NJRES and NJR Energy as cash flow hedges
under
the guidance of Statement of Financial Accounting Standards 133, Accounting
for Derivative Instruments and Hedging Activities, as amended and
interpreted, (SFAS 133). During fiscal 2007 management of the Company
became aware that staff of the Securities and Exchange Commission (the
“SEC”),
in a speech, had raised questions that some registrants may have inappropriately
been applying the CTM approach. As a result, the Company commenced a
study to
reanalyze how it documented CTM for its derivative instruments treated
as cash
flow hedges. Based on this analysis, the Company concluded that it had
incorrectly applied cash flow hedge accounting to these derivative
instruments.
The
Company’s conclusion that it had incorrectly applied cash flow hedge accounting
results in recognizing as part of Gas purchases and Operating revenues,
as
appropriate, in the Consolidated Statements of Income the impact of the
change
in fair value of NJRES’ and NJR Energy’s derivative assets and liabilities that
had previously been recorded as part of Accumulated other comprehensive
income
(OCI), which is a component of Common Stock Equity. These changes in
fair value,
referred to as unrealized gains or losses, impact the Consolidated Statements
of
Income only and have no change on the economic value associated with
the
underlying forecasted transactions. There was no impact on reported cash
flow
from operations or liquidity, and this change will not result in any
future
change to cash flow from operations or liquidity.
For
more
information, see Item 7. Management’s Discussion and Analysis,
and Item 8. Financial Statements and Supplementary
Data – As
Restated and Note 2. Restatement of Consolidated Financial
Statements.
New
Jersey Resources Corporation (NJR or the Company) is a New Jersey corporation
formed in 1982 pursuant to a corporate reorganization. The Company is
an energy
services holding company providing retail and wholesale energy services
to
customers in New Jersey and in states from the Gulf Coast to New England
regions
and Canada. The Company is an exempt holding company under section 1263
of the
Energy Policy Act of 2005. NJR’s subsidiaries and businesses
include:
Ÿ
|
New
Jersey Natural Gas (NJNG), a local natural gas distribution
company that
provides regulated retail natural gas service to approximately
478,000
residential and commercial customers in central and northern
New Jersey
and participates in the off-system sales and capacity release
markets.
NJNG is regulated by the New Jersey Board of Public Utilities
(BPU) and
comprises the Company’s Natural Gas Distribution
segment.
|
|
|
Ÿ
|
NJR
Energy Services (NJRES) is the Company’s principal non-utility subsidiary.
It maintains and transacts around a portfolio of physical
assets
consisting of natural gas storage and transportation contracts.
Also,
NJRES provides wholesale energy management services to other
energy
companies. NJRES comprises the Company’s Energy Services
segment.
|
|
|
Ÿ
|
The
Retail and Other operations segment, which includes the following
companies:
|
|
|
|
¡
|
NJR
Retail Holdings (Retail Holdings), an unregulated affiliate
that
consolidates the Company’s unregulated retail operations. Retail Holdings
consists of the following wholly owned subsidiaries:
|
|
|
|
- NJR
Home Services (NJRHS), a company that provides heating ventilation
and
cooling (HVAC) service repair and contract
services.
|
New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
|
|
|
- NJR
Plumbing Services (NJRPS), a company that provides plumbing
services for
our HVAC business.
|
|
|
|
- Commercial
Realty & Resources (CR&R), a company that holds and develops
commercial real estate.
|
|
|
|
¡
|
NJR
Energy Investments (NJREI), formerly known as NJR Capital
Services, formed
as an unregulated affiliate to consolidate the Company’s unregulated
energy-related and real estate investments. NJREI includes
the following
wholly owned subsidiaries:
|
|
|
|
- NJR
Energy Holdings, including NJR Energy, which invests primarily
in
energy-related ventures through its subsidiary, NJNR Pipeline
(Pipeline),
which holds the Company’s 5.53 percent interest in Iroquois Gas and
Transmission System, LP (Iroquois).
|
|
|
|
- NJR
Steckman Ridge Storage Company, which holds the Company’s 50 percent
combined interest in Steckman Ridge GP, LLC and Steckman
Ridge, LP
(collectively, Steckman Ridge), a natural gas storage facility
that is
being developed with a partner in western Pennsylvania.
|
|
|
|
- NJR
Investment, a company that makes and holds certain energy-related
investments, primarily through equity instruments of public
companies.
|
|
|
|
¡
|
NJR
Service (Service), an unregulated company that provides shared
administrative services, including corporate communications,
financial and
administrative, internal audit, legal, human resources and
technology for
NJR and all subsidiaries of
NJR.
|
The
Company operates within three primary business segments: Natural Gas
Distribution, Energy Services and Retail and Other.
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 segment
consists of appliance repair, sales and installation services, natural
gas and
natural gas-related investments, commercial real estate development and
other
corporate activities.
NJNG
provides natural gas service to approximately 478,000 customers. Its
service
territory encompasses 1,436 square miles, covering 104 municipalities
with an
estimated population of 1.3 million people.
NJNG’s
service territory is in New Jersey’s Monmouth and Ocean counties and parts of
Morris and Middlesex counties. It is primarily suburban, with a wide
range of
cultural and recreational activities and highlighted by approximately
100 miles
of New Jersey coastline. It is in close proximity to New York City, Philadelphia
and the metropolitan areas of northern New Jersey and is accessible through
a
network of major roadways and mass transportation. NJNG added 8,421 and
10,159
new customers and added natural gas heat and other services to another
770 and
874 existing customers in fiscal 2007 and 2006, respectively. NJNG’s current
annual growth rate of approximately 1.8 percent is expected to continue
with
projected additions in the range of approximately 16,000 to 19,000 new
customers
over the next two years. This customer growth would represent approximately
$4.0
to $4.3 million in new annual utility gross margin, respectively, as
calculated
under NJNG’s Conservation Incentive Program (CIP) tariff.
New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
In
assessing the potential for future growth in its service area, NJNG uses
information derived from county and municipal planning boards that describes
housing developments in various stages of approval. Furthermore, builders
in
NJNG’s service area are surveyed to determine their development plans for
future
time periods. NJNG has also periodically engaged outside consultants
to assist
in its customer growth projections. In addition to customer growth through
new
construction, NJNG’s business strategy includes aggressively pursuing
conversions from other fuels, such as electricity and oil. It is estimated
that
approximately 35 percent of NJNG’s projected customer growth will consist of
conversions. NJNG will also continue to pursue off-system sales and nonpeak
sales as part of its overall growth strategy.
For
the
fiscal year ended September 30, 2007, operating revenues and throughput by
customer class were as follows:
|
Operating Revenues
|
Throughput
|
|
(Thousands)
|
(Bcf)
|
Residential
|
$ 584,727
|
58
|
%
|
41.8
|
41
|
%
|
Commercial
and other
|
132,113
|
13
|
|
9.4
|
9
|
|
Firm
transportation
|
36,794
|
4
|
|
8.6
|
8
|
|
Total
residential and commercial
|
753,634
|
75
|
|
59.8
|
58
|
|
Interruptible
|
7,141
|
1
|
|
6.5
|
6
|
|
Total
system
|
760,775
|
76
|
|
66.3
|
64
|
|
Incentive
programs
|
244,813
|
24
|
|
36.5
|
36
|
|
Total
|
$1,005,588
|
100
|
%
|
102.8
|
100
|
%
|
In
fiscal
2007, no single customer represented more than 10 percent of total NJNG
operating revenue.
Seasonality
of Gas Revenues
As
a
result of the heat-sensitive nature of NJNG’s residential customer base, therm
sales are significantly affected by weather conditions. Specifically,
customer
demand substantially increases during the winter months when natural
gas is used
for heating purposes. Weather conditions directly influence the volume
of
natural gas delivered. The relative measurement of the impact of weather
is in
degree-days. Degree-day data is used to estimate amounts of energy required
to
maintain comfortable indoor temperature levels based on each day’s average
temperature. A degree-day is the measure of the variation in the weather
based
on the extent to which the average daily temperature falls below 65 degrees
Fahrenheit. Each degree of temperature below 65 degrees Fahrenheit is
counted as
one heating degree-day. Normal heating degree-days are based on a 20-year
average, calculated based upon three reference areas representative of
NJNG’s
service territory.
For
reporting periods through September 30, 2006, the impact of weather on the
level and timing of NJNG’s revenues, gross margin and cash flows had been
affected by a weather-normalization clause (WNC), which provided for
a revenue
adjustment if the weather varied by more than one-half of 1 percent from
normal.
However, the WNC did not capture declines in customer usage related to
customer
conservation measures. The accumulated adjustment from one heating season
(i.e.,
October-May) was billed or credited to customers in subsequent
periods.
New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
Effective
October 1, 2006 the BPU authorized the CIP pilot program, which decoupled
the
link between customer usage and NJNG’s utility gross margin, allowing NJNG to
encourage its customers to conserve energy. During the three-year term
of the
pilot, the existing WNC is suspended and replaced with the CIP tracking
mechanism, which addresses utility gross margin variations related to
both
weather and customer usage. Recovery of such utility gross margin is
subject to
additional conditions including an earnings test and an evaluation of
Basic Gas
Supply Service-related savings achieved. Under the CIP pilot program,
if NJNG
does not file for a rate review with the BPU within two years, the return
on
equity for the earnings test will decline from 10.5 percent to 10.25
percent.
Based
upon increases in NJNG’s operating, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base rates for
delivery
service by approximately $58.4 million, which includes a return on equity
component of 11.375 percent. This petition is consistent with NJNG’s objectives
of providing safe and reliable service to its customers and earning a
market-based return on its regulated investments. Based upon statutory
time
frames and potential regulatory lag, it is unlikely that any modification
to its
delivery rates would become effective during fiscal 2008.
For
additional information regarding the CIP, see Management’s Discussion and
Analysis—Natural Gas Distribution Operations and Note 3.
Regulation in the accompanying Consolidated Financial
Statements.
Firm
Natural Gas Supplies
NJNG’s
gas supply portfolio consists of long-term (over seven months), winter-term
(for
the five winter months) and short-term contracts. In fiscal 2007, NJNG
purchased
gas from 92 suppliers under contracts ranging from one day to four years.
In
fiscal 2007, NJNG purchased approximately 14.6 percent of its natural
gas from
Southwest Energy, L.P. No other supplier provided more than 7 percent
of NJNG’s
natural gas supplies. NJNG believes the loss of any one or all of these
suppliers would not have a material adverse impact on its results of
operations,
financial position or cash flows. NJNG believes that its supply strategy
should
adequately meet its expected firm load over the next several years.
Firm
Transportation and Storage Capacity
In
order
to take delivery of firm natural gas supplies, which ensures the ability
to
reliably service its customers, NJNG maintains agreements for firm
transportation and storage capacity with several interstate pipeline
companies.
NJNG receives natural gas at eight city gate stations located in Middlesex,
Morris and Passaic counties in New Jersey.
The
pipeline companies that provide firm transportation service to NJNG’s city gate
stations, the maximum daily deliverability of that capacity in dekatherms
(dths)
and the contract expiration dates are as follows:
Pipeline
|
Maximum daily
deliverability
(dths)
|
Expiration
|
Texas
Eastern Transmission, L.P.
|
370,738
|
|
Various
dates between 2008 and 2023
|
Iroquois
Gas Transmission System, L.P.
|
20,468
|
|
2012
|
Tennessee
Gas Pipeline Co.
|
35,894
|
|
Various
dates between 2008 and 2013
|
Transcontinental
Gas Pipe Line Corp.
|
22,531
|
|
Various
dates between 2008 and 2014
|
Columbia
Gas Transmission Corp.
|
10,000
|
|
2009
|
|
459,631
|
|
|
New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
The
pipeline companies that provide firm contract transportation service
to NJNG and
supply the above pipelines are ANR Pipeline Company, Tennessee Gas Pipeline,
Dominion Transmission Corporation and Columbia Gulf Transmission
Company.
In
addition, NJNG has storage and related transportation contracts that
provide
additional maximum daily deliverability to NJNG’s city gate stations of 102,941
dths from storage fields in its Northeast market area. The storage suppliers,
the maximum daily deliverability of that storage capacity and the contract
expiration dates are as follows:
Pipeline
|
Maximum daily
deliverability
(dths)
|
Expiration
|
Texas
Eastern Transmission, L.P.
|
94,557
|
|
Various
dates between 2008 and 2013
|
Transcontinental
Gas Pipe Line Corp.
|
8,384
|
|
2009
|
|
102,941
|
|
|
NJNG
also
has upstream storage contracts, maximum daily deliverability and contract
expiration dates as follows:
Company
|
Maximum daily
deliverability
(dths)
|
Expiration
|
ANR
Pipeline Company
|
40,000
|
|
2010
|
Dominion
Transmission Corporation
|
103,714
|
|
Various
dates between 2011 and 2012
|
Central
NY Oil & Gas (Stagecoach)
|
47,065
|
|
Various
dates between 2008 and 2011
|
|
190,779
|
|
|
ANR,
Dominion and Stagecoach utilize NJNG’s transportation contracts to transport gas
from their storage fields to NJNG’s city gate.
Peaking
Supply
To
manage
its winter peak day demand NJNG maintains two liquefied natural gas (LNG)
facilities with a combined deliverability of 150,000 dths per day, which
represents approximately 19 percent of its estimated peak day sendout.
See
Item 2. Properties–NJNG for additional information
regarding the LNG storage facilities.
Basic
Gas Supply Service
Wholesale
natural gas prices are, by their very nature, volatile. NJNG has mitigated
the
impact of volatile price changes on customers through the use of financial
derivative instruments, which are part of its financial risk management
program,
its storage incentive program and its Basic Gas Supply Service (BGSS)
clause.
BGSS is a BPU-approved clause designed to allow for the recovery of natural
gas
commodity costs. The clause also requires all New Jersey natural gas
utilities
to make an annual filing by each June 1 for review of BGSS rates and to
request a potential rate change to be effective the following October 1.
The BGSS also is designed to allow each natural gas utility to provisionally
increase residential and small commercial customer BGSS rates up to 5
percent on
December 1 and February 1 on a self-implementing basis, after proper
notice and BPU action on the June filing. Such increases are subject to
subsequent BPU review and final approval. Decreases in the BGSS tariff
can be
implemented upon five days notice to the BPU.
New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
On
June
1, 2007, NJNG filed its annual review and revision of its BGSS for fiscal
2008
proposing a self-implementing decrease, which would offset increases
related to
the Societal Benefits Clause (SBC) and the Weather Normalization Clause
(WNC).
On October 3, 2007, the BPU approved changes to the Company’s BGSS on a
provisional basis. These rate changes, as well as other regulatory actions,
are
discussed further in Note 3. Regulation in the
accompanying Consolidated Financial Statements.
Future
Natural Gas Supplies
NJNG
expects to meet the natural gas requirements for existing and projected
firm
customers into the foreseeable future. If NJNG’s long-term natural gas
requirements change, NJNG would renegotiate and restructure its contract
portfolio components to better match the changing needs of its
customers.
State
NJNG
is
subject to the jurisdiction of the BPU with respect to a wide range of
matters
such as rates, the issuance of securities, the adequacy of service, the
manner
of keeping its accounts and records, the sufficiency of natural gas supply,
pipeline safety, compliance with affiliate standards and the sale or
encumbrance
of its properties.
See
Note 3. Regulation in the accompanying Consolidated Financial
Statements for additional information regarding NJNG’s rate
proceedings.
Federal
The
Federal Energy Regulatory Commission (FERC) regulates rates charged by
interstate pipeline companies for the transportation and storage of natural
gas.
This affects NJNG’s agreements for the purchase of such services with several
interstate pipeline companies. Any costs associated with these services
are
recoverable through the BGSS.
Although
its franchises are nonexclusive, NJNG is not currently subject to competition
from other natural gas distribution utilities with regard to the transportation
of natural gas in its service territory. Due to significant distances
between
NJNG’s current large industrial customers and the nearest interstate natural
gas
pipelines, as well as the availability of its transportation tariff,
NJNG
currently does not believe it has significant exposure to the risk that
its
distribution system will be bypassed. Competition does exist from suppliers
of
oil, coal, electricity and propane. At the present time, however, natural
gas
enjoys an advantage over alternate fuels in over 95 percent of new construction
due to its efficiency and reliability. As deregulation of the natural
gas
industry continues, prices will be determined by market supply and demand
but,
although NJNG believes natural gas will remain competitive with alternate
fuels,
no assurance can be given in this regard.
The
BPU,
within the framework of the Electric Discount and Energy Competition
Act
(EDECA), approved a stipulation among various parties to fully open NJNG’s
residential markets to competition, restructure its rates to segregate
its BGSS
and delivery (i.e., transportation) prices and expand an incentive for
residential and small commercial customers to switch to transportation
service.
On September 30, 2007, NJNG had 9,229 residential and 4,875 commercial and
industrial customers utilizing the transportation service. Based on its
current
and projected level of transportation customers, NJNG expects to use
its
existing firm transportation and storage capacity to fully meet its firm
sales
contract obligations.
New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
Under
an
order issued in January 2002 from the BPU, BGSS can be provided by
suppliers other than the state’s natural gas utilities. BGSS must be provided by
the state’s natural gas utilities in the absence of any third-party
suppliers.
NJRES
provides unregulated, wholesale energy services, including base load
natural
gas, peaking and balancing services, utilizing physical assets it controls
through natural gas pipeline and storage contracts, as well as asset
management
services. NJRES’ business footprint extends to customers in states from the Gulf
Coast and Mid-Continent regions to the New England region and
Canada.
NJRES
has
built a portfolio of customers including local distribution companies,
industrial companies, electric generators and retail aggregators. Sales
to these
customers have allowed NJRES to leverage its transportation and storage
capacity
and manage sales to these customers in an aggregate fashion. This allows
NJRES
to extract additional value from its portfolio of storage and transportation
contracts.
NJRES
focuses on creating value from underutilized natural gas assets, which
are
typically amassed through contractual rights to natural gas transportation
and
storage capacity. NJRES has developed a portfolio of storage and transportation
capacity in the Northeast, Gulf Coast, Mid-Continent, and Appalachian
regions of
the United States and eastern Canada. These assets become more valuable
as their
underlying prices change between these geographic locations and over
time. 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 for serving
its
various commitments. This enables NJRES to capture geographic pricing
differences across these various regions as the price for delivered natural
gas
changes with respect to market conditions.
NJRES
participates in natural gas storage transactions where it seeks to identify
pricing differences that occur over time, as prices for future delivery
periods
at many locations are readily available. For example, NJRES may generate
gross
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 high current or future price, all within the constraints of its
contracts
and credit policies. Through the use of transportation and storage services,
NJRES is able to generate gross margin through pricing differences that
occur
over the duration of time the assets are held.
NJRES’
portfolio management customers include nonaffiliated utilities and electric
generation plants. Services provided by NJRES include optimization of
underutilized natural gas assets and basic gas supply functions.
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 gross margin. In evaluating
these
transactions NJRES will compare the fixed fee it will pay and the resulting
spread it can generate to 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 gross margin, NJRES will fix the gross margin by economically
hedging the transaction with natural gas futures.
New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
Generally,
NJRES’ financial futures and swaps contracts (derivative instruments) are
accounted for at fair value while its commodity contracts for future
delivery
meet the “normal purchase normal sale” scope exception of SFAS 133. Under
the normal purchase normal sale scope exception of SFAS 133 the commodity
contract is accounted for under accrual accounting. For each derivative
instrument accounted for at fair value, which represent economic hedges
designed
to protect the values of forecasted natural gas purchases, sales and
transportation, the change in fair value is recognized in the income
statement
during the period the derivative instrument is economically hedging the
underlying transaction.
Accounting
for derivative instruments at fair value may result in significant movements
between reporting periods depending on the underlying change in price. As
a result, the Company may be subject to extreme volatility in earnings,
while
the underlying economic impacts of the transaction will remain the same
when the
derivative instruments are settled and the forecasted transactions occur.
To
better understand the NJRES business, the Company believes that “net financial
earnings” are a better indicator of the results of NJRES, as this removes any
potential volatility associated with changes in fair value, commonly
referred to
as unrealized gains and losses, until the forecasted transaction is settled.
Net
financial earnings are not based on generally accepted accounting principles
of
the United States (GAAP). See Item 7.Management’s Discussion and
Analysis for a definition of net financial earnings and a reconciliation
to
the appropriate GAAP financial measure.
In
fiscal
2007, NJRES had one customer, Washington Gas Light Company, 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.
Retail
and Other operations consist primarily of the following unregulated
affiliates:
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NJRHS,
which provides service, sales and installation of
appliances;
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NJR
Energy, an investor in energy-related ventures through its
subsidiary,
Pipeline, which consists primarily of its 5.53 percent equity
investment
in Iroquois, which is a 412-mile natural gas pipeline from
the New
York-Canadian border to Long Island, New York; NJR Investment,
which makes
certain energy-related equity investments;
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NJR
Steckman Ridge Storage Company, which holds the Company’s 50 percent
equity method investment in Steckman Ridge. Steckman Ridge
is a
partnership, jointly owned and controlled by subsidiaries
of the Company
and subsidiaries of Spectra Energy Corporation, that will
build, own and
operate an anticipated 20 Bcf natural gas storage facility
in western
Pennsylvania. Steckman Ridge is currently under construction
and
commercial operation is expected during fiscal 2009. The
total project
cost is estimated at approximately $250 million, with the
Company
committed to fund $125 million. As of September 30, 2007,
the investment
in Steckman Ridge, which includes capitalized carrying costs,
is
approximately $56.7 million. NJR anticipates that Steckman
Ridge will be
able to obtain financing for construction and development
on a
non-recourse basis, thereby reducing the total funding commitment
required
by NJR; however, there can be no assurance that this will
occur;
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CR&R,
which holds and develops commercial real estate. As of September 30,
2007, CR&R’s real estate portfolio consisted of 83 acres of
undeveloped land in Monmouth and Atlantic counties and a
56,400-square-foot office building on 5 acres of developed
land in
Monmouth County with a total net book value of $17.2 million.
In fiscal
2005, CR&R changed its strategy with regard to its 52 acres of
undeveloped land in Atlantic
County.
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New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
|
In
conjunction with this change in strategy, CR&R estimated its fair
value and compared that to its book value. Accordingly, CR&R
recognized a pre-tax impairment charge of $3.9 million in fiscal
2005. See
Note 1. Summary Of Significant Accounting Policies–Impairment of
Long-Lived Assets in the accompanying Consolidated Financial
Statements for a discussion of this change in strategy with
regard to the
Atlantic County land. The net book value of this undeveloped
land is $2.1
million as of September 30, 2007. CR&R’s 31 acres of undeveloped land
in Monmouth County, which has a net book value of $6.1 million
as of
September 30, 2007, will be developed based on market conditions.
The
specific time frame for development is currently
unknown.
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In
November 2006, CR&R sold approximately 15 acres of land for
approximately $1.8 million, which resulted in pre-tax gain on sale of
$300,000. As the sale included a lease-back provision with
NJRHS of
certain portions of buildings to be constructed on the acreage,
CR&R
will recognize the pre-tax gain over the 10-year term of the
lease
beginning in fiscal 2008; and
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Service,
which provides shared administrative services to the Company
and all its
subsidiaries.
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See
Item 2. Properties–Retail and Other for additional information
regarding CR&R’s remaining real estate assets.
The
Company and its subsidiaries are subject to legislation and regulation
by
federal, state and local authorities with respect to environmental matters.
The
Company believes that it is in compliance in all material respects with
all
applicable environmental laws and regulations.
NJNG
is
responsible for the environmental remediation of three manufactured gas
plant
(MGP) sites, which contain contaminated residues from former gas manufacturing
operations that ceased at these sites by the mid-1950s and in some cases,
had
been discontinued many years earlier. In September 2007, NJNG updated an
environmental review of the MGP sites, including a review of potential
liability
related to the investigation and remedial action of these sites. Based
on this
review, NJNG estimated that the total future expenditures to remediate
and
monitor the three MGP sites for which it is responsible will range from
$105.3
million to $164.8 million.
NJNG’s
estimate of these liabilities is based upon known facts, existing technology
and
enacted laws and regulations in place when the review was completed.
Where
available information is sufficient to estimate the amount of the liability,
it
is NJNG’s policy to accrue the full amount of such estimate. Where the
information is sufficient only to establish a range of possible liability,
and
no point within the range is more likely than the other, it is NJNG’s policy to
accrue the lower end of the range. As a result, NJNG has recorded an
MGP
remediation liability and a corresponding Regulatory asset of $105.3
million on
the Consolidated Balance Sheet; however, actual costs may differ from
these
estimates. NJNG will continue to seek recovery of these costs through
its
remediation rider. See Item 3. Legal Proceedings and Note 13.
Commitments and Contingent Liabilities in the accompanying Consolidated
Financial Statements for information with respect to environmental matters
and material expenditures for the remediation of the MGP sites.
CR&R
is the owner of certain undeveloped land in Monmouth and Atlantic counties,
New
Jersey, with a net book value at September 30, 2007, of $8.2 million. These
lands are regulated by the provisions of the Freshwater Wetlands Protection
Act
(Wetlands Act), which restricts building in areas defined as “freshwater
wetlands” and their transition areas. Based upon a third-party environmental
engineer’s delineation of the wetland and transition areas in accordance
with the provisions of the Wetlands Act, CR&R will file for a Letter of
Interpretation from the New Jersey Department of Environmental Protection
(NJDEP) as parcels of land are selected for development. If the NJDEP
reduces the amount of developable yield from CR&R’s current estimates, a
write-down of the carrying value of the undeveloped land may be
required.
New
Jersey Resources
Part
I
ITEM
1. BUSINESS (Continued)
Taking
into consideration the environmental engineer’s revised estimated developable
yield for undeveloped acreage, the Company does not believe that a write-down
of
the carrying value of the Monmouth and Atlantic counties land was necessary
as
of September 30, 2007.
Although
the Company cannot estimate with certainty future costs of environmental
compliance, which, among other factors, are subject to changes in technology
and
governmental regulations, the Company does not presently anticipate any
additional significant future expenditure for compliance with existing
environmental laws and regulations, other than for the remediation of
the MGP
sites discussed in Note 13. Commitments and Contingent Liabilities in
the accompanying Consolidated Financial Statements, which would have
a material
effect upon the capital expenditures, results of operations or competitive
position of the Company or its subsidiaries.
For
the
fiscal years ended September 30, 2007 and 2006, respectively, the Company
and its subsidiaries had 808 and 766 employees. Of those employees, NJNG
had 388
and 370 union employees and NJRHS had 90 and 84 union employees, respectively.
In 2003, NJNG and NJRHS reached collective bargaining agreements with
local 1820
of the International Brotherhood of Electrical Workers (IBEW), AFL-CIO
expiring
in December 2008 and April 2007, respectively. In April 2007, the NJRHS
Agreement was extended until April 2010. The labor agreements cover wage
increases and other benefits during the term of the agreements. The Company
considers its relationship with employees, including those covered by
collective
bargaining agreements, to be good.
When
considering any investment in our securities, investors should consider
the
following information, as well as the information contained under the
caption
“Forward Looking Statements,” in analyzing our present and future business
performance. While this list is not exhaustive, our management also places
no
priority or likelihood based on their description or order of
presentation.
Financial
Risks
Ability
to access the financial markets
NJR
relies on access to both short-term and long-term credit as a significant
source
of liquidity for capital requirements not satisfied by its cash flow
from
operations. Any deterioration in NJR’s financial condition could hamper its
ability to access the credit markets or otherwise obtain debt financing.
Because
certain state regulatory approvals may be necessary in order for NJNG
to incur
debt, NJNG may not be able to access credit markets on a timely
basis.
New
Jersey Resources
Part
I
ITEM
1A. RISK FACTORS (Continued)
External
events could also increase the cost of borrowing or adversely affect
the ability
to access the financial markets. Such external events could include the
following:
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economic
weakness in the United States or in the regions where NJR
operates;
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financial
difficulties of unrelated energy companies;
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capital
market conditions generally;
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market
prices for natural gas;
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the
overall health of the natural gas utility industry; and
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fluctuations
in interest rates.
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Restrictions
on the ability to access financial markets could affect management’s ability to
execute NJR’s, NJRES’ and NJNG’s business plan. An inability to access capital
may limit the ability to pursue improvements or acquisitions that NJR,
or its
subsidiaries, may otherwise rely on for future growth.
Credit
rating downgrades could increase financing costs, limit access to the
financial
markets and negatively affect NJNG
The
debt
of NJNG is currently rated by the rating agencies Moody’s Investor
Services, Inc. and Standard & Poor’s as investment grade. If such
ratings are downgraded below investment grade, borrowing costs could
increase,
as will the costs of maintaining certain contractual relationships.
Lower
credit ratings could also adversely affect relationships with state regulators,
who may be unwilling to allow NJNG to pass along increased costs to its
natural
gas customers.
NJRES’
ability to conduct its business is dependent upon the creditworthiness
of
NJR
If
the
ability of NJR to issue parental guarantees, or if NJR suffers a reduction
in
its credit and borrowing capacity, the business prospects of NJRES, which
rely
on the creditworthiness of NJR, would be adversely affected. NJRES would
possibly be required to comply with various margin or other credit enhancement
obligations under its trading and marketing contracts, and it may be
unable to
continue to trade or be able to do so only on less favorable terms with
certain
counterparties.
Debt
covenants may impact financial condition if triggered
NJR
and
NJNG’s long-term debt obligations contain financial covenants related to
debt-to-capital ratios and interest coverage ratios. The failure to comply
with
any of these covenants could result in an event of default which, if
not cured
or waived, could result in the acceleration of outstanding debt obligations
or
the inability to borrow under certain credit agreements. Any such acceleration
would cause a material adverse change in NJR or NJNG’s financial
condition.
New
Jersey Resources
Part
I
ITEM
1A. RISK FACTORS (Continued)
An
effective system of internal control is not maintained, leading to material
weaknesses in internal control over financial reporting
Section 404
of the Sarbanes-Oxley Act of 2002 requires NJR’s management to make an
assessment of the design and effectiveness of internal controls. It also
requires NJR’s independent registered public accounting firm to audit
the design and effectiveness of these controls and to form an opinion
on both
management’s assessment and the effectiveness of these controls. Management’s
ongoing assessment of these controls may identify areas of weakness in
control
design or effectiveness, which may lead to the conclusion that a material
weakness in internal control exists. NJR’s independent public registered
accounting firm may also identify control deficiencies which may lead
to
identification of a material weakness in internal control. As of September
30,
2007, management concluded that NJR had a material weakness in internal
control
over financial reporting and that, as a result, its internal control over
financial reporting was not effective.
Because
NJR concluded that its internal control over financial reporting is not
effective and because its independent registered public accountants issued
an
adverse opinion on the effectiveness of its internal controls over financial
reporting, and to the extent NJR identify future weaknesses or
deficiencies, NJR may not be able to produce reliable financial statements,
which could result in a loss of investor confidence and a decline in
its stock
value. In addition, should NJR not be able to produce reliable financial
statements, it could limit NJR’s and NJNG’s ability to access the capital
markets.
As
described in Item 9A of this report, NJR is committed to the remediation of
the material weakness referred to above as well as the continued improvement
of its overall system of internal control over financial reporting.
Management is in the process of actively addressing and remediating this
material weakness in internal control over financial reporting, but there
can be
no assurance that its corrections will be sufficient or fully effective,
or
that it will not discover additional material weaknesses in its
internal controls and procedures in the future. While NJR’s system of internal
controls is reviewed periodically, there exist inherent limitations to
control
effectiveness.
Hedging
activities of the Company designed to protect against commodity and financial
market risks may cause fluctuations in reported financial results and
NJR’s
stock price could be adversely affected as a result.
Although
the Company uses derivatives, including futures, forwards, options and
swaps, to
manage commodity and financial market risks, the timing of the recognition
of
gains or losses on these economic hedges in accordance with GAAP does
not always
match up with the gains or losses on the items being hedged. The difference
in
accounting can result in volatility in reported results, even though
the
expected profit margin is essentially unchanged from the dates the transactions
were consummated.
Operational
Risks
NJNG’s
operations are subject to certain operating risks
NJNG’s
operations are subject to all operating hazards and risks incidental
to
handling, storing, transporting and providing customers with natural
gas,
including explosions, pollution, release of toxic substances, fires,
storms and
other adverse weather conditions and hazards, each of which could result
in
damage to or destruction of facilities or damage to persons and property.
If any
of these events were to occur, NJR could suffer substantial losses. Moreover,
as
a result, NJR has been, and likely will be, a defendant in legal proceedings
and
litigation arising in the ordinary course of business. Although NJR maintains
insurance coverage, insurance may not be sufficient to cover all material
expenses related to these risks.
New
Jersey Resources
Part
I
ITEM
1A. RISK FACTORS (Continued)
Major
changes in the supply and price of natural gas may affect financial
results
While
NJNG expects to provide for the demand of its customers for the foreseeable
future, factors impacting suppliers and other third parties, including
increased
competition, further deregulation, transportation costs, transportation
availability and drilling for new natural gas resources, may impact the
supply
and price of natural gas. NJNG actively hedges against the fluctuation
in the
price of natural gas by entering into forward and financial contracts
with third
parties. Should these third parties fail to perform, it may result in
a loss
that could have a material impact on the financial position, cash flows
and
statement of operations of NJR.
NJNG
and NJRES rely on third parties to supply natural gas
NJNG’s
ability to provide natural gas for its present and projected sales will
depend
upon its suppliers’ ability to obtain and deliver additional supplies of natural
gas, as well as NJNG’s ability to acquire supplies directly from new sources.
Factors beyond the control of NJNG, its suppliers and the independent
suppliers
who have obligations to provide natural gas to certain NJNG customers,
may
affect NJNG’s ability to deliver such supplies. These factors include other
parties’ control over the drilling of new wells and the facilities to transport
natural gas to NJNG’s city gate stations, competition for the acquisition of
natural gas, priority allocations, impact of severe weather disruptions
to
natural gas supplies, the regulatory and pricing policies of federal
and state
regulatory agencies, as well as the availability of Canadian reserves
for export
to the United States. Energy deregulation legislation may increase competition
among natural gas utilities and impact the quantities of natural gas
requirements needed for sales service.
NJRES
also relies on a firm supply source to meet its energy management obligations
for its customers. Should NJRES’ suppliers fail to deliver supplies of natural
gas, there could be a material impact on its cash flows and statement
of
operations.
The
use of derivative contracts in the normal course of NJRES’ business could result
in financial losses that negatively impact results of
operations
NJRES
uses derivatives, including futures, forwards, options and swaps, to
manage
commodity and financial market risks. NJRES could recognize financial
losses on
these contracts as a result of volatility in the market values of the
underlying
commodities or if a counterparty fails to perform under a contract. In
the
absence of actively quoted market prices and pricing information from
external
sources, the valuation of these financial instruments can involve management’s
judgment or use of estimates. As a result, changes in the underlying
assumptions
or use of alternative valuation methods could adversely affect the value
of the
reported fair value of these contracts.
Inflation
and increased natural gas costs could adversely impact NJNG’s customer base and
customer collections and increase its level of indebtedness
Inflation
has caused increases in certain operating and capital costs. NJR has
a process
in place to continually review the adequacy of NJNG’s rates in relation to the
increasing cost of providing service and the inherent regulatory lag
in
adjusting those rates. The ability to control expenses is an important
factor
that will influence future results.
Rapid
increases in the price of purchased gas may cause NJNG to experience
a
significant increase in short-term debt because it must pay suppliers
for gas
when it is purchased, which can be significantly in advance of when these
costs
may be recovered through the collection of monthly customer bills for
gas
delivered. Increases in purchased gas costs also slow collection efforts
as
customers are more likely to delay the payment of their gas bills, leading
to
higher-than-normal accounts receivable. This situation also results in
higher
short-term debt levels and increased bad debt expense.
New
Jersey Resources
Part
I
ITEM
1A. RISK FACTORS (Continued)
Changes
in weather conditions may affect earnings and cash flows
Weather
conditions and other natural phenomena can have an adverse impact on
earnings
and cash flows. Severe weather conditions can impact suppliers and the
pipelines
that deliver gas to NJNG’s distribution system. Extended mild weather, during
either the winter period or summer period, can have a significant impact
on
demand for and the cost of natural gas. While NJR believes the CIP will
mitigate
the impact of weather on its gross margin, unusual weather conditions
may still
have an impact on its earnings. The CIP will not mitigate the impact
of unusual
weather conditions on its cash flows.
Changes
in customer growth may affect earnings and cash flows
NJNG’s
ability to increase its utility firm gross margin is dependent upon the
new
construction housing market, as well as the additional conversion of
customers
to natural gas from other fuel sources. Should there be a slowdown in
these
markets there could be an adverse impact on NJNG’s utility firm gross margin,
earnings and cash flows.
The
cost of providing pension and postemployment health care benefits to
eligible
former employees is subject to changes in pension fund values and changing
demographics and may have a material adverse effect on NJR’s financial
results
NJR
has
two defined benefit pension plans and two postemployment health care
plans
(OPEB) for the benefit of substantially all full-time employees and qualified
retirees. The cost of providing these benefits to eligible current and
former
employees is subject to changes in the market value of the pension and
OPEB fund
assets and changing demographics, including longer life expectancy of
beneficiaries, an expected increase in the number of eligible former
employees
over the next five years and increases in health care costs.
Any
sustained declines in equity markets and reductions in bond yields may
have a
material adverse effect on the value of NJR’s pension and OPEB funds. In these
circumstances, NJR may be required to recognize an increased pension
and OPEB
expense or a charge to the statement of operations to the extent that
the
pension and OPEB fund values are less than the total anticipated liability
under
the plans.
NJRES’
earnings and cash flows are dependent upon an asset optimization strategy
of its
physical assets with financial transactions
NJRES’
earnings and cash flows are based, in part, on its ability to optimize
its
portfolio of contractual-based natural gas storage and pipeline assets.
The
optimization strategy involves utilizing its physical assets to take
advantage
of differences in natural gas prices between geographic locations and/or
time
periods. Any change among various pricing points could affect these
differentials, which in turn could affect NJRES’ earnings and cash
flows.
NJRES
is exposed to market risk and may incur losses in wholesale
services
The
commodity, storage and transportation portfolios at NJRES consist of
contracts
to buy and sell natural gas commodities, which are settled by physical
delivery.
New
Jersey Resources
Part
I
ITEM
1A. RISK FACTORS (Continued)
If
the
values of these contracts change in a direction or manner that NJRES
does not
anticipate, the value of NJRES’ portfolio could be negatively impacted. NJRES
employs a value at risk (VaR) model over these portfolios. VaR is defined
as the
largest likely potential loss in portfolio value and is usually measured
in
terms of time to unwind or settle contractual positions. NJRES’ portfolio of
positions as of September 30, 2007, had a VaR of $1.3 million based on a 95
percent confidence interval and employing a 1-day holding period, and
$5.8
million, based on a 99 percent confidence interval and employing a 10-day
holding period.
Accounting
results may not be indicative of the risks NJRES is taking or the expected
economic results due to changes in accounting for energy
services
Although
NJRES enters into various contracts to economically hedge the value of
its
energy assets and operations, there can be no assurance that the hedge
is
operating effectively as intended and will continue to do so. Any uncontemplated
change in the underlying item being hedged to that of a different or
unforecasted position could result in a substantial negative impact to
NJRES’
and NJR’s, financial condition, statement of operations or statement of cash
flows.
NJNG
and NJRES rely on storage and transportation assets that they do not
own or
control to deliver natural gas
NJNG
and
NJRES depend on natural gas pipelines and other storage and transportation
facilities owned and operated by third parties to deliver natural gas
to
wholesale markets and to provide retail energy services to customers.
If
transportation is disrupted, or if storage capacity is inadequate, including
for
reasons of force majeure, the ability of NJNG and NJRES to sell and deliver
their products and services may be hindered. As a result, they may be
responsible for damages incurred by their customers, such as the additional
cost
of acquiring alternative supply at then-current market rates.
Investing
through partnerships or joint ventures decreases NJR’s ability to manage
risk
NJR
and
its subsidiaries have utilized joint ventures for certain non-regulated
energy
investments, including Steckman Ridge and Iroquois, and although they
currently
have no specific plans to do so, NJR and its subsidiaries may acquire
interests
in other joint ventures in the future. In these joint ventures, NJR and
its
subsidiaries may not have the right or power to direct the management
and
policies of the joint ventures and other participants may take action
contrary
to their instructions or requests and against their policies and objectives.
In
addition, the other participants may become bankrupt or have economic
or other
business interests or goals that are inconsistent with those of NJR and
its
subsidiaries. If a joint venture participant acts contrary to the interests
of
NJR or its subsidiaries, it could harm NJR’s financial condition, results of
operations or cash flows.
Regulatory
and Legal Risks
NJR
is subject to governmental regulation. Compliance with current and future
regulatory requirements and procurement of necessary approvals, permits
and
certificates may result in substantial costs to NJR
NJR
and
its subsidiaries are subject to substantial regulation from federal,
state and
local regulatory authorities. They are required to comply with numerous
laws and
regulations and to obtain numerous authorizations, permits, approvals
and
certificates from governmental agencies. These agencies regulate various
aspects
of their business, including customer rates, services and natural gas
pipeline
operations.
New
Jersey Resources
Part
I
ITEM
1A. RISK FACTORS (Continued)
NJR
and
its subsidiaries cannot predict the impact of any future revisions or
changes in
interpretations of existing regulations or the adoption of new laws and
regulations applicable to them. Changes in regulations or the imposition
of
additional regulations could influence their operating environment and
may
result in substantial costs to them.
Risks
related to the regulation of NJNG could affect the rates it is able to
charge,
its costs and its profitability
NJNG
is
subject to regulation by federal, state and local authorities. These
authorities
regulate many aspects of NJNG’s distribution operations, including construction
and maintenance of facilities, operations, safety, rates that NJNG can
charge
customers, rates of return, the authorized cost of capital, recovery
of pipeline
replacement and environmental remediation costs and relationships with
its
affiliates. NJNG’s ability to obtain rate increases, including base rate
increases, extend its incentive programs and maintain its current rates
of
return depends on regulatory discretion. There can be no assurance that
NJNG
will be able to obtain rate increases, continue its incentive programs
or
continue receiving its currently authorized rates of return.
Significant
regulatory assets recorded by NJNG could be disallowed for recovery from
customers in the future
NJNG
records regulatory assets on its financial statements to reflect the
rate-making
nature and regulatory decision making of the BPU as allowed by current
accounting principles generally accepted in the United States of America.
The
creation of a regulatory asset allows for the deferral of costs, absent
a
recovery mechanism to charge its customers in rates approved by the BPU
that
NJNG would normally charge to expense on its income statement. Primary
regulatory assets that are subject to BPU approval include the underrecovery
of
BGSS and Universal Service Fund (USF) costs, remediation costs associated
with
its MGP sites, the CIP, WNC, the New Jersey Clean Energy program and
pension and
other postemployment plans. If there were to be a change in regulatory
position
surrounding the collection of these deferred costs there could be a material
impact on NJNG’s financial position, operations and
cash flows.
NJR’s
charter and bylaws may delay or prevent a transaction that stockholders
would
view as favorable
The
certificate of incorporation and bylaws of NJR, as well as New Jersey
law,
contain provisions that could have the effect of delaying, deferring
or
preventing an unsolicited change in control of NJR, which may negatively
affect
the market price of the common stock or the ability of stockholders to
participate in a transaction in which they might otherwise receive a
premium for
their shares over the then current market price. These provisions also
may have
the effect of preventing changes in management. In addition, the board
of
directors is authorized to issue preferred stock without stockholder
approval on
such terms as the board of directors may determine. The holders of common
stock
will be subject to, and may be negatively affected by, the rights of
any
preferred stock that may be issued in the future. In addition, NJR is
subject to
the New Jersey Shareholders’ Protection Act, which could have the effect of
delaying or preventing a change of control of NJR.
NJR
and its subsidiaries may be unable to obtain governmental approvals,
property
rights and/or financing for the construction, development and operation
of its
non-regulated energy investments
Construction,
development and operation of energy investments, such as natural gas
storage
facilities and pipeline transportation systems, is subject to federal
and state
regulatory oversight and require certain property rights and approvals,
including permits and licenses for such facilities and systems. NJR,
its
subsidiaries, or its joint venture partnerships may be unable to obtain,
in a
cost-efficient or timely manner, all such needed property rights, permits
and
licenses in order to successfully construct and develop its non-regulated
energy
facilities and systems. Successful financing of NJR’s energy investments will
require participation by willing financial institutions and lenders,
as well as
acquisition of capital at favorable interest rates. If NJR and its subsidiaries
do not obtain the necessary regulatory approvals and financing, their
equity
investments could become impaired and such impairment could have a materially
adverse effect on NJR’s financial condition, results of operations or cash
flows.
New
Jersey Resources
Part
I
ITEM
1A. RISK FACTORS (Continued)
Environmental
Risks
NJR
costs of compliance with present and future environmental laws are significant
and could adversely affect its cash flows and profitability
NJR’s
operations are subject to extensive federal, state and local environmental
statutes, rules and regulations relating to air quality, water quality,
waste management, natural resources and site remediation. Compliance
with these
laws and regulations may require NJR to expend significant financial
resources
to, among other things, conduct site remediation and perform environmental
monitoring. If NJR fails to comply with applicable environmental laws
and
regulations, even if it is unable to do so due to factors beyond its
control, it
may be subject to civil liabilities or criminal penalties and may be
required to
incur significant expenditures to come into compliance. Additionally,
any
alleged violations of environmental laws and regulations may require
NJR to
expend significant resources in its defense against alleged
violations.
None
NJNG
(All properties are located in New Jersey)
NJNG
owns
approximately 6,600 miles of distribution main, 6,500 miles of service
main, 213
miles of transmission main and approximately 491,000 meters. Mains are
primarily
located under public roads. Where mains are located under private property,
NJNG
has obtained easements from the owners of record.
Additionally,
NJNG owns and operates two LNG storage plants in Stafford Township, Ocean
County, and Howell Township, Monmouth County. The two LNG plants have
an
aggregate estimated maximum capacity of approximately 150,000 dth per
day. These
facilities are used for peaking natural gas supply and emergencies.
NJNG
owns
four service centers located in Rockaway Township, Morris County; Atlantic
Highlands and Wall Township, Monmouth County; and Lakewood, Ocean County.
These
service centers house storerooms, garages, gas distribution and administrative
offices. NJNG leases its headquarters and customer service facilities
in Wall
Township, customer service offices in Asbury Park, Monmouth County, and
a
service center in Manahawkin, Ocean County. These customer service offices
support customer contact, marketing, economic development and other
functions.
Substantially
all of NJNG’s properties, not expressly excepted or duly released, are subject
to the lien of an Indenture of Mortgage and Deed of Trust to BNY Midwest
Trust
Company, Chicago, Illinois, dated April 1, 1952, as amended by 31
supplemental indentures (Indenture), as security for NJNG’s bonded debt, which
totaled approximately $195 million at September 30, 2007. In addition,
under the terms of the Indenture, NJNG could have issued up to approximately
$493 million of additional first mortgage bonds as of September 30,
2007.
New
Jersey Resources
Part
I
ITEM
2. PROPERTIES (Continued)
Retail
and Other (All properties are located in New Jersey)
At
September 30, 2007, CR&R owned 83 acres of undeveloped land and a
56,400-square-foot office building on 5 acres. See Note
1. Summary of Significant Accounting
Policies-Impairment of Long-Lived Assets in the accompanying Consolidated
Financial Statements for a discussion of a change in strategy with regard
to
CR&R’s 52 acres of Atlantic County land.
See
Item 1. Environment for a discussion of regulatory matters concerning
undeveloped land owned by CR&R.
NJRHS
leases service centers in Town of Dover, Morris County, and Tinton Falls,
Monmouth County.
Capital
Expenditure Program
See
Item 7. Management Discussion and Analysis –Cash Flows
for a discussion of anticipated fiscal 2008 and 2009 capital expenditures
for
each business segment.
Manufactured
Gas Plant Remediation
NJNG
is
responsible for the remedial cleanup plan of three Manufactured Gas Plant
(MGP)
sites, dating back to 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) with respect to two of the sites, as well as participating
in
various studies and investigations by outside consultants to determine
the
nature and extent of any such contaminated residues and to develop appropriate
programs of remedial action, where warranted, under Administrative Consent
Orders or Memoranda of Agreement with the NJDEP.
NJNG
may,
subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to a remediation
adjustment
clause (RAC) approved by the BPU. In October 2007, the BPU approved $14.7
million in eligible costs to be recovered annually for those MGP remediation
expenditures actually incurred through September 30, 2006. As of September
30,
2007, $85.1 million of previously incurred remediation costs, net of
recoveries
from customers and insurance proceeds, are included in Regulatory assets
on the
Consolidated Balance Sheet.
In
September 2007, NJNG updated an environmental review of the MGP sites,
including
a review of potential liability for investigation and remedial action.
Based on
this review, NJNG estimated that total future expenditures to remediate
and
monitor the three MGP sites for which it is responsible will range from
approximately $105.3 million to $164.8 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 the cost 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.
New
Jersey Resources
Part
I
ITEM
3. LEGAL PROCEEDINGS (Continued)
Accordingly,
NJNG has recorded an MGP remediation liability and a corresponding Regulatory
asset of $105.3 million on the Consolidated Balance Sheet. The actual
costs to
be incurred by NJNG are dependent upon several factors, including final
determination of remedial action, changing technologies and governmental
regulations, the ultimate ability of other responsible parties to pay
and any
insurance recoveries.
NJNG
is
presently investigating the potential settlement of alleged Natural Resource
Damage claims that might be brought by the NJDEP concerning the three
MGP sites.
NJDEP has not made any specific demands for compensation for alleged
injury to
groundwater or other natural resources. NJNG’s evaluation of these potential
claims is in the early stages, and it is not yet possible to quantify
the amount
of compensation, if any that NJDEP might seek to recover. NJNG anticipates
that
any costs associated with this matter would be recoverable through the
RAC.
NJNG
will
continue to seek recovery of MGP-related costs through the RAC. If any
future
regulatory position indicates that the recovery of such costs is not
probable,
the related cost would be charged to income in the period of such determination.
However, because recovery of such costs is subject to BPU approval, there
can be
no assurance as to the ultimate recovery through the RAC or the impact
on the
Company’s results of operations, financial position or cash flows, which could
be material.
BPU
Order Regarding Long Branch Mass Tort Litigation-Related
Costs
Beginning
in July 2003, a series of complaints were filed in the New Jersey Superior
Court
against NJNG, the Registrant and other parties. The complaints were,
as of
February 2004, designated as a Mass Tort Litigation (the Mass Tort
Litigation). Among other things, the complaints alleged personal injuries,
wrongful death, survivorship actions, property damage and claims for
medical
monitoring stemming from the operation and remediation of the former
MGP site in
Long Branch, New Jersey.
In
December 2005, a confidential settlement between NJNG and the plaintiffs
in the
Mass Tort Litigation was finalized and approved by the New Jersey Superior
Court. A separate lawsuit (the Lawsuit) was filed by NJNG for declaratory
relief
against Kemper Indemnity Insurance Company (Kemper) arising from Kemper’s
refusal to honor its obligations related to the Mass Tort Litigation
under
insurance policies procured by NJNG that were intended to limit NJNG's
liability
for third party claims for bodily injury and property damage, legal defense
costs and remediation costs arising from environmental contamination
and
remediation at the former MGP sites in Long Branch and Toms River, New
Jersey.
The
Lawsuit was settled in January 2007. Pursuant to the terms of the settlement,
NJNG received a payment (the Settlement Payment) in the amount of $12.8
million
from Kemper and certain of its affiliates. The Settlement Payment was
made in
exchange for a general release of all claims asserted in the Lawsuit;
no portion
of the Settlement Payment was allocated to any particular claim.
Pursuant
to the RAC, NJNG sought to recover the remaining litigation and settlement
costs
related to the Mass Tort Litigation and the Lawsuit. Under a written
order by
the BPU, dated October 3, 2007, approving a stipulation among NJNG, the
BPU and
the State of New Jersey Department of the Public Advocate, Division of
Rate
Counsel, NJNG will be allowed to recover litigation and settlement costs
related
to the Mass Tort Litigation and the Lawsuit to the extent that such costs
exceed
$4.0 million. $4.0 million is the portion of the costs NJNG incurred
to litigate
and settle the Mass Tort Litigation and the Lawsuit that is reasonably
reflective of and attributable to personal injury claims. Personal injury
claims
are not recoverable under the RAC. The pre-tax settlement charge of $4.0
million
was recognized in the fourth quarter of fiscal 2007 and is reflected
in
Operations and maintenance expense in the Consolidated Statements of
Income.
New
Jersey Resources
Part
I
ITEM
3. LEGAL PROCEEDINGS (Continued)
General
The
Company is party to various other claims, legal actions and complaints
arising
in the ordinary course of business. In the Company’s opinion, other than as
disclosed in this Item 3, the ultimate disposition of these matters will
not
have a material adverse effect on its financial condition, results of
operations
or cash flows.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
ITEM
4A. EXECUTIVE OFFICERS OF THE
COMPANY
Office
|
Name
|
Age
|
Officer
Since
|
Chairman
of the Board, President and Chief Executive Officer
|
Laurence
M. Downes
|
50
|
1986
|
Senior
Vice President, Corporate Affairs and Marketing
|
Kathleen
T. Ellis
|
54
|
2004
|
Senior
Vice President and Chief Financial Officer
|
Glenn
C. Lockwood
|
46
|
1990
|
Senior
Vice President, Energy Services, NJNG and NJRES
|
Joseph
P. Shields
|
50
|
1996
|
Vice
President and General Counsel
|
Mariellen
Dugan
|
41
|
2005
|
Vice
President, Customer Services, NJNG
|
Kathleen
F. Kerr
|
43
|
2005
|
Vice
President, Energy Delivery, NJNG
|
Craig
A. Lynch
|
46
|
2005
|
Vice
President, Marketing and Business Intelligence, NJNG
|
Thomas
J. Massaro, Jr.
|
41
|
2004
|
Vice
President, Internal Auditing, Service
|
George
C. Smith, Jr.
|
50
|
2004
|
Vice
President, Regulatory Affairs, NJNG
|
Mark
R. Sperduto
|
49
|
2005
|
Vice
President, Corporate Services, Service
|
Deborah
G. Zilai
|
54
|
1996
|
Corporate
Secretary
|
Rhonda
M. Figueroa
|
48
|
2005
|
Director
of Government Affairs and Chief of Staff
|
Linda
B. Kellner
|
48
|
2006
|
Treasurer
|
William
G. Foley
|
51
|
2007
|
There
is
no arrangement or understanding between the officers listed above and
any other
person pursuant to which they were selected as officers. The following
is a
brief account of their business experience during the past five
years:
Laurence
M. Downes, Chairman of the Board, President and Chief Executive
Officer
Mr. Downes
has held the position of Chairman of the Board since September 1996. He has
held the position of President and Chief Executive Officer since July 1995.
From January 1990 to July 1995, he held the position of Senior Vice
President and Chief Financial Officer.
Kathleen
T. Ellis, Senior Vice President, Corporate Affairs and
Marketing
Ms. Ellis
has held the position of Senior Vice President, Corporate Affairs since
December 2004 and has held the position of Senior Vice President, Corporate
Affairs and Marketing of NJNG since July 2007. From December 2002 to
November 2004, she held the position of Director of Communications for the
Governor of the State of New Jersey, and from August 1998 to
December 2002, she held the position of Manager of Communications and
Director, State Governmental Affairs for Public Service Electric and
Gas Company
(PSE&G), a combined gas and electric utility company based in Newark,
NJ.
New
Jersey Resources
Part
I
ITEM
4A. EXECUTIVE OFFICERS OF THE COMPANY (Continued)
Glenn
C. Lockwood, Senior Vice President and Chief Financial
Officer
Mr. Lockwood
has held the position of Chief Financial Officer since September 1995 and
the added position of Senior Vice President since January 1996. From
January 1994 to September 1995, he held the position of Vice
President, Controller and Chief Accounting Officer. From January 1990
to January 1994, he held the position of Assistant Vice President,
Controller and Chief Accounting Officer.
Joseph
P. Shields, Senior Vice President, Energy Services, NJRES and
NJNG
Mr. Shields
joined NJNG in 1983 and has been Senior Vice President, NJRES since
January 1996. As head of the energy services business unit, he is
responsible for natural gas supply acquisitions, negotiating transportation
agreements and monitoring natural gas control activities as well as regulated
wholesale marketing activity for NJNG.
Mariellen
Dugan, Vice President and General Counsel
Ms. Dugan
has held the position of Vice President and General Counsel since
December 2005. Prior to joining NJR, from February 2004 to
November 2005, she held the position of First Assistant Attorney General
for the State of New Jersey, and from February 2003 to February 2004,
she held the position of Chief of Staff, Executive Assistant Attorney
General of
the State of New Jersey. From July 1999 to January 2003,
Ms. Dugan was Of Counsel to the law firm of Kevin H. Marino P.C. in Newark,
NJ.
Kathleen
F. Kerr, Vice President, Customer Services, NJNG
Mrs. Kerr
joined NJNG as Vice President, Customer Services in January 2005. Before
joining NJNG, Mrs. Kerr was Director of Customer Service for PSE&G from
April 2002 to December 2004. Prior thereto, she held various senior
management level positions at PSE&G in customer services and other areas
from April 1985 to December 2004.
Craig
A. Lynch, Vice President, Energy Delivery, NJNG
Mr. Lynch
has held the position of Vice President, Energy Delivery, NJNG, since
November 2005. He joined NJNG in 1984 and is responsible for all aspects of
NJNG’s distribution, transmission, and utility operations. Prior to his current
position, Mr. Lynch held the position of Director–Distribution, NJNG from
July 1997 to October 2005. His duties were focused on the operation of
the distribution system, ensuring that the expansion and maintenance
of the
system satisfied all federal, state, county and municipal regulations
and
conformed to all of NJNG’s procedures and practices in an efficient and
economical manner.
Thomas
J. Massaro, Jr., Vice President, Marketing and Business Intelligence,
NJNG
Mr. Massaro
has held the position of Vice President, Marketing and Business Intelligence,
since July 2007 and was the Treasurer at NJNG from September 2006 through
September 2007. He is responsible for the marketing function for NJNG.
He joined
NJNG in June 1989 as a Management Engineer and has held several senior
management positions in marketing, operations and customer service, including
President of NJRHS from November 2004 to June 2005, and Director of
Operations at NJRHS from January 2004 to November 2004.
New
Jersey Resources
Part
I
ITEM
4A. EXECUTIVE OFFICERS OF THE COMPANY (Continued)
George
C. Smith, Vice President, Internal Auditing, Service
Mr. Smith
joined NJR in 1984 as an Associate Auditor. He has held the position
of Vice
President, Internal Auditing since January 2004. In his prior role as
Director of Internal Audit from 1998 to 2004, he redefined the internal
audit
function at NJR, implementing a new approach to identify and analyze
controls
and related processes.
Mark
R. Sperduto, Vice President, Regulatory Affairs, NJNG
Mr. Sperduto
joined NJNG in March 2005 and is responsible for the regulatory affairs
strategy and supports initiatives on key issues such as price stability
and
improved service. Previously, Mr. Sperduto held the positions of Issues
Manager–Financial and Director–Corporate Issues at PSE&G from
November 2001 to March 2005 and held various positions there from
August 1991 to November 2001. Mr. Sperduto started his career on
the staff of the New Jersey Board of Public Utilities, holding various
positions
with the agency from 1980 to 1991.
Deborah
G. Zilai, Vice President, Corporate Services, Service
Mrs. Zilai
has held the position of Vice President, Corporate Services since
June 2005. She joined New Jersey Resources in June 1996 after a
twenty-year career at International Business Machines Corporation, where
she
held various management positions. Her current responsibilities include
technology, human resources and supply chain management. From June 1996 to
May 2005, she served as Vice President, Information Systems and
Services.
Rhonda
M. Figueroa, Corporate Secretary
Ms. Figueroa
has held the position of Corporate Secretary since March 2006. Her
responsibilities include serving as the secretary to the Board of Directors
of
NJR and its subsidiaries as well as on various internal committees. She
also
serves as the Company’s registered agent and keeper of records.
Ms. Figueroa joined NJR in 1981. From November 2005 to March 2006
she held the position of Assistant Corporate Secretary, from August 2002 to
November 2005, she held the position of Manager of Business Transformation,
and from August 2001 to August 2002, she held the position of Manager
of Marketing Services for NJRHS.
Linda
B. Kellner, Director of Government Affairs and Chief of
Staff
Ms. Kellner
has held the position of Chief of Staff since February 2001 and the
position of Director of Government Affairs since January 2003. She
currently is responsible for state and federal legislative activities
impacting
the energy industry, community relations as they relate to the Company’s
environmental remediation projects, the corporate-wide Diversity initiative
and
preparation of communications for the NJR Board of Directors. From January
2000
to January 2003, she held the position of Manager of Government Affairs
and from
October 1995 to December 1999, she served as Manager of Policy
Analysis.
William
G. Foley, Treasurer
Mr.
Foley
joined New Jersey Resources in September 2007 and is responsible for
the
management and leadership of the corporate treasury and investor relations
functions. He held the position of Director of Energy Derivatives at
Societe
Generale Bank from September 2005 to August 2007, at ABN AMRO Bank from
October
2004 to August 2005 and at Deutsche Bank from January 2001 to September
2004 and
was responsible for trading and marketing natural gas derivatives. From
August
1984 through June 1995 he held various positions in finance and treasury,
including Assistant Treasurer at CSX Corporation (CSX). His responsibilities
at
CSX included risk management, investor relations and cash management.
In
addition, Mr. Foley has taught as an adjunct professor at Rutgers Business
School.
New
Jersey Resources
Part
II
ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
NJR’s
Common Stock is traded on the New York Stock Exchange under the ticker
symbol
NJR. As of September 30, 2007, NJR had 13,736 holders of record of its
common stock.
NJR’s
common stock high and low sales prices and dividends paid per share were
as
follows:
|
2007
|
2006
|
Dividends
Paid
|
|
High
|
Low
|
High
|
Low
|
2007
|
2006
|
Fiscal
Quarter
|
|
|
|
|
|
|
First
|
$53.16
|
$48.46
|
$46.95
|
$40.68
|
$.36
|
$.34
|
Second
|
$51.10
|
$46.30
|
$45.96
|
$41.49
|
$.38
|
$.36
|
Third
|
$56.45
|
$49.80
|
$47.38
|
$42.85
|
$.38
|
$.36
|
Fourth
|
$52.70
|
$45.50
|
$51.39
|
$46.34
|
$.38
|
$.36
|
In
1996,
the NJR Board of Directors authorized the repurchase of up to 1 million
of the
Company’s common shares. Since 1996, the repurchase plan has been expanded
several times and, as of September 30, 2007, the Company has 8,147 shares
of its
common stock still available for repurchase. On November 14, 2007, the
NJR Board
of Directors authorized an increase to the plan to permit the repurchase,
in the
open market or in privately negotiated transactions, of 1 million shares,
bringing the total permitted repurchases to 4.5 million shares as of
that
date.
The
following table sets forth NJR’s repurchase activity for the quarter ended
September 30, 2007:
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
|
|
|
7/1/07
– 7/31/07
|
—
|
|
—
|
|
—
|
|
348,147
|
|
|
8/1/07
– 8/31/07
|
—
|
|
—
|
|
—
|
|
348,147
|
|
|
9/1/07
– 9/30/07
|
340,000
|
|
48.74
|
|
340,000
|
|
8,147
|
|
|
Total
|
340,000
|
|
48.74
|
|
340,000
|
|
8,147
|
|
|
The
Chief
Executive Officer’s annual certification regarding the Company’s compliance with
the NYSE’s corporate governance listing standards was submitted to the NYSE in
fiscal 2007.
New
Jersey Resources
Part
II
CONSOLIDATED
FINANCIAL STATISTICS
|
|
Fiscal Years Ended
September 30,
|
|
(Thousands, except per share data)
|
|
2007
|
|
|
2006
(1)
|
|
|
2005
(1)
|
|
|
2004
(2)
|
|
|
2003
(2)
|
|
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$ |
3,021,765
|
|
|
$ |
3,271,229
|
|
|
$ |
3,184,582
|
|
|
$ |
2,545,908
|
|
|
$ |
2,554,368
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
purchases
|
|
|
2,621,575
|
|
|
|
2,639,489
|
|
|
|
2,914,387
|
|
|
|
2,236,501
|
|
|
|
2,219,242
|
|
Operation
and maintenance
|
|
|
136,601
|
|
|
|
121,384
|
|
|
|
108,441
|
|
|
|
101,118
|
|
|
|
101,438
|
|
Regulatory
rider expenses
|
|
|
37,605
|
|
|
|
28,587
|
|
|
|
31,594
|
|
|
|
9,540
|
|
|
|
4,592
|
|
Depreciation
and amortization
|
|
|
36,235
|
|
|
|
34,753
|
|
|
|
33,675
|
|
|
|
32,449
|
|
|
|
31,965
|
|
Energy
and other taxes
|
|
|
62,499
|
|
|
|
58,632
|
|
|
|
56,211
|
|
|
|
49,908
|
|
|
|
46,639
|
|
Total
Operating Expenses
|
|
|
2,894,515
|
|
|
|
2,882,845
|
|
|
|
3,144,308
|
|
|
|
2,429,516
|
|
|
|
2,403,876
|
|
Operating
Income
|
|
|
127,250
|
|
|
|
388,384
|
|
|
|
40,274
|
|
|
|
116,392
|
|
|
|
150,492
|
|
Other
income
|
|
|
4,294
|
|
|
|
4,725
|
|
|
|
4,814
|
|
|
|
3,864
|
|
|
|
1,085
|
|
Interest
charges, net
|
|
|
27,613
|
|
|
|
25,669
|
|
|
|
20,474
|
|
|
|
15,395
|
|
|
|
13,992
|
|
Income
before Income Taxes
|
|
|
103,931
|
|
|
|
367,440
|
|
|
|
24,614
|
|
|
|
104,861
|
|
|
|
137,585
|
|
Income
tax provision
|
|
|
40,312
|
|
|
|
147,349
|
|
|
|
7,832
|
|
|
|
40,663
|
|
|
|
55,392
|
|
Equity
in earnings, net of tax
|
|
|
1,662
|
|
|
|
1,817
|
|
|
|
1,753
|
|
|
|
1,101
|
|
|
|
568
|
|
Net
Income
|
|
$ |
65,281
|
|
|
$ |
221,908
|
|
|
$ |
18,535
|
|
|
$ |
65,299
|
|
|
$ |
82,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets |
|
$ |
2,230,745
|
|
|
$ |
2,398,928
|
|
|
$ |
2,330,248
|
|
|
$ |
1,861,979
|
|
|
$ |
1,584,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITALIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock equity
|
|
$ |
644,797
|
|
|
$ |
621,662
|
|
|
$ |
438,052
|
|
|
$ |
467,917
|
|
|
$ |
418,941
|
|
Long-term
debt
|
|
|
383,184
|
|
|
|
332,332
|
|
|
|
317,204
|
|
|
|
315,887
|
|
|
|
257,899
|
|
Total
Capitalization
|
|
$ |
1,027,981
|
|
|
$ |
953,994
|
|
|
$ |
755,256
|
|
|
$ |
783,804
|
|
|
$ |
676,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share–Basic
|
|
|
$2.34
|
|
|
|
$7.96
|
|
|
|
$0.67
|
|
|
|
$2.37
|
|
|
|
$3.05
|
|
Earnings
per share–Diluted
|
|
|
$2.33
|
|
|
|
$7.90
|
|
|
|
$0.66
|
|
|
|
$2.33
|
|
|
|
$3.01
|
|
Dividends
declared per share
|
|
|
$1.52
|
|
|
|
$1.44
|
|
|
|
$1.36
|
|
|
|
$1.30
|
|
|
|
$1.24
|
|
(1)
|
See
“Restatement of Prior Years Financial Statements” at the beginning of Part
I, Item I and Note 2, “Restatement of Consolidated Financial Statements”
in Notes to Consolidated Financial Statements of the Form
10-K.
|
(2)
|
The
Selected Financial Data for years ended September 30, 2004
and 2003 have
been restated to reflect adjustments to a change in accounting
for certain
derivative instruments as further described in the “Restatement of Prior
Years Financial Statements” at the beginning of Part 1, Item
1.
|
New
Jersey Resources
Part
II
ITEM
6. SELECTED FINANCIAL DATA (Continued)
NJNG
OPERATING STATISTICS
|
Fiscal Years Ended
September 30,
|
($
in thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
|
|
Residential
|
$ 584,727
|
|
$ 598,274
|
|
$ 568,324
|
|
$496,866
|
|
$433,634
|
|
Commercial
and other
|
132,113
|
|
172,465
|
|
143,211
|
|
118,326
|
|
99,587
|
|
Firm
transportation
|
36,794
|
|
28,656
|
|
29,566
|
|
28,987
|
|
34,682
|
|
Total
residential and commercial
|
753,634
|
|
799,395
|
|
741,101
|
|
644,179
|
|
567,903
|
|
Interruptible
|
7,141
|
|
12,134
|
|
14,377
|
|
9,575
|
|
8,406
|
|
Total
system
|
760,775
|
|
811,529
|
|
755,478
|
|
653,754
|
|
576,309
|
|
Incentive
programs
|
244,813
|
|
327,245
|
|
382,802
|
|
275,148
|
|
183,569
|
|
Total
Operating Revenues
|
$1,005,588
|
|
$1,138,774
|
|
$1,138,280
|
|
$928,902
|
|
$759,878
|
|
Throughput
(Bcf)
|
|
|
|
|
|
|
|
|
|
|
Residential
|
41.8
|
|
39.4
|
|
43.7
|
|
44.1
|
|
46.2
|
|
Commercial
and other
|
9.4
|
|
10.4
|
|
11.3
|
|
10.9
|
|
10.9
|
|
Firm
transportation
|
8.6
|
|
7.4
|
|
7.6
|
|
8.4
|
|
10.4
|
|
Total
residential and commercial
|
59.8
|
|
57.2
|
|
62.6
|
|
63.4
|
|
67.5
|
|
Interruptible
|
6.5
|
|
7.2
|
|
9.7
|
|
8.9
|
|
7.4
|
|
Total
system
|
66.3
|
|
64.4
|
|
72.3
|
|
72.3
|
|
74.9
|
|
Incentive
programs
|
36.5
|
|
38.4
|
|
52.4
|
|
47.1
|
|
35.8
|
|
Total
Throughput
|
102.8
|
|
102.8
|
|
124.7
|
|
119.4
|
|
110.7
|
|
Customers
at Year-End
|
|
|
|
|
|
|
|
|
|
|
Residential
|
435,169
|
|
429,834
|
|
418,646
|
|
410,005
|
|
397,584
|
|
Commercial
and other
|
28,916
|
|
28,914
|
|
28,878
|
|
27,718
|
|
26,313
|
|
Firm
transportation
|
14,104
|
|
12,874
|
|
15,246
|
|
16,387
|
|
19,867
|
|
Total
residential and commercial
|
478,189
|
|
471,622
|
|
462,770
|
|
454,110
|
|
443,764
|
|
Interruptible
|
45
|
|
48
|
|
47
|
|
63
|
|
51
|
|
Incentive
programs
|
26
|
|
35
|
|
39
|
|
35
|
|
25
|
|
Total
Customers at Year-End
|
478,260
|
|
471,705
|
|
462,856
|
|
454,208
|
|
443,840
|
|
Interest
Coverage Ratio
|
6.03
|
|
7.63
|
|
6.38
|
|
7.38
|
|
7.65
|
|
Average
Therm Use per Customer
|
|
|
|
|
|
|
|
|
|
|
Residential
|
960
|
|
920
|
|
1,045
|
|
1,079
|
|
1,178
|
|
Commercial
and other
|
5,710
|
|
5,084
|
|
5,443
|
|
5,646
|
|
6,182
|
|
Degree-days
|
4,481
|
|
4,367
|
|
4,927
|
|
4,810
|
|
5,354
|
|
Weather
as a Percent of Normal
|
94
|
%
|
90
|
%
|
102
|
%
|
99
|
%
|
111
|
%
|
Number
of Employees
|
548
|
|
516
|
|
518
|
|
539
|
|
551
|
|
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking
and Cautionary Statements
From
time to time, we may make statements that may constitute “forward-looking
statements” within the meaning of the “safe-harbor” provisions of the Private
Securities Litigation Reform Act of 1995. These statements are based
on our then
current expectations and are subject to a number of risks and uncertainties
that
could cause actual results to differ materially from those addressed
in the
forward-looking statements. Information concerning forward-looking statements
is
set forth on page 1 of this annual report and are incorporated herein
and the
risk factors that may cause such differences are summarized in Item 1A
beginning
on page 11 and are incorporated herein.
Restatement
of Prior Fiscal Year Periods
The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” gives effects to the restatement discussed in Note 2 to
the Consolidated Financial Statements.
During
fiscal years 2007, 2006 and 2005 the Company used what is commonly referred
to
as “critical-terms-match” (CTM) to qualify its derivative instruments used in
energy transactions at NJRES and NJR Energy as cash flow hedges under
the
guidance of Statement of Financial Accounting Standards 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted,
(SFAS 133). During fiscal 2007, management of the Company became aware
that staff of the Securities and Exchange Commission (the “SEC”), in a speech,
had raised questions that some registrants may have inappropriately been
applying the CTM approach. As a result, the Company commenced a study
to
reanalyze how it documented CTM for its derivative instruments treated
as cash
flow hedges. Based on this analysis, the Company concluded that it had
incorrectly applied cash flow hedge accounting to these derivative
instruments.
The
Company’s conclusion that it had incorrectly applied cash flow hedge accounting
results in recognizing as part of Gas purchases and Operating revenues,
as
appropriate, in the Consolidated Statements of Income the impact of the
change
in fair value of NJRES’ and NJR Energy’s derivative assets and liabilities that
had previously been recorded as part of Accumulated other comprehensive
income
(OCI), which is a component of Common Stock Equity. These changes in
fair value,
referred to as unrealized gains or losses, impact the Consolidated Statements
of
Income only and have no change on the economic value associated with
the
underlying forecasted transactions. There was no impact on reported cash
flow
from operations or liquidity, and this change will not result in any
future
change to cash flow from operations or liquidity.
Management’s
Overview
New
Jersey Resources Corporation (NJR or the Company) is an energy services
holding
company providing retail natural gas service in New Jersey and wholesale
natural
gas and related energy services to customers in states from the Gulf
Coast and
Mid-Continent regions to the New England region and Canada through its
two
principal subsidiaries, New Jersey Natural Gas (NJNG) and NJR Energy
Services
(NJRES).
Comprising
the Natural Gas Distribution segment, NJNG is a natural gas utility which
provides regulated retail natural gas service in central and northern
New Jersey
and also participates in the off-system sales and capacity release markets.
NJNG
is regulated by the New Jersey Board of Public Utilities (BPU).
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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.
NJRES
comprises the Energy Services segment.
The
Retail and Other segment includes NJR Home Services (NJRHS), which provides
service, sales and installation of appliances; NJR Energy (NJRE), an
investor in
energy-related ventures, most significantly through NJNR Pipeline which
holds
the Company’s 5.53 percent interest in Iroquois Gas and Transmission System, LP
(Iroquois), a 412-mile natural gas pipeline from the New York-Canadian
border to
Long Island, New York and NJR Steckman Ridge Storage Company, which,
in March
2007, acquired a 50 percent equity ownership interest in Steckman Ridge
GP, LLC
and Steckman Ridge, LP (collectively, Steckman Ridge), an estimated 20
billion
cubic foot (Bcf) natural gas storage facility that is being jointly developed
and constructed with a partner in western Pennsylvania; NJR Investment,
which
makes energy-related equity investments; Commercial Realty and Resources
(CR&R), which holds and develops commercial real estate; and NJR Service
Company, which provides support services to the various NJR
businesses.
Net
income and assets by business segment are as follows:
($ in thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
44,480
|
|
|
|
68 |
% |
|
$ |
46,870
|
|
|
|
21 |
% |
|
$ |
53,376
|
|
|
|
288 |
% |
Energy
Services
|
|
|
21,298
|
|
|
|
33
|
|
|
|
188,372
|
|
|
|
85
|
|
|
|
(62,805 |
) |
|
|
(339 |
) |
Retail
and Other
|
|
|
(497 |
) |
|
|
(1 |
) |
|
|
(13,334 |
) |
|
|
(6 |
) |
|
|
27,964
|
|
|
|
151
|
|
Total
|
|
$ |
65,281
|
|
|
|
100 |
% |
|
$ |
221,908
|
|
|
|
100 |
% |
|
$ |
18,535
|
|
|
|
100 |
% |
($ in thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
1,568,895
|
|
|
|
70 |
% |
|
$ |
1,586,934
|
|
|
|
66 |
% |
|
$ |
1,581,758
|
|
|
|
68 |
% |
Energy
Services
|
|
|
482,404
|
|
|
|
22
|
|
|
|
714,867
|
|
|
|
30
|
|
|
|
621,471
|
|
|
|
27
|
|
Retail
and Other
|
|
|
179,446
|
|
|
|
8
|
|
|
|
97,127
|
|
|
|
4
|
|
|
|
127,019
|
|
|
|
5
|
|
Total
|
|
$ |
2,230,745
|
|
|
|
100 |
% |
|
$ |
2,398,928
|
|
|
|
100 |
% |
|
$ |
2,330,248
|
|
|
|
100 |
% |
NJRES
and
NJR Energy account for certain of its derivative instruments (financial
futures,
swaps and options) used to economically hedge the forecasted purchase,
sale and
transportation of natural gas at fair value, as required under SFAS
133.
The
change in fair value of 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). Included
in Net
income in the table above are unrealized (losses) and gains in the Energy
Services segment of $(18.9) million, $160.3 million and $(79.3) million,
after
taxes, for the fiscal years ended September 30, 2007, 2006 and 2005,
respectively.
Included
in Net income above are unrealized (losses) and gains in the Retail and
Other
segment of $(4.2) million, $(16.9) million and $21.5 million, after taxes,
for
the fiscal year ended September 30, 2007, 2006 and 2005,
respectively.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Unrealized
losses and gains at NJRES are the result of changes in the fair value
of
financial derivative instruments used to economically hedge future natural
gas
sales, purchases and transportation. They are the result of changes in the
market-price of natural gas futures and basis swaps.
NJR
Energy records unrealized losses and gains with respect to the change
in fair
value of the long-term financial natural gas swaps that are used to economically
hedge a long-term natural gas sale contact.
Natural
Gas Distribution Segment
Natural
Gas Distribution operations have been managed with the goal of growing
profitably through several key initiatives including:
Ÿ
|
Working
with the BPU and New Jersey Department of the Public Advocate,
Division of
Rate Counsel (Rate Counsel), for the development of the decoupling
of the
impact of customer usage on utility gross margin, which has
allowed for
the implementation of the 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;
|
|
|
Ÿ
|
Managing
its customer growth, which is expected to total approximately
1.8 percent
annually;
|
|
|
Ÿ
|
Generating
earnings from various BPU-authorized gross margin-sharing incentive
programs;
|
|
|
Ÿ
|
Managing
the volatility of wholesale natural gas prices through a hedging
program
designed to keep customers’ prices as stable as possible;
and
|
|
|
Ÿ
|
Assessing
the market and timing with respect to filing for a base rate
increase,
which takes into account many factors, including, but not limited
to,
earning a reasonable rate of return on the investments that
have been
constructed in the gas distribution system, as well as recovery
of all
prudently incurred costs in order to provide reliable service
throughout
NJNG’s service territory.
Based
upon increases in NJNG’s operating, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base
rates for its
natural gas delivery service by approximately $58.4 million,
including a
return on equity component of 11.375 percent. This base rate
review filing
is consistent with NJNG’s objectives of providing safe and reliable
service to its customers and earning a market-based return.
Based upon
statutory time frames and potential regulatory lag, it is unlikely
that
any modification to its delivery rates would become effective
during
fiscal 2008.
|
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.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
For
the fiscal
years ended September 30, 2006 and 2005, the impact on weather was mitigated
by
a Weather Normalization Clause (WNC). The WNC, however, did not capture
lower
customer usage per degree-day. To mitigate this, NJNG obtained approval
of the
CIP effective as of October 1, 2006. Therefore, for fiscal 2007, the
impact of
weather and usage on NJNG’s utility gross margin was significantly mitigated due
to the CIP.
The
CIP is a three-year
pilot program designed to decouple the link between customer usage and
NJNG’s
utility gross margin to allow NJNG to encourage its customers to conserve
energy. For the term of the pilot the existing WNC has been suspended
and
replaced with the CIP tracking mechanism, which addresses utility gross
margin
variations related to both weather and customer usage in comparison to
established benchmarks. Recovery of such utility gross margin variations
is
subject to additional conditions including an earnings test, which includes
a
return on equity component of 10.5 percent, and an evaluation of Basic
Gas
Supply Service (BGSS)-related savings achieved. To encourage energy efficiency,
NJNG is also required to administer programs to further customer conservation
efforts over the term of the pilot. As of September 30, 2007 and 2006, the
obligation to fund these conservation programs was recorded at its present
value
of $1.4 million and $1.8 million, respectively on the Consolidated Balance
Sheets. An annual filing for the CIP must be made in June of each year,
coincident with NJNG’s annual BGSS filing.
NJNG’s
operating expenses are heavily influenced by labor costs, large components
of
which are covered by a negotiated collective bargaining agreement that
expires
in the first quarter of fiscal 2009. Labor-related fringe benefit costs
may also
influence NJNG’s results.
As
a
regulated company, NJNG is required to recognize the impact of regulatory
decisions on its financial statements. As a result, significant costs
are
deferred and treated as regulatory assets, pending BPU decisions regarding
their
ultimate recovery from customers. The most significant costs incurred
that are
subject to this accounting treatment include manufactured gas plant (MGP)
remediation costs and wholesale natural gas costs. Actual remediation
costs may
vary from management’s estimates due to the developing nature of remediation
requirements, regulatory decisions by the New Jersey Department of Environmental
Protection (NJDEP) and related litigation. If there are changes in the
regulatory position on the recovery of these costs, such costs would
be charged
to income in the period of such determination.
Due
to
the capital-intensive nature of NJNG’s operations and the seasonal nature of its
working capital requirements, significant changes in interest rates can
also
impact NJNG’s results.
Energy
Services Segment
NJRES
provides unregulated wholesale energy services, including base load natural
gas,
peaking and balancing services, utilizing physical assets it controls
through
natural gas pipeline transportation and storage contracts, as well as
providing
asset management services to customers in states from the Gulf Coast
and
Mid-continent regions to the Appalachian and Northeast regions and
Canada.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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
hedging programs that are designed to mitigate adverse market
price
fluctuations in natural gas transportation and storage
commitments.
|
NJRES
views “financial margin” as its key financial measurement metric. NJRES’
financial margin 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 financial
instruments designed to hedge the economic impact of its transactions
that have
not been settled, which represent unrealized gains and losses.
NJRES
has
built a portfolio of customers including local distribution companies,
industrial companies, electric generators and retail aggregators. Sales
to these
customers have allowed NJRES to leverage its transportation and storage
capacity
and manage sales to these customers in an aggregate fashion. This strategy
allows NJRES to extract more value from its portfolio of natural gas
storage and
pipeline transportation capacity through the arbitrage of pricing differences
as
a result of locational differences or over different periods of
time.
NJRES
also focuses on creating value from underutilized natural gas assets,
which are
typically amassed through contractual rights to natural gas transportation
and
storage capacity. NJRES has developed a portfolio of natural gas storage
and
transportation capacity in states in the Northeast, Gulf Coast, Mid-continent
and Appalachian regions and eastern Canada. These assets become more
valuable
when prices change between these areas and across time periods. NJRES
seeks to
optimize this process on a daily basis as market conditions change by
evaluating
all the natural gas supplies, transportation and opportunities to which
it has
access, to find the most profitable alternative to serve its various
commitments. This enables NJRES to capture geographic pricing differences
across
these various regions as delivered natural gas prices change as a result
of
market conditions. NJRES focuses on earning a financial margin on a single
original transaction and then utilizing that transaction, and the changes
in
prices across the regions or across time periods, as the basis to further
improve the initial result.
In
a
similar manner, NJRES participates in natural gas storage transactions
where it
seeks to identify pricing differences that occur over time, as prices
for future
delivery periods at many different locations, commonly referred to as
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 high
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.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
NJRES’
portfolio management customers include nonaffiliated utilities and electric
generation plants. Services provided by NJRES include optimization of
underutilized natural gas assets and basic gas supply functions.
NJRES
also participates in park-and-loan transactions with pipeline counterparties,
where NJRES will borrow natural gas when there is an opportunity to capture
arbitrage value. In these cases, NJRES evaluates the economics of the
transaction to determine if it can capture pricing differentials in the
marketplace in order to be able to generate financial margin. In evaluating
these transactions NJRES will compare the fixed fee it will pay and the
resulting spread it can generate to 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 Segment
In
the
Retail and Other segment, NJR utilizes a subsidiary, NJR Energy Holdings,
to
develop its investments in natural gas “mid-stream” assets. Mid-stream assets
represent natural gas transportation and storage facilities. NJR believes
that
acquiring, owning and developing these mid-stream assets, which generally
have a
regulated rate or tariff structure, can provide a significant growth
opportunity
for the Company. To that end, NJR has acquired an interest in Iroquois
and
Steckman Ridge, which is currently under development, and is actively
pursuing
other potential opportunities that meet its investment and development
criteria.
Other businesses in the Retail and Other segment include NJRHS, which
provides
service, sales and installation of appliances to over 149,000 customers,
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.
As
of
September 30, 2007, NJR has invested $55 million in the Steckman Ridge
natural
gas storage facility. Project costs related to the development of the
storage
facility are expected to be approximately $250 million of which NJR is
responsible for 50 percent, or $125 million. NJR expects that Steckman
Ridge
will be able to secure non-recourse financing for the construction and
development of its facilities, thereby reducing the expected funding
obligation
of NJR.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Critical
Accounting Policies
The
Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America (GAAP).
Application of these accounting principles requires the use of estimates
and
assumptions that affect the reported amounts of liabilities, revenues
and
expenses, and related disclosures of contingencies during the reporting
period.
The Company regularly evaluates its estimates, including those related
to the
calculation of the fair value of derivative instruments, unbilled revenues,
provisions for depreciation and amortization, regulatory assets, income
taxes,
pension and postemployment benefits other than pensions and contingencies
related to environmental matters and litigation. NJR bases its estimates
on
historical experience and on various other assumptions that are believed
to be
reasonable under the circumstances, the results of which form the basis
for
making judgments about the carrying value of assets and liabilities that
are not
readily apparent from other sources. In the normal course of business,
estimated
amounts are subsequently adjusted to actual results that may differ from
estimates.
Regulatory
Accounting
NJNG
maintains its accounts in accordance with the Federal Energy Regulatory
Commission (FERC) Uniform System of Accounts as prescribed by the BPU.
As a
result of the ratemaking process, NJNG is required to follow Statement
of
Financial Accounting Standards (SFAS) No. 71, Accounting for the
Effects of Certain Types of Regulation (SFAS 71), and consequently, the
accounting principles applied by NJNG differ in certain respects from
those
applied by unregulated businesses. NJNG is required under SFAS 71 to
recognize
the impact of regulatory decisions on its financial statements. NJNG’s BGSS
requires NJNG to project its natural gas costs and provides the ability,
subject
to BPU approval, to recover or refund the difference, if any, of such
actual
costs as compared with the projected costs included in prices through
a BGSS
charge to customers. Any underrecovery or overrecovery is recorded as
a
Regulatory asset or liability on the Consolidated Balance Sheets and
reflected
in the BGSS charge to customers in subsequent years. NJNG also enters
into
derivatives that are used to hedge natural gas purchases, and the offset
to the
resulting fair value of derivative assets or liabilities is recorded
as a
Regulatory asset or liability on the Consolidated Balance Sheets.
As
of
September 30, 2007, NJR adopted SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postemployment Plans, which requires that
the funded status of its pension and OPEB plans be fully recognized on
the
balance sheet. The liability relating to NJNG’s unrecognized prior service costs
is offset by an increase to Regulatory assets as of September 30, 2007,
as these
unrecognized prior service costs have historically been recovered in
rates
charged to customers. In addition to the BGSS and deferred pension costs,
other
regulatory assets consist primarily of remediation costs associated with
MGP
sites, the CIP, the WNC, the New Jersey Clean Energy Program and the
Universal Service Fund Program, all of which are subject to BPU approval
and are
recorded as a Regulatory asset or liability on the Consolidated Balance
Sheets.
If there are changes in future regulatory positions that indicate the
recovery
of such regulatory assets is not probable, the related cost and carrying
costs
would be charged to income in the period of such determination.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Derivatives
Derivative
activities are recorded in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS 133), under
which NJR records the fair value of derivatives held as assets and
liabilities.
NJR’s unregulated subsidiaries record changes in the fair value of its
derivative instruments in Gas purchases or Operating revenues, as appropriate,
on the Consolidated Statements of Income. NJR also has certain derivative
instruments that qualify as cash flow hedges. Under SFAS 133, the changes
in
fair value of derivatives qualifying as cash flow hedges are recorded,
net of
tax, in Other comprehensive income, which accumulates as a component
of Common
stock equity.
NJNG’s
derivatives that are used to manage price risk of its natural gas purchasing
activities are recoverable through its BGSS, subject to BPU approval.
Accordingly, the offset to the change in fair value of these derivatives
is
recorded as a Regulatory asset or liability on the Consolidated Balance
Sheets.
NJR
has
not designated any derivatives as fair value hedges as of September 30,
2007 and 2006.
In
providing its unregulated wholesale energy services, NJRES enters into
physical
contracts to buy and sell natural gas. These contracts qualify for the
“normal
purchase normal sale” scope exception under SFAS 133 in that they provide for
the purchase or sale of natural gas that will be delivered in quantities
expected to be used or sold by NJRES over a reasonable period of time
in the
normal course of business. Accordingly, NJRES records the related liabilities
incurred and assets acquired under these contracts when title to the
underlying
commodity passes.
The
fair
value of derivative instruments is determined by reference to quoted
market
prices of listed contracts, published quotations or quotations from independent
parties. NJRES’ portfolio is valued using a combination of proprietary modeling
methods and the most currently available market pricing and data. Should
there
be a significant change in model assumptions, or in the underlying market
prices
or data, or should certain contracts fail to meet the normal purchase
normal
sale scope exception of SFAS 133, NJRES may experience a significant
impact on
its financial position, results of operations and cash flows. The valuation
methods have remained consistent for fiscal years 2007, 2006 and
2005.
Environmental
Costs
At
the
end of each fiscal year, NJNG updates the environmental review of its
MGP sites,
including a review of its potential liability for investigation and remedial
action, based on assistance from an outside consulting firm. From this
review,
NJNG estimates expenditures that will be necessary to remediate and monitor
these MGP sites. NJNG’s estimate of these liabilities is developed from then
currently available facts, existing technology and presently enacted
laws and
regulations.
Where
it
is probable that the cost will be incurred, but the information is
sufficient to
establish only a range of possible liability, and no point within the
range is
more likely than any other, it is NJNG’s policy to accrue the lower end of the
range. Since management believes that recovery of these expenditures,
as well as
related litigation costs, is possible through the regulatory process,
in
accordance with SFAS 71, it has recorded a regulatory asset corresponding
to the
accrued liability.
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, the impact of litigation and any insurance recoveries. If there
are changes
in future regulatory positions that indicate the recovery of all or a
portion of
such regulatory asset is not probable, the related cost and carrying
costs would
be charged to income in the period of such determination. As of
September 30, 2007 and 2006, $85.1 million and $83.7 million of previously
incurred remediation costs, net of recoveries from customers and insurance
proceeds received, is included in Regulatory assets on the Consolidated
Balance
Sheet, respectively.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
If
there
are changes in the regulatory position surrounding these costs, or should
actual
expenditures vary significantly from estimates in that these costs are
disallowed for recovery by the BPU, such costs would be charged to income
in the
period of such determination.
Postemployment
Employee Benefits
NJR’s
costs of providing postemployment employee benefits are dependent upon
numerous
factors including actual plan experience and assumptions of future experience.
Postemployment employee benefit costs, for example, are impacted by actual
employee demographics including age, compensation levels and employment
periods,
the level of contributions made to the plans and the return on plan assets.
Changes made to the provisions of the plans may also impact current and
future
postemployment employee benefit costs. Postemployment employee benefit
costs may
also be significantly affected by changes in key actuarial assumptions,
including anticipated rates of return on plan assets, health care cost
trends
and discount rates used in determining the projected benefit obligations
(PBO).
In determining the PBO and cost amounts, assumptions can change from
period to
period and could result in material changes to net postemployment employee
benefit periodic costs and the related liability recognized by NJR.
NJR’s
postemployment employee benefit plan assets consist primarily of U.S.
equity
securities, international equity securities and fixed-income investments,
with a
targeted allocation of 53 percent, 18 percent and 29 percent, respectively.
Fluctuations in actual market returns, as well as changes in interest
rates, may
result in increased or decreased postemployment employee benefit costs
in future
periods. Postemployment employee benefit expenses are included in
Operations and maintenance expense on the Consolidated Statements of
Income.
The
following is a summary of a sensitivity analysis for each actuarial
assumption:
Pension
Plans
Actuarial Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/
(Decrease)
on PBO
(Thousands)
|
Estimated
Increase/
(Decrease)
to Expense
(Thousands)
|
Discount
rate
|
1.00
|
%
|
$(13,128
|
)
|
$(1,434
|
)
|
Discount
rate
|
(1.00
|
)%
|
$
16,264
|
|
$
1,490
|
|
Rate
of return on plan assets
|
1.00
|
%
|
n/a
|
|
$(912
|
)
|
Rate
of return on plan assets
|
(1.00
|
)%
|
n/a
|
|
$
912
|
|
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Other Postemployment Benefits
Actuarial Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/(Decrease)
on PBO
(Thousands)
|
Estimated
Increase/(Decrease)
to Expense
(Thousands)
|
Discount
rate
|
1.00
|
%
|
$(7,169
|
)
|
$(721
|
)
|
Discount
rate
|
(1.00
|
)%
|
$
9,038
|
|
$
866
|
|
Rate
of return on plan assets
|
1.00
|
%
|
n/a
|
|
$(254
|
)
|
Rate
of return on plan assets
|
(1.00
|
)%
|
n/a
|
|
$
254
|
|
Actuarial Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/(Decrease)
on PBO
(Thousands)
|
Estimated
Increase/(Decrease)
to Expense
(Thousands)
|
Health
care cost trend rate
|
1.00
|
%
|
$
8,493
|
|
$
1,440
|
|
Health
care cost trend rate
|
(1.00
|
)%
|
$(6,850
|
)
|
$(1,142
|
)
|
New
Accounting Standards
For
a
detailed description of New Accounting Standards see Note 1. Summary of
Significant Accounting Policies in the accompanying Consolidated Financial
Statements.
Results
of Operations
Consolidated
Net
income decreased 70.6 percent to $65.3 million in fiscal 2007 and increased
1,097.2 percent to $221.9 million in fiscal 2006. The fluctuations are
based on
comparisons to the same prior fiscal year period. The fiscal 2007 results
were
$2.34 per basic share and $2.33 per diluted share, compared with the
fiscal 2006
results of $7.96 per basic share and $7.90 per diluted share. Changes
in Net
income were primarily driven by unrealized (losses) and gains at NJRES
and NJR
Energy. Combined unrealized (losses) and gains, which were primarily
due to the
change in the fair market value of financial derivative instruments as
a result
of market conditions for the purchase and sale of natural gas, were $(23.1)
million, $143.4 million and $(57.8) million, after taxes, for the years
ended
September 30, 2007, 2006 and 2005, respectively.
Natural
Gas Distribution Operations
NJNG
is a
local natural gas distribution company that provides regulated retail
energy
services to approximately 478,000 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.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
1,005,588
|
|
|
$ |
1,138,774
|
|
|
$ |
1,138,280
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
purchases
|
|
|
687,201
|
|
|
|
847,276
|
|
|
|
846,373
|
|
Energy
and other taxes
|
|
|
56,475
|
|
|
|
52,908
|
|
|
|
50,517
|
|
Regulatory
rider expense
|
|
|
37,605
|
|
|
|
28,587
|
|
|
|
31,594
|
|
Total
Utility Gross Margin
|
|
$ |
224,307
|
|
|
$ |
210,003
|
|
|
$ |
209,796
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
and commercial
|
|
$ |
186,183
|
|
|
$ |
178,732
|
|
|
$ |
179,374
|
|
Transportation
|
|
|
29,350
|
|
|
|
22,850
|
|
|
|
23,209
|
|
Total
Utility Firm Gross Margin
|
|
|
215,533
|
|
|
|
201,582
|
|
|
|
202,583
|
|
Incentive
programs
|
|
|
8,125
|
|
|
|
7,403
|
|
|
|
6,092
|
|
Interruptible
|
|
|
649
|
|
|
|
1,018
|
|
|
|
1,121
|
|
Total
Utility Gross Margin
|
|
$ |
224,307
|
|
|
$ |
210,003
|
|
|
$ |
209,796
|
|
Operation
and maintenance expense
|
|
|
97,006
|
|
|
|
84,907
|
|
|
|
76,626
|
|
Depreciation
and amortization
|
|
|
35,648
|
|
|
|
34,146
|
|
|
|
32,905
|
|
Other
taxes not reflected in utility gross margin
|
|
|
3,125
|
|
|
|
2,921
|
|
|
|
2,857
|
|
Operating
Income
|
|
$ |
88,528
|
|
|
$ |
88,029
|
|
|
$ |
97,408
|
|
Other
income
|
|
|
3,468
|
|
|
|
3,448
|
|
|
|
3,144
|
|
Interest
charges, net
|
|
|
21,182
|
|
|
|
16,456
|
|
|
|
14,293
|
|
Income
tax provision
|
|
|
26,334
|
|
|
|
28,151
|
|
|
|
32,883
|
|
Net
Income
|
|
$ |
44,480
|
|
|
$ |
46,870
|
|
|
$ |
53,376
|
|
The
following table summarizes total throughput in billion cubic feet (Bcf)
of
natural gas by type through the NJNG distribution system:
(Bcf)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Throughput
|
|
|
|
|
|
|
|
|
|
Residential
and commercial
|
|
|
51.2
|
|
|
|
49.8
|
|
|
|
55.0
|
|
Transportation
|
|
|
8.6
|
|
|
|
7.4
|
|
|
|
7.6
|
|
Total
Firm Throughput
|
|
|
59.8
|
|
|
|
57.2
|
|
|
|
62.6
|
|
Incentive
programs
|
|
|
36.5
|
|
|
|
38.4
|
|
|
|
52.4
|
|
Interruptible
|
|
|
6.5
|
|
|
|
7.2
|
|
|
|
9.7
|
|
Total
Throughput
|
|
|
102.8
|
|
|
|
102.8
|
|
|
|
124.7
|
|
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Utility
Gross Margin
NJNG’s
utility gross margin is defined as natural gas revenues less natural
gas
purchases, sales tax, a Transitional Energy Facilities Assessment (TEFA)
and
regulatory rider expenses. Management believes that utility gross margin
provides a more meaningful basis than revenue for evaluating utility
operations
since natural gas costs, sales tax, TEFA and regulatory rider expenses
are
included in operating revenue and passed through to customers and, therefore,
have no effect on utility gross margin. This definition of utility gross
margin
may not be comparable to the definition of gross margin used by others
in the
natural gas distribution business and other industries.
Natural
gas costs are charged to operating expenses on the basis of therm sales
at the
prices in NJNG’s BGSS tariff, approved by the BPU. The BGSS tariff 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.
Sales
tax
was calculated at 6 percent of revenue for fiscal year 2005, as well
as through
July 14, 2006. On July 15, 2006, the sales tax was raised to 7 percent
of revenue, and was calculated at 7 percent for all of fiscal 2007. The
sales
tax calculation excludes sales to cogeneration facilities, other utilities,
off-system sales and federal accounts.
TEFA,
which is included in Energy and other taxes on the 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 $133.2 million, or 11.7 percent, and
Gas
purchases decreased by $160.1 million, or 18.9 percent, for fiscal year
2007.
Unlike fiscal 2006 and 2005, which remained flat at approximately $1.1
billion,
the change in operating revenue from fiscal 2007 as compared to fiscal
2006 is
the net effect of:
|
a
decrease due to BGSS customer refunds of $55.1 million and
$21.3 million,
inclusive of sales tax refunds of $3.6 million and $1.3 million,
in
December 2006 and March 2007, respectively, as a result of
lower cost of
gas purchases achieved through a successful natural gas commodity
purchasing strategy and declining wholesale natural gas market
prices;
|
|
|
|
a
decrease in off-system revenue of $81 million as a result of
a 20 percent
decrease in the average off-system price of natural gas from
$9.405 per
dth for fiscal 2006 to $7.513 per dth for fiscal 2007 coupled
with a 5
percent decrease in sales volume from 38.4 bcf in fiscal 2006
to 36.5 bcf
in fiscal 2007;
|
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
|
|
|
the
effect of the non-weather portion of CIP accrual totaling $8.3
million, as
a result of lower customer usage per degree-day; and
|
|
|
|
growth
in the number of residential sales customers of 5,335 from
fiscal 2006 to
fiscal 2007 along with an increase in the number of commercial
and
industrial transport customers of 595 from fiscal 2006 to fiscal
2007.
|
The
changes for fiscal 2006, as compared with fiscal 2005, were due primarily
to:
|
an
increase in operating revenues associated with firm sales of
$83.3 million
due primarily to BGSS rates being adjusted in fiscal 2006 to
provide
provisional rate relief to NJNG in light of the volatile wholesale
natural
gas market; fully offset by
|
|
|
|
a
decrease due to a BGSS customer refund of approximately $23.7
million,
which is inclusive of a sales tax refund of $1.3 million, as
a result of
lower cost of gas purchases achieved through a successful natural
gas
commodity purchasing strategy and declining wholesale natural
gas market
prices; and
|
|
|
|
a
decrease in off-system revenue in the amount of $55.6 million,
which was
primarily the result of a 27 percent decrease in volume sold
from 52.4 bcf
in 2005 to 38.4 bcf in 2006, partially offset by a 13.2 percent
increase
in the average off-system price of natural gas from $8.23 per
dth for
fiscal 2005 to $9.405 per dth for fiscal
2006.
|
Gas
purchases decreased 18.9 percent to $687.2 million in fiscal 2007 from
$847.3
million in fiscal 2006. This decrease was due primarily to the
following:
|
a
23.5 percent decrease in the average price of natural gas from
$8.830 per
dth in fiscal 2006 to $6.758 per dth in fiscal 2007;
|
|
|
|
credits
to the cost of gas of $51.5 million and $19.9 million as a
result of the
BGSS customer refunds in December 2006 and March 2007 respectively;
and
|
|
|
|
a
20 percent decrease in the average off-system price of natural
gas from
$9.405 per dth in fiscal 2006 to $7.513 per dth in fiscal 2007,
in
conjunction with a 5 percent decrease in off-system sales of
1.9
bcf.
|
Gas
purchases increased less than 1 percent to $847.3 million in fiscal 2006,
as
compared with fiscal 2005. The $903,000 increase in fiscal 2006 was due
primarily to increased average gas prices offset by decreased volumes
purchased.
Energy
tax and TEFA, which are presented as both components of Revenues and
Operating
Expenses in the Consolidated Statements of Income, totaled $56.5 million,
$52.9
million and $50.5 million in fiscal 2007, 2006 and 2005, respectively.
This
increase in fiscal 2007 as compared with fiscal 2006 is due primarily
to the
change in the sales tax rate from 6 percent to 7 percent, as applied
to NJNG’s
operating revenue, and was partially offset by reduced revenues, as a
result of
customer refunds. The increase in sales tax and TEFA in fiscal 2006 was
due
primarily to an increase in operating revenue from firm sales to $799
million in
fiscal 2006 from $741 million in fiscal 2005.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Regulatory
rider expenses totaled $37.6 million, $28.6 million and $31.6 million
in fiscal
2007, 2006, and 2005, respectively. The increase in regulatory rider
expenses in
fiscal 2007 is due primarily to an increase in the USF rider rate in
November,
2006 in conjunction with an increase in firm throughput sales as a result
of
customer growth. The decrease in regulatory rider expenses in fiscal
2006 is a
direct result of the decrease in firm throughput through the NJNG natural
gas
distribution system.
Utility
gross margin is comprised of three major categories:
|
Utility
Firm Gross Margin, which is derived from residential and commercial
customers who receive natural gas service from NJNG through
either sales
or transportation tariffs;
|
|
|
|
Incentive
programs, where revenues generated or savings achieved from
BPU-approved
off-system sales, capacity release, Financial Risk Management
(defined in
Incentive Programs, below) or storage incentive programs are
shared
between customers and NJNG; and
|
|
|
|
Utility
gross margin from interruptible customers who have the ability
to switch
to alternative fuels and are subject to BPU-approved
incentives.
|
Utility
Firm Gross Margin
For
fiscal years 2006 and 2005, Utility firm gross margin from residential
and
commercial customers was impacted by the WNC, which provided for a revenue
adjustment if the weather varied by more than one-half percent from normal
weather (i.e., 20-year average). The accumulated adjustment from one
heating
season (i.e., October through May) was billed or credited to customers in
subsequent periods. This mechanism reduced the variability of both customers’
bills and NJNG’s earnings due to weather fluctuations. The WNC did not, however,
reflect reductions in customer usage from the assumed level in the WNC.
These
reductions related to customer usage have been captured in NJNG’s CIP tariff,
which became effective in fiscal 2007.
Effective
October 1, 2006, the BPU approved the CIP to encourage energy savings
while
allowing NJNG to recover the necessary costs of operations. The three-year
pilot
program eliminates the disincentive to promote conservation and energy
efficiency, since utility gross margin is no longer directly linked to
customer
usage. The CIP tariff normalizes NJNG’s utility gross margin recoveries for
variances not only in weather but also other factors affecting usage,
including
customer conservation. Recovery of utility gross margin 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 10.5 percent.
Customers
switching between sales service and transportation service affect the
components
of utility gross margin from firm customers. NJNG’s total utility gross margin
is not negatively affected by customers who use its transportation service
and
purchase natural gas from another supplier because its tariff is designed
so
that no profit is earned on the commodity portion of sales to firm customers.
All customers who purchase natural gas from another supplier continue
to use
NJNG for transportation service.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Total
utility firm gross margin increased $14.0 million, or 6.9 percent, and
$1.0
million, or less than 1 percent, in fiscal 2007 and 2006, respectively.
The
changes for fiscal 2007 were due primarily to:
|
the
effect of the CIP in the current fiscal year, which captures
the impact
from both weather and customer usage, when compared to the
same periods in
the prior fiscal year when the WNC, which did not capture the
impact of
lower usage per degree-day, was in effect;
|
|
|
|
commercial
transport customer growth of 13.9 percent; and
|
|
|
|
residential,
commercial and industrial sales customer growth of 1.2
percent.
|
The
change in fiscal 2006 was due primarily to the net effect of:
|
the
decrease in natural gas used by customers, as the winter heating
season
was 11.4 percent warmer compared with fiscal 2005;
|
|
|
|
a
reduction in customer usage per degree-day over the same period
in fiscal
2005; partially offset by
|
|
|
|
an
increase in fixed revenue as a result of customer growth;
and
|
|
|
|
the
impact of the WNC.
|
NJNG
added 8,421 and 10,159 new customers and added natural gas heat and other
services to another 770 and 874 existing customers in fiscal 2007 and
2006,
respectively. This customer growth represents an estimated annual increase
of
approximately 1.1 billion cubic feet in sales to firm customers, assuming
normal
weather and usage.
The
weather in fiscal 2007 was 5.6 percent warmer than normal, which resulted
in an
accrual of utility gross margin under the CIP of $8.2 million. In fiscal
2006,
the weather was 9.9 percent warmer than normal, therefore NJNG deferred
$10.3
million of gross margin for future recovery from customers under the
WNC. The
weather in fiscal 2005 was 1.5 percent colder than normal, therefore
NJNG
deferred $2.1 million of gross margin for future refunds to customers
under the
WNC. On October 3, 2007, the BPU approved the full recovery of $8.1 million
of
previously deferred amounts associated with the WNC.
Utility
firm gross margin from transportation service increased $6.5 million,
or 28.4
percent, and decreased approximately $359,000, or 1.6 percent, in fiscal
2007
and 2006, respectively. NJNG transported 8.6 Bcf for its firm customers
in
fiscal 2007, compared with 7.4 Bcf in fiscal 2006 and 7.6 Bcf in fiscal
2005.
The increase in utility firm gross margin in fiscal 2007 was due primarily
to an
increase in the number of residential and commercial customers switching
from
firm to transportation services, combined with the impact of the CIP
program.
The decrease in fiscal 2006 were due primarily to a reduction in customers
utilizing the transportation service as a result of warmer weather and
lower
usage per degree-day discussed above.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The
following table shows residential and commercial customers using transportation
services as of the fiscal years ended September 30:
|
2007
|
2006
|
2005
|
Residential
|
9,229
|
8,594
|
11,723
|
Commercial
|
4,875
|
4,280
|
3,523
|
Total
|
14,104
|
12,874
|
15,246
|
The
increase in transportation customers for fiscal 2007 was due primarily
to a
change in marketing efforts by third-party natural gas service providers
in
NJNG’s service territory. The decrease in transportation customers for fiscal
2006 was due primarily to a decline in third-party marketing efforts
in NJNG’s
service territory.
In
fiscal
2008 and 2009, NJNG currently expects to add, in total, approximately
16,000 to
19,000 new customers. In addition, NJNG expects to convert an additional
700
existing customers per year to natural gas heat and other services. Achieving
these expectations would represent an estimated annual customer growth
rate of
approximately 1.8 percent and result in an estimated sales increase of
approximately 1.1 Bcf to 1.2 Bcf, annually.
The
Company believes that this growth would increase utility gross margin
under
present base rates by approximately $4.0 to $4.3 million annually, as
calculated
under NJNG’s CIP tariff.
These
growth expectations are based upon management’s review of local planning board
data, recent market research performed by third parties, builder surveys
and
studies of population growth rates in NJNG’s service territory. However, future
sales will be affected by the weather, actual energy usage patterns of
NJNG’s
customers, economic conditions in NJNG’s service territory, conversion and
conservation activity, the impact of changing from a regulated to a competitive
environment, changes in state regulation and other marketing efforts,
as has
been the case in prior years.
Incentive
Programs
To
reduce
the overall cost of its natural gas supply commitments, NJNG has entered
into
contracts to sell natural gas to wholesale customers outside its franchise
territory when the natural gas is not needed for system requirements.
These
off-system sales enable NJNG to spread its fixed demand costs, which
are charged
by pipelines to access their supplies year round, over a larger and more
diverse
customer base. NJNG also participates in the capacity release market
on the
interstate pipeline network when the capacity is not needed for its firm
system
requirements. NJNG retains 15 percent of the utility gross margin from
these
sales, with 85 percent credited to firm customers through the BGSS.
The
Financial Risk Management (FRM) program is designed to provide price
stability
to NJNG’s natural gas supply portfolio. The FRM program includes an incentive
mechanism designed to encourage the use of financial instruments to hedge
NJNG’s
natural gas costs, enabling NJNG customers to be credited 80 percent,
and NJNG
to retain 20 percent, of these costs and results. Beginning November
1, 2007,
NJNG customers will be credited 85 percent and NJNG will retain 15 percent
of
the gains or losses.
The
storage incentive program shares gains and losses on an 80 percent and
20
percent basis between customers and NJNG, respectively. This program
measures
the difference between the actual cost of natural gas injected into storage
and
a benchmark applicable to the April-through-October injection
season.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
On
October 3, 2007, the BPU approved an agreement whereby the existing off-system
sales, capacity release, storage incentive and FRM utility gross margin-sharing
programs between customers and NJNG were extended through October 31,
2008.
NJNG’s
incentive programs totaled 36.5 Bcf and generated $8.1 million of utility
gross
margin in fiscal 2007, compared with 38.4 Bcf and $7.4 million of utility
gross
margin in fiscal 2006 and 52.4 Bcf and $6.1 million of utility gross
margin in
fiscal 2005. Utility gross margin from incentive programs comprised 4
percent of
total utility gross margin in fiscal 2007 and 4 percent and 3 percent
of total
utility gross margin in fiscal 2006 and 2005, respectively. The increase
in
utility gross margin for fiscal 2007 was due primarily to higher margin
from the
storage incentive and FRM programs which was largely offset by lower
off-system
sales margin from lower volumes sold and as driven by market opportunities.
The
increase in utility gross margin in fiscal 2006 was primarily due to
the FRM and
the storage incentive programs, which both benefited from additional
volatility
in the wholesale energy market.
New
York
Mercantile Exchange (NYMEX) settlement prices for natural gas are a general
indication of the monthly market movements. NYMEX prices have decreased
from an
average of $8.830/dth in fiscal year 2006 to $6.758/dth in fiscal year
2007,
which represents a 23.5 percent decrease, while the average off-system
price
decreased by 20.0 percent from an average of $9.405/dth in 2006 to $7.513
/dth
in 2007.
Interruptible
Sales Tariff Revenues
NJNG
serves 45 customers through interruptible sales and/or transportation
tariffs.
Sales made under the interruptible sales tariff are priced on market-sensitive
energy parity rates. Although therms sold and transported to interruptible
customers represented 6.3 percent of total throughput in fiscal 2007,
7.0
percent of total throughput in fiscal 2006 and 7.8 percent of the total
throughput in fiscal 2005, they accounted for less than 1 percent of
the total
utility gross margin in each year due to the sharing formulas that govern
these
sales. Under these formulas, NJNG retains 10 percent of the utility gross
margin
from interruptible sales and 5 percent of the utility gross margin from
transportation sales, with 90 percent and 95 percent, respectively, credited
to
firm sales customers through the BGSS. Interruptible sales were 1.5 Bcf
and 2.0
Bcf in fiscal 2007 and 2006, respectively. In addition, NJNG transported
5.0 Bcf
and 5.2 Bcf in fiscal 2007 and 2006, respectively, for its interruptible
customers. The agreement with the BPU approved on October 3, 2007, included
the
termination of the incentive programs related to interruptible sales,
on-system
interruptible transportation and sales to the Sayreville and Forked River
facilities effective November 1, 2007.
Operation
and Maintenance Expense
Operation
and maintenance expense increased $12.1 million, or 14.2 percent, in
fiscal 2007
as compared with fiscal 2006 due primarily to:
Ÿ
|
the
BPU settlement related to the Long Branch Mass Tort Litigation,
reflecting
the pre-tax litigation and settlement cost of $4.0 million
attributed to
personal injury claims that were previously deferred in Regulatory
assets,
but were not approved by the BPU as recoverable costs;
|
|
|
Ÿ
|
higher
compensation costs of $5.9 million primarily due to an increase
in the
number of employees as well as annual wage
increases;
|
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
|
|
Ÿ
|
an
increase in contractor’s expense of $1.4 million due primarily to
federally mandated pipeline integrity efforts in working towards
completion of the Transmission Pipeline Integrity requirements;
and
|
|
|
Ÿ
|
higher
marketing incentives of $1.2 million for special promotional
rebates
associated with the conversion of additional customers from
other
fuels.
|
Operation
and maintenance expense increased $8.3 million, or 10.8 percent, in fiscal
2006,
compared with fiscal year 2005, due primarily to:
Ÿ
|
an
increase in labor costs in the amount of $4.4 million as a
result of an
increased number of employees and annual wage
increases;
|
|
|
Ÿ
|
the
accrual of $1.8 million for the value of customer conservation
costs to be
incurred over a three-year period as part of the stipulation
agreement for
the CIP; and
|
|
|
Ÿ
|
an
increase in bad debt expense of $350,000 as result of a change
in the
nature of the related accounts
receivable.
|
Depreciation
Expense
Depreciation
expense increased $1.5 million in fiscal 2007 and $1.2 million in fiscal
2006,
as compared with the respective previous fiscal years, due primarily
to utility
plant additions of $64.9 million and $53.1 million in fiscal 2007 and
2006,
respectively.
Operating
Income
Operating
income increased $500,000, or 0.6 percent, in fiscal 2007, compared with
fiscal
2006, due primarily to an increase in firm utility gross margin as a
result of
implementation of the CIP and firm utility customer growth, offset by
an
increase in operation and maintenance expense and depreciation expense
as
described above. During fiscal 2006, the WNC did not capture reductions
in
customer usage, but only the variability experienced by NJNG’s utility gross
margin as a result of weather fluctuations. Operating income decreased
$9.4
million, or 9.6 percent, in fiscal 2006, compared with fiscal 2005, due
primarily to the relatively flat gross margin and higher Operation and
maintenance expense due to higher regulatory costs, increased labor costs,
an
increase in bad debt expense and higher depreciation expense.
Interest
Charges
Interest
charges increased $4.7 million in fiscal 2007 compared with $2.2 million
in
fiscal 2006 due primarily to an increase in short-term borrowings and
higher
interest rates, as well as interest due to customers on balances associated
with
overrecovered gas costs. The increase in fiscal 2006 compared with fiscal
2005
was due primarily to higher average interest rates on variable rate long-term
and short-term debt and interest costs payable to customers on overrecovered
BGSS balances.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Net
Income
Net
income decreased $2.4 million, or 5.1 percent, in fiscal 2007, compared
with
fiscal 2006, due primarily to higher Operating and maintenance expense
as a
result of the BPU settlement and higher labor expenses described above,
as well
as higher interest expense, partially offset by the implementation of
the CIP
and a reduction in bad debt expense. Net income decreased $6.5 million,
or 12.2
percent, in fiscal 2006, compared with fiscal 2005, due primarily to
lower
operating income and higher interest expense as previously
discussed.
Energy
Services Operations
NJRES
utilizes contractual assets that it controls for natural gas storage
and
pipeline transportation to meet its various sale and delivery commitments
to its
customers. NJRES purchases natural gas predominantly in the Gulf region
of the
United States and Canada, and transports that gas, through the use of
pipeline
contracts to which it has reserved capacity through the payment of a
fixed
demand charge, to either storage facilities that it has reserved, primarily
in
the Appalachian, Mid-Continent and Gulf regions of the United States
and Canada
or directly to customers in various market areas including the Northeastern
region of the United States and eastern Canada.
NJRES
enters into contracts for delivery of physical natural gas and also enters
into
derivatives financial contracts at advantageous prices to establish an
initial
financial margin for the transaction. 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 economically fix and protect the cash flows surrounding
these
transactions.
Predominantly
all of NJRES’ purchases and sales result in the physical delivery of natural
gas, and therefore, NJRES has elected the “normal purchase normal
sale” scope exception of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended (SFAS 133), under which related
liabilities incurred and assets acquired under these contracts are
recorded when
title to the underlying commodity passes. The changes in fair value
of NJRES’
derivative instruments, which are financial futures, forwards and swap
contracts, are recognized in the Consolidated Statements of Income,
as a
component of Gas purchases.
NJRES
expenses its demand charges, which represent the right to use natural
gas
pipeline and storage capacity assets of a third-party for a fixed period
of
time, ratably over the term of the related natural gas pipeline or storage
contract.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
NJRES’
financial results are summarized as follows:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
revenues
|
|
$ |
1,994,682
|
|
|
$ |
2,133,540
|
|
|
$ |
1,973,268
|
|
Gas
purchases
|
|
|
1,934,374
|
|
|
|
1,792,213
|
|
|
|
2,068,014
|
|
Gross
margin (loss)
|
|
|
60,308
|
|
|
|
341,327
|
|
|
|
(94,746 |
) |
Operation
and maintenance expense
|
|
|
18,521
|
|
|
|
16,415
|
|
|
|
6,916
|
|
Depreciation
and amortization
|
|
|
214
|
|
|
|
211
|
|
|
|
253
|
|
Other
taxes
|
|
|
660
|
|
|
|
656
|
|
|
|
710
|
|
Operating
income (loss)
|
|
|
40,913
|
|
|
|
324,045
|
|
|
|
(102,625 |
) |
Other
income
|
|
|
555
|
|
|
|
998
|
|
|
|
585
|
|
Interest
charges, net
|
|
|
4,222
|
|
|
|
7,042
|
|
|
|
4,137
|
|
Income
tax provision
|
|
|
15,948
|
|
|
|
129,629
|
|
|
|
(43,372 |
) |
Net
income (loss)
|
|
$ |
21,298
|
|
|
$ |
188,372
|
|
|
$ |
(62,805 |
) |
Management
of the Company also uses non-GAAP measures when viewing the results of
NJRES to
understand the operational results without the impact of unsettled derivative
instruments. These non-GAAP measures are “financial margin” and “net financial
earnings.”
Financial
margin represents Operating revenues from the sale of natural gas sales
less Gas
purchases, and excludes the accounting impacts of unrealized gains and
losses
from derivative instruments. These accounting impacts represent the change
in
fair value of these financial instruments, which represent futures and
swaps
designed to economically hedge forecasted natural gas purchases, sales and
transportation, and are primarily open positions resulting in unrealized
gains
or losses. Net financial earnings represents Net income excluding the
accounting
impacts of unrealized gains and losses from these derivative instruments,
net of
taxes.
As
revenues from the sale of natural gas to its customers, on a wholesale
basis,
are highly correlated to the wholesale price of natural gas and the economic
impact of its derivative instruments will be substantially the same as
the
accounting results under GAAP upon transaction settlement, management
of the
Company believes that the net financial margin and net financial earnings
measurements better represent the economic results of operations of NJRES.
While
significant volatility is measured on a GAAP basis the ultimate impact
of the
transaction will yield the same cash flow and economic result upon settlement
of
the derivative instrument and completion of the forecasted transaction.
In
viewing the financial margin and net financial earnings of NJRES, management
of
the Company reviews the results of operations without this volatility
to measure
the economic impact that NJRES achieved in relation to established
benchmarks and goals.
The
following table is a computation of financial margin of NJRES for the
fiscal
years ended September 30:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
revenues
|
|
$ |
1,994,682
|
|
|
$ |
2,133,540
|
|
|
$ |
1,973,268
|
|
Gas
purchases
|
|
|
1,934,374
|
|
|
|
1,792,213
|
|
|
|
2,068,014
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments
|
|
|
27,988
|
|
|
|
(269,590 |
) |
|
|
127,744
|
|
Realized
loss (gain) from derivative instruments related to natural
gas
inventory
|
|
|
2,903
|
|
|
|
(710 |
) |
|
|
6,300
|
|
Financial
margin
|
|
$ |
91,199
|
|
|
$ |
71,027
|
|
|
$ |
39,298
|
|
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
A
reconciliation of Operating income, the closest GAAP financial
measurement, to the financial margin of NJRES is as follows for the
years ended September 30:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
income (loss)
|
|
$ |
40,913
|
|
|
$ |
324,045
|
|
|
$ |
(102,625 |
) |
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance expense
|
|
|
18,521
|
|
|
|
16,415
|
|
|
|
6,916
|
|
Depreciation
and amortization
|
|
|
214
|
|
|
|
211
|
|
|
|
253
|
|
Other
taxes
|
|
|
660
|
|
|
|
656
|
|
|
|
710
|
|
Subtotal
– Gross margin (loss)
|
|
$ |
60,308
|
|
|
$ |
341,327
|
|
|
$ |
(94,746 |
) |
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments
|
|
|
27,988
|
|
|
|
(269,590 |
) |
|
|
127,744
|
|
Realized
loss (gain) from derivative instruments related to natural
gas
inventory
|
|
|
2,903
|
|
|
|
(710 |
) |
|
|
6,300
|
|
Financial
margin
|
|
$ |
91,199
|
|
|
$ |
71,027
|
|
|
$ |
39,298
|
|
A
reconciliation of Net income to net financial earnings, is as follows
for the
years ended September 30:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
income (loss)
|
|
$ |
21,298
|
|
|
$ |
188,372
|
|
|
$ |
(62,805 |
) |
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments, net of taxes
|
|
|
17,079
|
|
|
|
(159,838 |
) |
|
|
75,561
|
|
Realized
loss (gain) from derivative instruments related to natural
gas
inventory,
net of taxes
|
|
|
1,771
|
|
|
|
(421 |
) |
|
|
3,726
|
|
Net
financial earnings
|
|
$ |
40,148
|
|
|
$ |
28,113
|
|
|
$ |
16,482
|
|
NJRES'
financial margin in fiscal 2007 increased $20.2 million, as compared
to fiscal
year 2006, due primarily to storage positions designed to capture additional
value from favorable time spreads, coupled with higher sales volumes
related to
arbitrage opportunities that also provided additional margins during the
winter season of fiscal 2007, when natural gas market prices experienced
higher
volatilities within a short time period in the Appalachian and Northeast
regions
of the United States. The volatility in prices, which were primarily
due to
below-normal temperatures in those regions, primarily during the second
quarter
of fiscal 2007, allowed NJRES to maximize its existing natural gas storage
and
basis positions to secure the majority of this increase in financial
margin in
fiscal 2007 as compared to fiscal 2006 as it was able to maximize pricing
differences between locations from where it took delivered gas to where
it could
best be utilized given the weather conditions.
NJRES’
financial margin increased $31.7 million in fiscal 2006, as compared
with fiscal
2005, due primarily to favorable time spreads on larger storage asset
positions,
as well as securing positive locational spreads on transportation capacity,
and
the benefit in market price changes from certain natural gas basis swaps,
which
concluded in October 2006.
NJRES’
operation and maintenance increased $2.1 million and $9.5 million in
fiscal 2007
and 2006, respectively. The increases in both years are due primarily
to
increased compensation as a result of operational growth, incentive costs
correlated to net financial earnings performance and increased charitable
contributions.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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, 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:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
revenues
|
|
$ |
21,495
|
|
|
$ |
(1,085 |
) |
|
$ |
73,034
|
|
Operation
and maintenance expense
|
|
$ |
21,074
|
|
|
$ |
20,062
|
|
|
$ |
24,899
|
|
Other
income
|
|
$ |
271
|
|
|
$ |
279
|
|
|
$ |
1,085
|
|
Equity
in earnings, net of tax
|
|
$ |
1,662
|
|
|
$ |
1,817
|
|
|
$ |
1,753
|
|
Net
(loss) income
|
|
$ |
(497 |
) |
|
$ |
(13,334 |
) |
|
$ |
27,964
|
|
NJR
Energy has an economic hedge associated with a long-term fixed price
contract to
sell gas to a counterparty. The Income statement impact represents unrealized
(losses) and gains associated with these derivative instruments of $(7.2)
million, $(28.4) million and $36.3 for the fiscal years ended September
30,
2007, 2006 and 2005, respectively, which are recorded, pre-tax, as a
component
of Operating revenues. On an after-tax basis, these unrealized (losses)
gains
are $(4.2) million, $(16.9) million and $21.5 million for the fiscal
years ended
September 30, 2007, 2006 and 2005, respectively.
Operating
revenue in fiscal 2007 increased $22.6 million compared with fiscal 2006
due
primarily to greater sales volumes associated with installations of cooling
equipment and a greater volume of service contracts at NJRHS, and lower
unrealized losses at NJR Energy as a result of its economic hedge. Operating
revenues in fiscal 2006 decreased $74.1 million compared with fiscal
2005 due
primarily to changes in fair value of NJR Energy’s economic hedge, resulting in
unrealized losses, as a result of adverse price movements associated
with the
derivative financial instruments.
Operation
and maintenance expenses in fiscal 2007 increased $1.0 million compared
with
fiscal 2006 due to higher compensation costs primarily due to an increase
in the
number of employees as well as annual wage increases. Operation and maintenance
expenses in fiscal 2006 decreased $4.8 million compared with fiscal 2005
due
primarily to impairment charges for undeveloped land for CR&R in fiscal
2005.
Other
income in fiscal 2007 remained constant as compared to fiscal 2006. Other
income
in fiscal 2006 decreased $806,000 compared to fiscal 2005 due primarily
to a
significant gain on the sale of a commercial office building owned by
CR&R
in fiscal 2005 that did not recur in fiscal 2006.
Taxes
netted in Equity in earnings from Iroquois are $1.1 million, $1.1 million,
and
$900,000 and are included in the Consolidated Statements of Income for
the
fiscal years ended September 30, 2007, 2006 and 2005, respectively. Equity
in earnings from Iroquois is driven by the underlying performance of
natural gas
transportation through its existing pipeline, which is based on FERC
regulated
tariffs.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Net
income in fiscal 2007 increased $12.8 million compared to fiscal 2006
due
primarily to operating results at NJRHS offset partially by a reduced
gain on
the sale of land at CR&R and lower continued unrealized losses at NJR
Energy. Net income in fiscal 2005, included a $6 million after-tax gain
on the
sale of the commercial office building, partially offset by the $2.5
million
after-tax loss on the impairment of 52 acres of undeveloped land and
early
retirement charges. Excluding these items fiscal 2005 net income was
$24.5
million. In fiscal 2006 net income decreased by $37.8 million, as compared
with
adjusted fiscal 2005 net income, due primarily to unrealized losses associated
with the economic hedges at NJR Energy partially offset by improved operating
results at NJRHS and greater earnings from the investment in
Iroquois.
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 at September 30 was as follows:
|
|
2007
|
|
2006
|
Common
stock equity
|
|
|
50 |
% |
|
|
50 |
% |
Long-term
debt
|
|
|
30
|
|
|
|
27
|
|
Short-term
debt
|
|
|
20
|
|
|
|
23
|
|
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.
As
of
September 30, 2007, the Company had a 3.5 million share repurchase plan
that has
been approved by its Board of Directors and had repurchased all but 8,147
shares
under this plan. On November 14, 2007, the NJR Board of Directors authorized
an
increase of 1 million shares to the plan, bringing the total permitted
repurchases to 4.5 million shares as of that date.
Debt
NJR
and
its unregulated subsidiaries rely on cash flows generated from operating
activities and utilization of committed credit facilities to provide
liquidity
to meet working capital and external debt-financing requirements.
As
of
September 30, 2007, NJR, NJRES and NJNG had committed credit facilities
of $605
million with approximately $306 million available under these facilities
(see
Item 8. Financial Statements and Other Supplemental Data as Restated
and Note 8. Short-term debt and credit
facilities).
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
NJR
On
September 24, 2007, NJR issued $50 million of Unsecured Senior Notes
which will
be used for financing its initial investment in Steckman Ridge and general
corporate purposes, including refinancing short-term debt. These notes
have a
10-year maturity and an interest rate of 6.05 percent.
As
of
September 30, 2007, NJR had a $325 million committed credit facility
with
several banks, with a 3-year term expiring in December 2007. NJR expects to
replace this facility in the first quarter of fiscal 2008 with a five-year
committed credit facility.
Financial
covenants contained in NJR’s credit facility include a maximum debt-to-total
capitalization of 65 percent and minimum interest coverage ratio of 2.5.
At
September 30, 2007, the debt-to-total capitalization was 52 percent after
adjustments for the fair value of derivative assets and liabilities and
standby
letters of credit, as defined in NJR’s credit facility. For the year ended
September 30, 2007, the interest coverage ratio, as defined in the credit
facility, was 6.14.
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 hedging activities in the volatile wholesale natural gas market,
create
significant short-term cash requirements.
NJR’s
short-term borrowings at September 30, 2007, decreased to $40.2 million
from $129.2 million at September 30, 2006, largely as a result of fewer
share repurchases during the fourth quarter of fiscal 2007 compared to
the
fourth quarter of fiscal 2006. In addition, in October 2006, NJRES entered
into
a 3-year $30 million committed credit facility, guaranteed by NJR, which
provided NJRES with an initial source of funds that NJRES was able to
draw upon
during fiscal 2007 to finance its working capital needs. NJR’s short-term debt
at September 30, 2006, decreased to $129.2 million from $174.1 million at
September 30, 2005. The decrease was due primarily to reduced margin calls,
which were a result of increased over-the-counter transactions and lower
natural
gas prices.
As
of
September 30, 2007, NJR had three letters of credit outstanding on behalf
of NJRES, one of which expired on November 30, 2007. A $14.0 million letter
of credit was related to margin requirements for NJRES’ natural gas transactions
and was not renewed. There are two remaining letters of credit outstanding
on behalf of NJRES that expire on December 31, 2007. These two letters of
credit are comprised of a $4.0 million letter of credit that was renewed on
August 1, 2007, in conjunction with a long-term natural gas storage
agreement,
and a $500,000 letter of credit that was entered into on September
28, 2007 for
an additional storage transaction.
NJR
also
has a $675,000 letter of credit outstanding on behalf of CR&R, which expired
on December 3, 2007, in conjunction with development activities. This
letter of
credit will be renewed during the first quarter of fiscal
2008.
All
of
these letters of credit reduce the amount available under NJR’s committed credit
facility by the same amount. NJR does not anticipate that these letters
of
credit will be drawn upon by the counterparties and they will be renewed
as
necessary.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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.
In
August
2007, the BPU approved NJNG’s petition to issue and sell, in one or more series,
an aggregate of $125 million in medium-term notes through July 31, 2010.
The
notes may be issued on a secured or unsecured basis and maturities can
range
from one to forty years. The proceeds from the issuance of the notes
will be
used to refinance short-term debt, which has been incurred to fund capital
expenditure requirements and pension and other post-employment benefit
programs.
The notes are anticipated to be issued during the second quarter of fiscal
2008.
To
support the issuance of commercial paper, NJNG has a $250 million committed
credit facility with several banks, with a 5-year term, expiring in
December 2009. NJNG had $175.7 million of commercial paper borrowings
supported by the credit facility as of September 30, 2007, and $151.5
million commercial paper borrowings as of September 30, 2006.
As
of
September 30, 2007, NJNG had a $34 million letter of credit outstanding
that will expire on December 31, 2007, in conjunction with a long-term swap
agreement. The long-term swap agreement was entered into as a hedge related
to
an offsetting physical purchase of natural gas for the same time period
and
volume. This letter of credit was replaced on November 30, 2007, by a
stand-alone letter of credit, expiring on December 31, 2007, which does
not
reduce the amount available to be borrowed under NJNG’s credit facility. NJNG
does not anticipate that this letter of credit will be drawn upon by
the
counterparty, and it will be renewed as necessary upon its
expiration.
In
April
2007, NJNG entered into a 3-year, $30 million uncommitted credit facility
with a
multinational financial institution. As of September 30, 2007, NJNG had
borrowings of $10.5 million outstanding under this facility. Borrowings
under
this facility are in addition to the amount available under the NJNG
bank credit
facility mentioned above.
NJRES
In
October 2006, NJRES entered into a 3-year $30 million committed credit
facility with a multinational financial institution. Borrowings under
this
facility are guaranteed by NJR. As of September 30, 2007, $30 million
was
borrowed under the facility.
Consolidated
Neither
NJNG nor its assets are obligated or pledged to support the NJR or NJRES
facilities.
NJR
believes that as of September 30, 2007, NJR, NJNG and NJRES were, and
currently
are, in compliance with all debt covenants.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 in fiscal 2008 and 2009 will be met through the issuance
of
short-term and long-term debt and proceeds from the Company’s Automatic Dividend
Reinvestment Plan.
Sale
Leaseback
NJNG
has
received approximately $5.5 million, $4.1 million and $4.9 million in
fiscal
2007, 2006 and 2005, respectively, related to the sale-leaseback of a
portion of
its gas meters. NJNG also plans to continue its meter sale-leaseback
program at
approximately $5 million annually.
Contractual
Obligations
The
following table is a summary of NJR, NJNG and NJRES contractual cash
obligations
and financial commitments and their applicable payment due dates as of
September
30, 2007.
(Thousands)
|
Payments Due by Period
|
|
Contractual Obligations
|
Total
|
|
Up to
1 Year
|
|
2-3
Years
|
|
4-5
Years
|
|
After
5 Years
|
|
Long-term
debt *
|
$ 527,944
|
|
$ 16,104
|
|
$
82,156
|
|
$
43,820
|
|
$385,864
|
|
Capital
lease obligations *
|
83,402
|
|
7,994
|
|
16,183
|
|
17,990
|
|
41,235
|
|
Operating
leases *
|
8,601
|
|
2,870
|
|
3,795
|
|
1,266
|
|
670
|
|
Short-term
debt
|
256,479
|
|
256,479
|
|
—
|
|
—
|
|
—
|
|
New
Jersey Clean Energy Program*
|
11,473
|
|
8,832
|
|
2,641
|
|
—
|
|
—
|
|
Construction
obligations
|
5,071
|
|
5,071
|
|
—
|
|
—
|
|
—
|
|
Remediation
expenditures**
|
105,340
|
|
29,600
|
|
17,800
|
|
10,600
|
|
47,340
|
|
Natural
gas supply purchase obligations–NJNG
|
35,201
|
|
30,781
|
|
4,008
|
|
412
|
|
—
|
|
Demand
fee commitments - NJNG
|
436,554
|
|
81,409
|
|
170,702
|
|
112,604
|
|
71,839
|
|
Natural
gas supply purchase obligations–NJRES
|
867,631
|
|
473,941
|
|
393,690
|
|
—
|
|
—
|
|
Demand
fee commitments - NJRES
|
227,009
|
|
99,130
|
|
78,192
|
|
36,541
|
|
13,146
|
|
Total
contractual cash obligations
|
$2,564,705
|
|
$1,012,211
|
|
$769,167
|
|
$223,233
|
|
$560,094
|
|
*
These obligations include an interest component.
**
Expenditures are estimated.
As
of
September 30, 2007, there were NJR guarantees covering approximately $289
million of natural gas purchases and demand fee commitments of NJRES
and NJNG,
included in natural gas supply purchase obligations above, not yet reflected
in
Accounts payable on the Consolidated Balance Sheet.
The
Company made a discretionary $10 million tax-deductible contribution
to its
pension plans in fiscal 2006. The Company was not required to make minimum
pension funding contributions during fiscal 2007. If market performance
is less
than anticipated, additional funding may be required.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
In
fiscal
2006, $3.7 million of tax-deductible discretionary contributions were
made to
the Other Postemployment Benefit (OPEB) plans. The Company’s funding level to
its OPEB plans is expected to be approximately $685,000 annually over
the next
five years. Additional contributions to the pension and OPEB plans may
be made
based on market conditions and various assumptions.
The
Company is obligated to fund up to $125 million associated with the construction
and development of Steckman Ridge. Currently, NJR anticipates that Steckman
Ridge will secure non-recourse project financing for a portion of its
construction activities and therefore reduce NJR’s obligation. There can be no
assurances that Steckman Ridge will eventually secure such non-recourse
project
financing.
NJNG’s
total capital expenditures are estimated at $80.9 million and $77.4 million
in
fiscal 2008 and 2009, respectively, and consist primarily of its construction
program to support customer growth, maintenance of its distribution system
and
replacement needed under pipeline safety regulations.
Off-Balance-Sheet
Arrangements
The
Company does not have any off-balance-sheet financing arrangements.
Cash
Flow
Operating
Activities
As
presented in the Consolidated Statements of Cash Flows, cash flow from
operations totaled $122.4 million in fiscal 2007, compared with cash
flow used
in operations of $23.0 million in fiscal 2006 and cash flow from operations
of $204.8 million in fiscal 2005. Operating cash flows are primarily
impacted by variations in working capital, which are a function of the
seasonality of NJR’s business and fluctuations in wholesale natural gas prices.
In addition to higher net income and lower MGP expenditures, changes
to the
following components of working capital contributed to the increase in
operating
cash flows during fiscal 2007 as compared to fiscal 2006:
Ÿ
|
At
NJNG, an increase in the change in accounts receivable of
$91.5 million, a
decrease in customer credit balances of $71.4 million, and
a decrease in
overrecovered gas costs primarily as a result of credits
issued to retail
customers due to reductions in the wholesale cost of natural
gas;
|
|
|
Ÿ
|
An
increase in gas inventory values at NJNG largely as a result
of higher
delivered average inventory prices;
|
|
|
Ÿ
|
A
decrease in gas inventory values at NJRES is a result of
lower volumes of
gas in storage and a reduction in park-and-loan transactions,
which
represents natural gas inventory borrowed by NJRES to be
ultimately
returned at a later date, which NJRES utilizes to take advantage
of
pricing differentials over time; and
|
|
|
Ÿ
|
A
decrease in gas purchases payable mostly as a result of lower
NJRES gas
purchases during September 2007 and reduced park-and-loan
activity.
|
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Cash
flow
used in operations totaled $23.0 million in fiscal 2006,
compared with cash flow from operations of
$204.8 million in fiscal 2005. The decrease of approximately $228 million
in fiscal 2006, as compared with fiscal 2005, was due primarily to changes
in
working capital and higher MGP expenditures, which were partially offset
by
higher net income and a lower gain on asset sale. The reduction in cash
flow
from working capital was due primarily to the increase in gas in storage
and a
decrease in gas purchases payable, which were caused by higher storage
volumes
and wholesale gas commodity costs, partially offset by a decrease in
accounts
receivable, primarily as the result of BGSS customer credits in September
2006.
NJNG’s
MGP expenditures are currently expected to total $29.6 million in fiscal
2008
(see Note 13. Commitments and Contingent Liabilities). Operating cash
flows for the fiscal year ended September 30, 2007 include the receipt
of $12.8
million in January 2007 related to the settlement of certain claims against
NJNG’s insurance company (see Note 13. Commitments and Contingent
Liabilities – Legal Proceedings – Kemper Insurance Company
Litigation).
Financing
Activities
Cash
flow
used in financing activities totaled $3.5 million in fiscal 2007, compared
with
cash flows from financing activities of $74.0 million in fiscal 2006 and
cash flows used in financing activities of $157.7 million in fiscal 2005.
The change in fiscal 2007, as compared with fiscal 2006, was due primarily
to a
reduction in short term borrowings as a result of lower margin requirements
and
lower volumes held in gas inventory at NJRES, partially offset by refinancing
of
short-term borrowings through a long-term debt issuance of $50 million
at NJR,
as well as a reduction in the amount of share repurchases. The change
in fiscal
2006, as compared to fiscal 2005, was due primarily to an increase in
the amount
of short-term debt utilized, increased issuance of
long-term debt and increased proceeds from the exercise of stock options
partially offset by higher common stock repurchases.
NJRES’
use of high-injection, high-withdrawal storage facilities and anticipated
pipeline park-and-loan arrangements, combined with related hedging activities
in
the volatile wholesale natural gas market, create significant short-term
cash
requirements, which are funded by NJR or its committed credit facility
guaranteed by NJR.
In
October 2005, under the New Jersey Economic Development Authority (EDA)
Act,
NJNG used proceeds from EDA Series 2005A and 2005B bonds to refinance
NJNG’s
$10.3 million, 5.38 percent Series W First Mortgage Bonds and its $10.5
million, 6.25 percent Series Y First Mortgage Bonds. Also in October 2005,
the EDA issued its 4.9 percent (Series 2005C) Natural Gas Facilities
Revenue
Bonds. The net proceeds from the 2005C bonds were deposited into a construction
fund. NJNG drew down $6.5 million from the construction fund during fiscal
2006
and issued its $15 million, 4.9 percent Series KK bonds to the EDA with
a
maturity date of October 1, 2040. NJNG drew down an additional $4.3 million
from
the construction fund in the fourth quarter of fiscal 2007.
NJNG
received $5.5 million, $4.1 million and $4.9 million for fiscal year
2007, 2006
and 2005, respectively, in connection with the sale-leaseback of its
gas meters.
This sale-leaseback program will continue on an annual basis.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Investing
Activities
Cash
flows used in investing activities totaled $118.7 million in fiscal 2007,
compared with $71.0 million and $27.2 million in fiscal 2006 and 2005,
respectively. The increase in fiscal 2007, as compared to fiscal 2006,
was due
primarily to NJR’s investment of $55.0 million in the Steckman Ridge partnership
and increased capital expenditures for utility plant additions at
NJNG, partially offset by the absence of the net $8.5 million deposit into
a construction fund created under the EDA financing arrangement in fiscal
2006
described above. The change in fiscal 2006, as compared to fiscal 2005,
was due
primarily to the cash proceeds from a commercial office building sale
in fiscal
2005, which did not recur in fiscal 2006, and additional deposits in
the
construction fund associated with the EDA financing agreement, partially
offset
by the absence of additional equity investments in Iroquois.
The
Company’s capital expenditures for fiscal 2005 through fiscal 2007 and projected
capital requirements for fiscal years 2008 and 2009 are as follows:
(Thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
NJNG
|
|
$ |
77,454
|
|
|
$ |
80,889
|
|
|
$ |
67,937
|
|
|
$ |
60,559
|
|
|
$ |
59,303
|
|
Energy
Services
|
|
|
100
|
|
|
|
50
|
|
|
|
—
|
|
|
|
244
|
|
|
|
774
|
|
Retail and
Other
|
|
|
390
|
|
|
|
790
|
|
|
|
2,777
|
|
|
|
5,490
|
|
|
|
823
|
|
Total
|
|
$ |
77,944
|
|
|
$ |
81,729
|
|
|
$ |
70,714
|
|
|
$ |
66,293
|
|
|
$ |
60,900
|
|
NJNG’s
capital expenditures result primarily from the need for services, mains
and
meters to support its continued customer growth, mandated pipeline safety
rulemaking and general system improvements. NJNG’s capital expenditures are
expected to increase in fiscal 2008 and 2009 when compared to the capital
spending in fiscal 2007, due primarily to system integrity and replacements
that
NJNG is expecting to be required under pending pipeline safety
rulemaking.
Retail
and Other capital expenditures each year have been made primarily in
connection
with investments made to preserve the value of real estate holdings.
At
September 30, 2007, CR&R owned 83 acres of undeveloped land and a
56,400-square-foot building on 5 acres of land. In fiscal 2007 and fiscal
2006,
capital expenditures of $2.8 million and $5.5 million, respectively,
were
primarily related to CR&R’s construction of the 56,400-square-foot office
building.
During
the second quarter of fiscal 2007, NJR and Spectra Energy Corporation,
through
their respective subsidiaries, formed a partnership to develop and operate
the
Steckman Ridge gas storage facility. NJR will share 50 percent of the
acquisition and development costs of the storage facility, up to a maximum
of
$125 million, of which $55.0 million was expended through September 2007,
as
noted above.
NJR’s
investment in Steckman Ridge is a strategic investment to enter the mid-stream
natural gas business. This storage capacity will provide NJR the potential
to
diversify is revenue stream through another market-based outlet that
has a
consistent demand and a regulated tariff structure. NJR expects a portion
of
Steckman Ridge to be financed on a non-recourse, or project, basis and
for the
majority of its revenue to be secured by long-term contracts; however,
there can
be no assurances that this will occur.
NJRES
does not currently anticipate any significant capital expenditures in
fiscal
2008 and 2009.
New
Jersey Resources
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Credit
Ratings
The
table
below summarizes NJNG’s credit ratings issued by two rating entities, Standard
and Poor’s (S&P) and Moody’s Investors Service, Inc. (Moody’s) as of
September 30, 2007:
|
Standard
and Poor’s
|
Moody’s
|
Corporate Rating
|
A+
|
N/A
|
|
Commercial
Paper
|
A-1
|
P-1
|
|
Senior
Secured
|
AA-
|
Aa3
|
|
Ratings
Outlook
|
Negative
|
Stable
|
|
NJNG’s
S&P and Moody’s Senior Secured ratings are investment-grade ratings and
represent the sixth highest rating within the investment grade category.
Moody’s
and S&P give NJNG’s commercial paper the highest rating within the
Commercial Paper investment-grade category.
Investment-grade
ratings are generally divided into three groups: high, upper medium and
medium.
NJNG’s senior secured ratings and the commercial paper ratings fall into the
high group. NJR is not a rated entity.
NJNG
is
not party to any lending agreements that would accelerate the maturity
date of
any obligation caused by a failure to maintain any specific credit rating.
A
rating set forth above is not a recommendation to buy, sell or hold the
Company’s or NJNG’s securities and may be subject to revision or withdrawal at
any time. Each rating set forth above should be evaluated independently
of any
other rating.
The
timing and mix of any external financings will target a common equity
ratio that
is consistent with maintaining the Company’s current short- and long-term credit
ratings.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Financial
Risk Management
Commodity
Market Risks
Natural
gas is a nationally traded commodity, and its prices are determined effectively
by the New York Mercantile Exchange (NYMEX) and over-the-counter markets.
The prices on the NYMEX and over-the-counter markets generally reflect
the
notional balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
The
regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations, in the price
of
natural gas. To economically hedge against such fluctuations, the Company
and
its subsidiaries have entered into futures contracts, options agreements
and
swap agreements. To manage these derivative instruments, the Company
has
well-defined risk management policies and procedures that include daily
monitoring of volumetric limits and monetary guidelines. The Company’s natural
gas businesses are conducted through three of its operating subsidiaries.
First,
NJNG is a regulated utility that uses futures, options and swaps to economically
hedge against price fluctuations and its recovery of natural gas costs
is
governed by the BPU. Second, NJRES uses futures, options and swaps to
economically hedge purchases and sales of natural gas. Finally, NJR Energy
has
entered into two swap transactions related to an 18-year fixed-price
contract to
sell remaining volumes of approximately 7.3 Bcf of natural gas (Gas Sales
Contract) to an energy marketing company.
New
Jersey Resources
Part
II
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
The
following table reflects the changes in the fair market value of commodity
derivatives from September 30, 2006, to September 30,
2007:
(Thousands)
|
Balance
September 30,
2006
|
Increase
(Decrease)
in Fair
Market Value
|
Less
Amounts
Settled
|
Balance
September 30,
2007
|
NJNG
|
$(82,451
|
)
|
$ 7,348
|
|
$
(23,242
|
)
|
$(51,861
|
)
|
NJRES
|
116,547
|
|
120,458
|
|
147,559
|
|
89,446
|
|
NJR
Energy
|
35,423
|
|
(7,236
|
)
|
(166
|
)
|
28,353
|
|
Total
|
$
69,519
|
|
$120,570
|
|
$124,151
|
|
$
65,938
|
|
There
were no changes in methods of valuations during the year ended
September 30, 2007.
The
following is a summary of fair market value of commodity derivatives
at
September 30, 2007, by method of valuation and by maturity for each fiscal
year period:
(Thousands)
|
|
2008
|
|
|
2009
|
|
2010-2012
|
After
2012
|
|
|
Total
Fair Value
|
|
Price
based on NYMEX
|
|
$ |
36,817
|
|
|
$ |
6,152
|
|
|
$ |
(1,930 |
) |
|
$ |
—
|
|
|
$
|
41,039
|
|
Price
based on over-the-counter
published
quotations and models
|
|
|
22,998
|
|
|
|
1,485
|
|
|
|
416
|
|
|
|
—
|
|
|
|
24,899
|
|
Total
|
|
$ |
59,815
|
|
|
$ |
7,637
|
|
|
$ |
(1,514 |
) |
|
$ |
—
|
|
|
$
|
65,938
|
|
The
following is a summary of commodity derivatives by type as of September 30,
2007:
|
|
Volume
(Bcf)
|
Price
per
Mmbtu
|
Amounts
included
in
Derivatives (Thousands)
|
NJNG
|
Futures
|
18.7
|
|
$6.00
- $ 9.39
|
$ 2,186
|
|
|
Options
|
7.2
|
|
$6.00
- $11.00
|
$ (1,884
|
)
|
|
Swaps
|
(11.7
|
)
|
$3.99
- $ 9.85
|
$(52,163
|
)
|
NJRES
|
Futures
|
(8.5
|
)
|
$5.33
- $11.59
|
$
14,154
|
|
|
Options
|
—
|
|
$6.50
- $14.20
|
$ 143
|
|
|
Swaps
|
(71.2
|
)
|
$5.33
- $11.98
|
$
75,149
|
|
NJR
Energy
|
Swaps
|
7.9
|
|
$3.22
- $ 4.41
|
$
28,353
|
|
Total
|
|
|
|
|
$
65,938
|
|
The
Company uses a value-at-risk (VaR) model to assess the market risk of
its net
futures, options and swap positions. VaR represents the potential loss
in value
of NJRES’ trading portfolio due to adverse market movements over a defined time
horizon (NJRES utilizes holding periods of 1 day and 10 days) with a
specified
confidence level (NJRES utilizes either a 95 percent or 99 percent confidence
level). As an example, utilizing a 1 day holding period with a 95 percent
confidence level would indicate that there is a 5 percent chance that
the
liquidation value of the NJRES portfolio would fall below the expected
trading
value by an amount at least as large as the calculated VaR.
New
Jersey Resources
Part
II
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
The
VaR
at September 30, 2007, 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 $5.8
million.
The calculated VaR represents an estimate of the potential change in
the value
of the net positions. These estimates may not be indicative of actual
results
because actual market fluctuations may differ from forecasted
fluctuations.
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy engage in wholesale marketing activities. NJR monitors
and
manages the credit risk of its wholesale marketing operations through
credit
policies and procedures that management believes reduce overall credit
risk.
These policies include a review and evaluation of prospective counterparties’
financial statements and/or credit ratings, daily monitoring of counterparties’
credit limits, daily communication with traders regarding credit status
and the
use of credit mitigation measures, such as minimum margin requirements,
collateral requirements and netting agreements. Examples of collateral
include
letters of credit and cash received for either prepayment or margin
deposit.
The
Company’s Risk Management Committee (RMC) continuously monitors NJR’s credit
risk management policies and procedures. The RMC is comprised of individuals
from NJR-affiliated companies that meet twice a month and, among other
things,
evaluates the effectiveness of existing credit policies and procedures,
reviews
material transactions and discusses emerging issues.
The
following is a summary of gross and net credit exposures, grouped by
investment
and noninvestment grade counterparties, as of September 30, 2007. Gross
credit exposure is defined as the unrealized fair value of derivative
and energy
trading contracts plus any outstanding receivable for the value of natural
gas
delivered for which payment has not yet been received. Net credit exposure
is
defined as gross credit exposure reduced by collateral received from
counterparties and/or payables, where netting agreements exist. The amounts
presented below exclude accounts receivable for retail natural gas sales
and
services.
Unregulated
counterparty credit exposure as of September 30, 2007, is as
follows:
(Thousands)
|
Gross Credit
Exposure
|
|
Net Credit
Exposure
|
Investment
grade
|
$175,001
|
|
|
$153,634
|
|
Noninvestment
grade
|
8,962
|
|
|
—
|
|
Internally
rated investment grade
|
25,762
|
|
|
16,331
|
|
Internally
rated noninvestment grade
|
1,667
|
|
|
—
|
|
Total
|
$211,392
|
|
|
$169,965
|
|
NJNG’s
counterparty credit exposure as of September 30, 2007, is as
follows:
(Thousands)
|
Gross Credit
Exposure
|
|
Net Credit
Exposure
|
Investment
grade
|
$11,905
|
|
|
$9,630
|
|
Noninvestment
grade
|
141
|
|
|
4
|
|
Internally
rated investment grade
|
203
|
|
|
94
|
|
Internally
rated noninvestment grade
|
70
|
|
|
—
|
|
Total
|
$12,319
|
|
|
$9,728
|
|
New
Jersey Resources
Part
II
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
Due
to
the inherent volatility in the prices of natural gas commodities and
derivatives, the market value of contractual positions with individual
counterparties could exceed established credit limits or collateral provided
by
those counterparties. If a counterparty failed to perform the obligations
under
its contract (for example, failed to deliver or pay for natural gas),
then the
Company could sustain a loss. This loss would comprise the loss on natural
gas
delivered but not paid for and/or the cost of replacing natural gas not
delivered at a price higher than the price in the original contract.
Any such
loss could have a material impact on the Company’s financial condition, results
of operations or cash flows.
Interest
Rate Risk–Long-Term Debt
At
September 30, 2007, the Company (excluding NJNG) had no variable-rate
long-term debt.
At
September 30, 2007, NJNG had total variable-rate, tax-exempt long-term debt
of $97.0 million, which is hedged by interest rate caps expiring in
July 2009 that limit NJNG’s variable-rate debt exposure on the tax-exempt
EDA bonds at 4.5 percent.
Effects
of Inflation
Although
inflation rates have been relatively low to moderate in recent years,
any change
in price levels has an effect on operating results due to the capital-intensive
and regulated nature of the Company’s utility subsidiary. The Company attempts
to minimize the effects of inflation through cost control, productivity
improvements and regulatory actions where appropriate.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Management’s
Report on Internal Control over Financial
Reporting
Management
of New Jersey Resources Corporation (NJR or the Company) is responsible
for
establishing and maintaining adequate internal control over financial
reporting
as defined in Rule 13A-15 (f) and 15d-15 (f) of the
Securities and Exchange Act of 1934, as amended. The Company’s internal control
over financial reporting is a process designed to provide reasonable
assurance
to the Company’s Management and Board of Directors regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles
and
includes policies and procedures that:
Ÿ
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets
of the
Company;
|
|
|
Ÿ
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of
the Company
are being made only in accordance with authorizations of management
and
directors of the Company; and
|
|
|
Ÿ
|
provide
reasonable assurance regarding prevention or timely detection
of
unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements, errors or fraud. Also, projections of
any
evaluations of effectiveness to future periods are subject to the risk
that
controls may become inadequate because of changes in conditions, or that
the
degree of compliance with the policies or procedures may
deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2007. In making this assessment, management
used
criteria set forth by the Committee of Sponsoring Organizations of the
Treadway
Commission (COSO) in an Internal Control Integrated Framework. As a
result of the restatement of the Company’s consolidated financial statements,
management has determined that a material weakness in internal control
over
financial reporting existed as of September 30, 2007, and based on the
criteria
set forth by COSO, concluded that the Company’s internal control over financial
reporting was not effective as of September 30, 2007.
A
“material weakness,” as defined by the Public Company Accounting Oversight Board
(PCAOB) is a deficiency, or a combination of deficiencies, in internal
control
over financial reporting, such that there is a reasonable possibility
that a
material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected on a timely basis. In connection with
the
Company’s preparation of its consolidated financial statements for the fiscal
year ended September 30, 2007, the Company reassessed its accounting
treatment
and disclosures for its derivative instruments under Statement of Financial
Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”). As a result of this accounting assessment, the
Company determined that certain of its derivative instruments have not
qualified
as cash flow hedges under SFAS 133 as they did not meet the definition
for
“critical-terms-match,” as defined under paragraph 65 of SFAS 133 and related
authoritative accounting literature issued by various standard setting
bodies
and their related interpretations for all fiscal periods. As the Company
has
determined the hedging relationships did not meet the “critical-terms-match,”
the related derivative instruments did not qualify as cash flow hedges
and the
unrealized gains or losses on the derivative instruments are required
to be
reflected in the Consolidated Statement of Income for each period rather
than
recorded in
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Comprehensive
Income and included as a component of “accumulated other comprehensive income,”
a component of Total Common Stock Equity in the Consolidated Balance
Sheets,
until the forecasted transaction is settled. Therefore, because of this
material
weakness, the Company has amended and restated certain of its historical
consolidated financial statements and made appropriate changes in the
preparation of its consolidated financial statements for the year ended
September 30, 2007.
The
Company’s independent registered public accounting firm, Deloitte &
Touche LLP, has issued its report on the Company’s assessment of its internal
control over financial reporting as of September 30, 2007, which appears
herein.
December
10, 2007
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the Board of Directors and Stockholders of
New
Jersey Resources Corporation:
We
have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of New Jersey Resources Corporation and
subsidiaries (the “Company”) as of September 30, 2007 and 2006, and the related
consolidated statements of income, common stock equity and comprehensive
income,
and cash flows for each of the three years in the period ended September
30,
2007. Our audits also included the consolidated financial statement schedule
listed in the index in Item 15. These consolidated financial statements
and
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these
consolidated financial statements and consolidated financial statement
schedule
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in
all
material respects, the financial position of the Company as of September
30,
2007 and 2006, and the results of its operations and its cash flows for
each of
the three years in the period ended September 30, 2007, in conformity
with
accounting principles generally accepted in the United States of America.
Also,
in our opinion, such consolidated financial statement schedule, when
considered
in relation to the basic consolidated financial statements taken as a
whole,
presents fairly in all material respects, the information set forth
therein.
As
discussed in Note 2, the accompanying 2006 and 2005 consolidated financial
statements have been restated.
As
discussed in Note 10 to the consolidated financial statements, as of
September 30, 2007, the Company adopted Statement of Financial Accounting
Standard No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postemployment Plans.
As
discussed in Note 11 to the consolidated financial statements, on September
30, 2006, the Company adopted Financial Accounting Standards Board
Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Company’s
internal control over financial reporting as of September 30, 2007, based
on the
criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
and our
report dated December 10, 2007 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an adverse opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
December
10, 2007
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
of
New Jersey Resources Corporation
We
have audited management's assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that New Jersey
Resources
Corporation and subsidiaries (the “Company”) maintained effective internal
control over financial reporting as of September 30, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The
Company's
management is responsible for maintaining effective internal control
over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an
opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and
evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We
believe
that our audit provides a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed
by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting
and the
preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override
of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because
of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will be prevented
or
detected. The following material weakness has been identified and included
in
management’s assessment: The Company did not maintain effective controls over
procedures to designate at inception certain hedging relationships with
the
required specificity necessary to meet the requirements of Statement
of
Financial Accounting Standard No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (SFAS 133). Specifically, controls to ensure that its
derivatives qualify as cash flow hedges by meeting the definition for
“critical-terms-match,” as defined by SFAS 133 and related authoritative
accounting literature. Management has determined, for all affected periods
that
certain of its derivative instruments no longer qualify as cash flow
hedges
under SFAS 133 as they do not meet the requirements of SFAS 133. As a
result of
this material weakness, the Company restated its previously issued consolidated
financial statements as of September 30, 2006 and September 30, 2005
and for the
years ended September 30, 2006 and September 30, 2005, and as discussed
in
Quarterly Financial Data, the Company restated its previously reported
selected
quarterly financial information for the first three quarters in 2007
as well as
2006. This material weakness was considered in determining the nature,
timing,
and extent of audit tests applied in our audit of the financial statements
as of
and for the year ended September 30, 2007, of the Company and this report
does
not affect our report on such financial statements.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
In
our opinion, management’s assessment that the Company did not maintain effective
internal control over financial reporting as of September 30, 2007, is
fairly
stated, in all material respects, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion,
because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has
not
maintained, in all material respects, effective internal control over
financial
reporting as of September 30, 2007, based on the criteria established
in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance
sheet and
consolidated statement of capitalization of the Company as of September
30,
2007, and the related consolidated statements of income, common stock
equity and
comprehensive income, and cash flows for the year ended September 30,
2007 and
our report dated December 10, 2007 expressed an unqualified opinion on
those
financial statements and included explanatory paragraphs relating to
the
adoption of Financial Accounting Standard No. 158, Employers’ Accounting for
Defined Benefit Pension, Other Post Employment Plans, and Financial Accounting
Standards Board Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations, and relating to the 2006 and 2005 consolidated
financial
statements restatements.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
December
10, 2007
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Fiscal Years Ended
September 30,
|
|
(Thousands, except per share data) |
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
As
Restated
(See
Note 2)
|
|
|
As
Restated
(See
Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
|
$
|
3,021,765
|
|
|
$
|
3,271,229
|
|
|
$
|
3,184,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
purchases
|
|
|
2,621,575
|
|
|
|
2,639,489
|
|
|
|
2,914,387
|
|
Operation
and maintenance
|
|
|
136,601
|
|
|
|
121,384
|
|
|
|
108,441
|
|
Regulatory
rider expenses
|
|
|
37,605
|
|
|
|
28,587
|
|
|
|
31,594
|
|
Depreciation
and amortization
|
|
|
36,235
|
|
|
|
34,753
|
|
|
|
33,675
|
|
Energy
and other taxes
|
|
|
62,499
|
|
|
|
58,632
|
|
|
|
56,211
|
|
Total
operating expenses
|
|
|
2,894,515
|
|
|
|
2,882,845
|
|
|
|
3,144,308
|
|
OPERATING
INCOME
|
|
|
127,250
|
|
|
|
388,384
|
|
|
|
40,274
|
|
Other
income
|
|
|
4,294
|
|
|
|
4,725
|
|
|
|
4,814
|
|
Interest
charges, net
|
|
|
27,613
|
|
|
|
25,669
|
|
|
|
20,474
|
|
INCOME
BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF
AFFILIATES
|
|
|
103,931
|
|
|
|
367,440
|
|
|
|
24,614
|
|
Income
tax provision
|
|
|
40,312
|
|
|
|
147,349
|
|
|
|
7,832
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
1,662
|
|
|
|
1,817
|
|
|
|
1,753
|
|
NET
INCOME
|
|
$
|
65,281
|
|
|
$
|
221,908
|
|
|
$
|
18,535
|
|
EARNINGS
PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
$2.34
|
|
|
|
$7.96
|
|
|
|
$0.67
|
|
DILUTED
|
|
|
$2.33
|
|
|
|
$7.90
|
|
|
|
$0.66
|
|
DIVIDENDS
PER COMMON SHARE
|
|
|
$1.52
|
|
|
|
$1.44
|
|
|
|
$1.36
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
27,903
|
|
|
|
27,862
|
|
|
|
27,591
|
|
DILUTED
|
|
|
28,075
|
|
|
|
28,081
|
|
|
|
28,121
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Fiscal Years Ended
September 30,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
As
Restated
(See
Note 2)
|
|
As
Restated
(See
Note 2)
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
65,281
|
|
|
$
|
221,908
|
|
|
$
|
18,535
|
|
ADJUSTMENTS
TO RECONCILE NET INCOME TO CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments, net of tax
|
|
|
22,910
|
|
|
|
(148,324 |
) |
|
|
60,861
|
|
Depreciation
and amortization
|
|
|
36,536
|
|
|
|
35,054
|
|
|
|
35,227
|
|
Impairment
charge
|
|
|
4,000
|
|
|
|
—
|
|
|
|
3,895
|
|
Deferred
income taxes
|
|
|
17,762
|
|
|
|
(11,896 |
) |
|
|
(2,406 |
) |
Manufactured
gas plant remediation costs
|
|
|
(20,171 |
) |
|
|
(22,346 |
) |
|
|
(15,330 |
) |
Gain
on asset sales
|
|
|
—
|
|
|
|
(617 |
) |
|
|
(11,818 |
) |
Equity
in earnings from investments, net of distributions
|
|
|
(556 |
) |
|
|
1,556
|
|
|
|
9
|
|
Cost
of removal – asset retirement obligations
|
|
|
(880 |
) |
|
|
—
|
|
|
|
—
|
|
Contributions
to employee benefit plans
|
|
|
(685 |
) |
|
|
(13,690 |
) |
|
|
(11,548 |
) |
Changes
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of working capital
|
|
|
(32,135 |
) |
|
|
(107,204 |
) |
|
|
120,548
|
|
Other
noncurrent assets
|
|
|
23,707
|
|
|
|
(20,721 |
) |
|
|
1,372
|
|
Other
noncurrent liabilities
|
|
|
6,637
|
|
|
|
43,287
|
|
|
|
5,477
|
|
Cash
flows from (used in) operating activities
|
|
|
122,406
|
|
|
|
(22,993 |
) |
|
|
204,822
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
18,515
|
|
|
|
25,346
|
|
|
|
9,918
|
|
Tax
benefit from stock options exercised
|
|
|
1,761
|
|
|
|
6,791
|
|
|
|
2,172
|
|
Net
proceeds from long-term debt
|
|
|
49,850
|
|
|
|
35,800
|
|
|
|
—
|
|
Proceeds
from sale-leaseback transaction
|
|
|
5,482
|
|
|
|
4,090
|
|
|
|
4,904
|
|
Payments
of long-term debt
|
|
|
(4,031 |
) |
|
|
(24,276 |
) |
|
|
(28,070 |
) |
Purchases
of treasury stock
|
|
|
(9,024 |
) |
|
|
(40,883 |
) |
|
|
(23,835 |
) |
Payments
of common stock dividends
|
|
|
(41,869 |
) |
|
|
(39,446 |
) |
|
|
(37,164 |
) |
Payments
of short-term debt, net of proceeds
|
|
|
(24,221 |
) |
|
|
106,600
|
|
|
|
(85,600 |
) |
Cash
flows (used in) from financing activities
|
|
|
(3,537 |
) |
|
|
74,022
|
|
|
|
(157,675 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
plant
|
|
|
(60,747 |
) |
|
|
(53,060 |
) |
|
|
(52,801 |
) |
Real
estate properties and other
|
|
|
(2,777 |
) |
|
|
(5,734 |
) |
|
|
(1,597 |
) |
Cost
of removal
|
|
|
(6,310 |
) |
|
|
(7,499 |
) |
|
|
(6,502 |
) |
Investments
in equity investees
|
|
|
(54,978 |
) |
|
|
—
|
|
|
|
(8,764 |
) |
Withdrawal
from (investment in) restricted cash construction fund
|
|
|
4,300
|
|
|
|
(8,500 |
) |
|
|
7,800
|
|
Proceeds
from asset sales and available for sale investments
|
|
|
1,792
|
|
|
|
3,747
|
|
|
|
34,682
|
|
Cash
flows used in investing activities
|
|
|
(118,720 |
) |
|
|
(71,046 |
) |
|
|
(27,182 |
) |
Change
in cash and temporary investments
|
|
|
149
|
|
|
|
(20,017 |
) |
|
|
19,965
|
|
Cash
and temporary investments at beginning of year
|
|
|
4,991
|
|
|
|
25,008
|
|
|
|
5,043
|
|
Cash
and temporary investments at end of year
|
|
$
|
5,140
|
|
|
$
|
4,991
|
|
|
$
|
25,008
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
Fiscal Years Ended
September 30,
|
|
(Thousands) |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
As
Restated
(See
Note 2)
|
|
As
Restated
(See
Note 2)
|
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
$ |
5,306
|
|
|
$
|
96,769
|
|
|
$
|
(87,897 |
) |
Inventories
|
|
|
68,727
|
|
|
|
(250,765 |
) |
|
|
19,620
|
|
Overrecovered
gas costs
|
|
|
7,873
|
|
|
|
38,759
|
|
|
|
32,456
|
|
Gas
purchases payable
|
|
|
(79,543 |
) |
|
|
(3,107 |
) |
|
|
90,118
|
|
Prepaid
and accrued taxes, net
|
|
|
(16,160 |
) |
|
|
6,808
|
|
|
|
2,135
|
|
Accounts
payable and other
|
|
|
9,152
|
|
|
|
(3,294 |
) |
|
|
9,978
|
|
Restricted
broker margin accounts
|
|
|
19,411
|
|
|
|
(18,437 |
) |
|
|
40,084
|
|
Customers’
credit balances and deposits
|
|
|
(33,698 |
) |
|
|
37,738
|
|
|
|
1,746
|
|
Other
current assets
|
|
|
(13,203 |
) |
|
|
(11,675 |
) |
|
|
12,308
|
|
Total
|
|
$ |
(32,135 |
) |
|
$
|
(107,204 |
) |
|
$
|
120,548
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
|
$ |
26,403
|
|
|
$
|
22,186
|
|
|
$
|
18,085
|
|
Income
taxes
|
|
$ |
52,549
|
|
|
$
|
38,101
|
|
|
$
|
47,812
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
BALANCE SHEETS
ASSETS
|
|
September 30,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
Utility
plant, at cost
|
|
|
$1,299,445
|
|
|
|
$1,243,586
|
|
Real
estate properties and other, at cost
|
|
|
28,793
|
|
|
|
27,136
|
|
|
|
|
1,328,238
|
|
|
|
1,270,722
|
|
Accumulated
depreciation and amortization
|
|
|
(357,367 |
) |
|
|
(335,783 |
) |
Property,
plant and equipment, net
|
|
|
970,871
|
|
|
|
934,939
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and temporary investments
|
|
|
5,140
|
|
|
|
4,991
|
|
Customer
accounts receivable
|
|
|
|
|
|
|
|
|
Billed
|
|
|
132,444
|
|
|
|
133,615
|
|
Unbilled
revenues
|
|
|
8,895
|
|
|
|
12,543
|
|
Allowance
for doubtful accounts
|
|
|
(3,166 |
) |
|
|
(2,679 |
) |
Regulatory
assets
|
|
|
24,634
|
|
|
|
8,105
|
|
Gas
in storage, at average cost
|
|
|
439,168
|
|
|
|
512,942
|
|
Materials
and supplies, at average cost
|
|
|
5,033
|
|
|
|
3,599
|
|
Prepaid
state taxes
|
|
|
28,034
|
|
|
|
26,343
|
|
Derivatives,
at fair value
|
|
|
138,986
|
|
|
|
223,559
|
|
Broker
margin account
|
|
|
12,345
|
|
|
|
30,833
|
|
Other
|
|
|
8,353
|
|
|
|
11,665
|
|
Total
current assets
|
|
|
799,866
|
|
|
|
965,516
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Investments
in equity investees
|
|
|
86,743
|
|
|
|
27,208
|
|
Regulatory
assets
|
|
|
312,369
|
|
|
|
322,986
|
|
Derivatives,
at fair value
|
|
|
44,306
|
|
|
|
94,638
|
|
Prepaid
pension
|
|
|
—
|
|
|
|
21,045
|
|
Restricted
cash construction fund
|
|
|
4,200
|
|
|
|
8,500
|
|
Other
|
|
|
12,390
|
|
|
|
24,096
|
|
Total
noncurrent assets
|
|
|
460,008
|
|
|
|
498,473
|
|
|
|
|
$2,230,745
|
|
|
|
$2,398,928
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
BALANCE SHEETS (Continued)
CAPITALIZATION
AND LIABILITIES
|
|
September 30,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
CAPITALIZATION
|
|
|
|
|
|
|
Common
stock equity
|
|
$
|
644,797
|
|
|
$
|
621,662
|
|
Long-term
debt
|
|
|
383,184
|
|
|
|
332,332
|
|
Total
capitalization
|
|
|
1,027,981
|
|
|
|
953,994
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
4,338
|
|
|
|
3,739
|
|
Short-term
debt
|
|
|
256,479
|
|
|
|
280,700
|
|
Gas
purchases payable
|
|
|
218,336
|
|
|
|
297,879
|
|
Accounts
payable and other
|
|
|
64,386
|
|
|
|
46,823
|
|
Dividends
payable
|
|
|
10,633
|
|
|
|
10,056
|
|
Deferred
and accrued taxes
|
|
|
9,031
|
|
|
|
9,267
|
|
Regulatory
liabilities
|
|
|
9,583
|
|
|
|
1,710
|
|
New
Jersey clean energy program
|
|
|
8,832
|
|
|
|
8,244
|
|
Derivatives,
at fair value
|
|
|
79,243
|
|
|
|
163,557
|
|
Broker
margin account
|
|
|
15,143
|
|
|
|
14,220
|
|
Customers’
credit balances and deposits
|
|
|
27,262
|
|
|
|
60,960
|
|
Total
current liabilities
|
|
|
703,266
|
|
|
|
897,155
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
216,258
|
|
|
|
227,100
|
|
Deferred
investment tax credits
|
|
|
7,513
|
|
|
|
7,835
|
|
Deferred
revenue
|
|
|
9,806
|
|
|
|
10,206
|
|
Derivatives,
at fair value
|
|
|
38,085
|
|
|
|
85,036
|
|
Manufactured
gas plant remediation
|
|
|
105,340
|
|
|
|
105,400
|
|
Postemployment
employee benefit liability
|
|
|
25,743
|
|
|
|
4,497
|
|
Regulatory
liabilities
|
|
|
61,270
|
|
|
|
64,220
|
|
New
Jersey clean energy and conservation incentive programs
|
|
|
3,992
|
|
|
|
13,138
|
|
Asset
retirement obligation
|
|
|
23,895
|
|
|
|
23,293
|
|
Other
|
|
|
7,596
|
|
|
|
7,054
|
|
Total
noncurrent liabilities
|
|
|
499,498
|
|
|
|
547,779
|
|
Total
capitalization and liabilities
|
|
$
|
2,230,745
|
|
|
$
|
2,398,928
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
STATEMENTS OF CAPITALIZATION
|
September 30,
|
(Thousands, except share amounts) |
2007
|
2006
|
|
|
As
Restated
(See
Note 2)
|
COMMON
STOCK EQUITY
|
|
|
|
|
Common
stock, $2.50 par value; authorized 50,000,000 shares;
outstanding
2007–29,342,626;
2006–29,098,173
|
|
$ 73,356
|
|
$ 72,745
|
|
Premium
on common stock
|
|
261,438
|
|
253,167
|
|
Accumulated
other comprehensive income, net of tax
|
|
(931
|
)
|
2,742
|
|
Treasury
stock at cost and other; shares
2007–1,601,518;
2006–1,473,023
|
|
(69,948
|
)
|
(65,039
|
)
|
Retained
earnings
|
380,882
|
|
358,047
|
|
Total
Common stock equity
|
644,797
|
|
621,662
|
|
LONG-TERM
DEBT
|
|
|
|
|
New
Jersey Natural Gas
|
|
|
|
|
First
mortgage bonds:
|
Maturity
date:
|
|
|
|
|
6.27%
|
Series X
|
November 1,
2008
|
30,000
|
|
30,000
|
|
Variable
|
Series AA
|
August 1,
2030
|
25,000
|
|
25,000
|
|
Variable
|
Series BB
|
August 1,
2030
|
16,000
|
|
16,000
|
|
6.88%
|
Series CC
|
October 1,
2010
|
20,000
|
|
20,000
|
|
Variable
|
Series DD
|
September 1,
2027
|
13,500
|
|
13,500
|
|
Variable
|
Series EE
|
January 1,
2028
|
9,545
|
|
9,545
|
|
Variable
|
Series FF
|
January 1,
2028
|
15,000
|
|
15,000
|
|
Variable
|
Series GG
|
April 1,
2033
|
18,000
|
|
18,000
|
|
5%
|
Series HH
|
December 1,
2038
|
12,000
|
|
12,000
|
|
4.5%
|
Series II
|
August 1,
2023
|
10,300
|
|
10,300
|
|
4.6%
|
Series JJ
|
August 1,
2024
|
10,500
|
|
10,500
|
|
4.9%
|
Series KK
|
October 1,
2040
|
15,000
|
|
15,000
|
|
4.77%
Unsecured senior notes
|
March 15,
2014
|
60,000
|
|
60,000
|
|
Capital
lease obligation–Buildings
|
June 1,
2021
|
27,063
|
|
27,701
|
|
Capital
lease obligation–Meters
|
October 1,
2012
|
30,614
|
|
28,525
|
|
Less:
Current maturities of long-term debt
|
|
(4,338
|
)
|
(3,739
|
)
|
Total
New Jersey Natural Gas long-term debt
|
308,184
|
|
307,332
|
|
|
|
|
|
|
New
Jersey Resources
|
|
|
|
|
3.75%
Unsecured senior notes
|
March
15, 2009
|
25,000
|
|
25,000
|
|
6.05%
Unsecured senior notes
|
September
24, 2017
|
50,000
|
|
—
|
|
Total
long-term debt
|
383,184
|
|
332,332
|
|
Total
capitalization
|
$1,027,981
|
|
$953,994
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
STATEMENTS OF COMMON STOCK EQUITY
(Thousands)
|
Number
of
Shares
|
Common
Stock
|
Premium
on
Common
Stock
|
Accumulated
Other Comprehensive Income/(Loss)
As
Restated
(See
Note 2)
|
Treasury
Stock
and Other
|
Retained
Earnings
As
Restated
(See
Note 2)
|
Total
As
Restated
(See
Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2004
|
27,741
|
|
$69,786
|
|
$215,096
|
|
$(7,536
|
)
|
$
(4,683
|
)
|
195,254
|
|
$467,917
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
18,535
|
|
18,535
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
314
|
|
|
|
|
|
314
|
|
Common
stock issued under stock plans
|
352
|
|
671
|
|
6,114
|
|
|
|
3,292
|
|
|
|
10,077
|
|
Tax
benefits from stock plans
|
|
|
|
|
2,172
|
|
|
|
|
|
|
|
2,172
|
|
Cash
dividend declared
|
|
|
|
|
|
|
|
|
|
|
(37,514
|
)
|
(37,514
|
)
|
Treasury
stock and other
|
(547
|
)
|
|
|
|
|
|
|
(23,449
|
)
|
|
|
(23,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2005
|
27,546
|
|
70,457
|
|
223,382
|
|
(7,222
|
)
|
(24,840
|
)
|
176,275
|
|
438,052
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
221,908
|
|
221,908
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
9,964
|
|
|
|
|
|
9,964
|
|
Common
stock issued under stock plans
|
1,074
|
|
2,288
|
|
22,994
|
|
|
|
6,277
|
|
|
|
31,559
|
|
Tax
benefits from stock plans
|
|
|
|
|
6,791
|
|
|
|
|
|
|
|
6,791
|
|
Cash
dividend declared
|
|
|
|
|
|
|
|
|
|
|
(40,136
|
)
|
(40,136
|
)
|
Treasury
stock and other
|
(995
|
)
|
|
|
|
|
|
|
(46,476
|
)
|
|
|
(46,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
27,625
|
|
72,745
|
|
253,167
|
|
2,742
|
|
(65,039
|
)
|
358,047
|
|
621,662
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
65,281
|
|
65,281
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
491
|
|
|
|
|
|
491
|
|
Adjustment
to initially adopt SFAS No. 158, net of tax
|
|
|
|
|
|
|
(4,164
|
)
|
|
|
|
|
(4,164
|
)
|
Common
stock issued under stock plans
|
456
|
|
611
|
|
6,510
|
|
|
|
11,408
|
|
|
|
18,529
|
|
Tax
benefits from stock plans
|
|
|
|
|
1,761
|
|
|
|
|
|
|
|
1,761
|
|
Cash
dividend declared
|
|
|
|
|
|
|
|
|
|
|
(42,446
|
)
|
(42,446
|
)
|
Treasury
stock and other
|
(340
|
)
|
|
|
|
|
|
|
(16,317
|
)
|
|
|
(16,317
|
)
|
Balance
at September 30, 2007
|
27,741
|
|
$73,356
|
|
$261,438
|
|
$(931
|
)
|
$(69,948
|
)
|
$380,882
|
|
$644,797
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
September 30,
|
(Thousands) |
2007
|
|
2006
|
|
2005
|
|
|
|
|
As
Restated
(See
Note 2)
|
|
As
Restated
(See
Note 2)
|
|
|
|
|
|
|
|
|
Net
income
|
$65,281
|
|
$221,908
|
|
$18,535
|
|
Unrealized
gain on investments in equity investees, net of tax of $(456),
$(184) and
$(320), respectively
|
634
|
|
267
|
|
463
|
|
Net
unrealized (loss) gain on derivatives, net of tax of $98, $341
and $143,
respectively
|
(143
|
)
|
(496
|
)
|
(205
|
)
|
Minimum
pension liability adjustment, net of tax of $—,
$(7,113) and $(38), respectively
|
—
|
|
10,193
|
|
56
|
|
Other
comprehensive income
|
491
|
|
9,964
|
|
314
|
|
Comprehensive
income
|
$65,772
|
|
$231,872
|
|
$18,849
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of the Business
New
Jersey Resources Corporation (NJR or the Company) has two principal subsidiaries
and operates three business segments. New Jersey Natural Gas (NJNG),
the
Company’s principal utility subsidiary, is a public utility which provides
natural gas utility service to approximately 478,000 retail customers
in central
and northern New Jersey and comprises the Natural Gas Distribution segment.
NJNG
is subject to rate regulation by the New Jersey Board of Public Utilities
(BPU).
NJR
Energy Services (NJRES) is the Company’s principal non-utility subsidiary that
maintains and trades a portfolio of natural gas storage and transportation
positions and provides wholesale energy and energy management services
to
customers from states in the Gulf Coast and Mid-Continent regions to
the New
England region and Canada. NJRES comprises the Energy Services
segment.
Other
subsidiaries of the Company, all of which comprise the Retail and Other
segment,
include NJR Home Services (NJRHS), which provides services and installation
of
heating, ventilation and cooling (HVAC) systems throughout New Jersey;
NJNR
Pipeline (NJNR), which holds the Company’s 5.53 percent interest in Iroquois Gas
and Transmission System, L.P (Iroquois), a 412-mile interstate natural
gas
pipeline which connects from the northern New York border with Canada
to Long
Island, NY; NJR Storage Holdings, which holds the Company’s 50 percent interest
in Steckman Ridge GP and Steckman Ridge LP (collectively, Steckman Ridge),
a
planned 20 billion cubic foot (Bcf) natural gas storage facility currently
under
construction with a partner in western Pennsylvania; NJR Energy, an investor
in
energy-related ventures; Commercial Realty and Resources (CR&R), which holds
and develops commercial real estate; and NJR Service, which provides
shared
administrative services.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of the Company
and its
subsidiaries that are controlled through a majority voting interest.
All
intercompany accounts and transactions have been eliminated.
Other
financial investments or contractual interests that lack the characteristics
of
a voting interest entity, which are commonly referred to as variable
interest
entities, are evaluated by NJR to determine if it can absorb a majority
of
expected losses or returns and if the consolidation guidance in Financial
Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of
Variable Interest Entities-an interpretation of ARB No. 51 (FIN 46(R))
applies. NJR does not have any investments in any variable interest
entities.
Entities
that are deemed voting interest entities in which NJR does not have a
controlling financial interest but can exercise significant influence
are
accounted for using the equity method of accounting.
Regulatory
Assets & Liabilities
Under
cost-based regulation, regulated utility enterprises generally are permitted
to
recover their operating expenses and earn a reasonable return on their
utility
investment.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NJNG
maintains its accounts in accordance with the Federal Energy Regulatory
Commission (FERC) Uniform System of Accounts as prescribed by the BPU.
In
accordance with the ratemaking process, NJNG is required to follow Statement
of
Financial Accounting Standards (SFAS) No. 71, Accounting for the
Effects of Certain Types of Regulation (SFAS 71), and as a result, the
accounting principles applied by NJNG differ in certain respects from
those
applied by unregulated businesses.
Gas
in Storage
Gas
in
Storage is reflected at average cost in the Consolidated Balance Sheets,
and
represents natural gas that will be utilized in the ordinary course of
business.
The
following table summarizes Gas in storage by company as of September
30,
2007.
|
2007
|
2006
|
($
in thousands)
|
Assets
|
(Bcf)
|
Assets
|
(Bcf)
|
NJNG
|
$191,460
|
23.0
|
$155,874
|
23.8
|
NJRES
|
247,708
|
28.9
|
357,068
|
32.3
|
Total
|
$439,168
|
51.9
|
$512,942
|
56.1
|
Demand
Fees
For
the
purpose of securing adequate storage and pipeline capacity, NJRES and
NJNG enter
into storage and pipeline capacity contracts, which require the payment
of
certain demand charges in order to maintain the ability to access such
natural
gas storage or pipeline capacity, during a fixed time period, which generally
range from one to five years. Demand charges are based on established
rates as
regulated by FERC. These demand charges represent commitments to pay
storage
providers or pipeline companies for the right to store and transport
natural gas
utilizing their respective assets.
Demand
charges are recognized in the Consolidated Statements of Income as incurred
as
part of Gas purchases as follows:
(Millions)
|
2007
|
2006
|
2005
|
NJRES
|
$132.9
|
$109.8
|
$ 63.0
|
NJNG
|
73.9
|
83.0
|
79.5
|
Total
|
$206.8
|
$192.8
|
$142.5
|
NJNG
recovers its costs associated with demand fees as part of its wholesale
gas
commodity component of its Basic Gas Supply Service (BGSS), a component
of its
tariff.
Derivative
Instruments
Derivative
instruments associated with natural gas commodity contracts are recorded
in
accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended (SFAS 133), under which NJR records the fair
value of derivatives held as assets and liabilities. Certain of the Company’s
commodity contracts meet the scope exception of SFAS 133, while its financial
contracts, such as futures, options and swaps, are considered derivative
instruments. NJR’s unregulated subsidiaries record changes in the fair value of
its derivatives in Gas purchases or Operating revenues, as appropriate,
on the
Consolidated Statements of Income.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Fair
values of exchange-traded instruments, principally futures, swaps and
certain
options, are based on actively quoted market prices. Fair values are
subject to
change in the near term and reflect management’s best estimate based on various
factors. In establishing the fair value of commodity contracts that do
not have
quoted prices, such as physical contracts, over-the-counter options and
swaps,
management uses available market data and pricing models to estimate
fair
values. Estimating fair values of instruments that do not have quoted
market
prices requires management’s judgment in determining amounts which could
reasonably be expected to be received from, or paid to, a third party
in
settlement of the instruments. These amounts could be materially different
from
amounts that might be realized in an actual sale transaction.
See
Note 4. Financial Instruments and Risk Management for additional
details regarding natural gas trading and hedging activities.
NJNG’s
derivatives used to hedge its natural gas purchasing activities are recoverable
through its Basic Gas Supply Service, a component of its tariff. Accordingly,
the offset to the change in fair value of these derivatives is recorded
as a
Regulatory asset or liability on the Consolidated Balance Sheets in accordance
with SFAS 71.
NJR
has
not designated any derivatives as fair value hedges as of September 30,
2007 and 2006.
Revenues
Revenues
from the sale of natural gas to customers of NJNG are recognized in the
period
that gas is delivered and consumed by customers, including an estimate
for
unbilled revenue.
Unbilled
revenues are associated solely with NJNG. Natural gas sales to individual
customers are based on their meter readings, which are performed on a
systematic
basis throughout the month. At the end of each month, the amount of natural
gas
delivered to each customer after the last meter reading is estimated
and NJNG
recognizes unbilled revenues related to these amounts. The unbilled revenue
estimates are based on monthly send-out amounts, estimated customer usage
by
customer type, weather effects, unaccounted-for gas and the most recent
rates.
Generally,
commodity contracts for physical delivery of natural gas fall within
the “normal
purchase normal sale” scope exception of SFAS 133. The normal purchase normal
sale scope exception requires, among other things, physical delivery
in
quantities expected to be used or sold over a reasonable period in the
normal
course of business. Contracts that are designated as normal purchases
and normal
sales and the related liabilities incurred and assets acquired under
these
contracts are recorded when title to the underlying commodity passes.
Certain
derivative instruments at NJRES and NJR Energy (encompassing financial
futures,
options or swaps), are designed to economically hedge the cash flows
of a
forecasted transaction. These derivative instruments are recorded at
fair value
on the Consolidated Balance Sheet and any change in the fair value is
included
as a component of Gas purchases or Operating revenues, as appropriate,
on the
Consolidated Statements of Income. Derivative instruments at NJNG are
recorded
at fair value on the Consolidated Balance Sheets with corresponding changes
in
fair value also being recorded on the Consolidated Balance Sheets as
regulatory
assets or liabilities.
Revenues
from all other activities are recorded in the period during which products
or
services are delivered and accepted by customers, or over the related
contractual term.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Gas
Purchases
NJNG’s
tariff includes a component for Basic Gas Supply Service (BGSS), which
is
designed to allow NJNG to recover the commodity cost of natural gas through
rates charged to its customers and is normally revised on an annual basis.
As
part of computing its BGSS rate, NJNG projects its cost of natural gas,
net of
supplier refunds, the impact of hedging activities and credits from nonfirm
sales and transportation activities, and recovers or refunds the difference,
if
any, of such projected costs compared with those included in rates through
levelized monthly charges to customers. Any underrecoveries or overrecoveries
are deferred and, subject to BPU approval, reflected in the BGSS in subsequent
years.
NJRES’
gas purchases represent the total commodity contract cost, recognized
upon
completion of the transaction, for the contracts that qualify under the
normal
purchase normal sale scope exception under SFAS 133, as well as realized
gains
and losses and unrealized gains and losses on the change in fair value
of
derivative financial instruments that have not yet settled.
Income
Taxes
The
Company computes income taxes using the liability method, whereby deferred
income taxes are generally determined based on the difference between
the
financial statement and tax basis of assets and liabilities using enacted
tax
rates in effect in the years in which the differences are expected to
reverse.
Deferred tax assets are recorded net of a valuation allowance when it
is more
likely than not such tax benefits will be realized. See Note 12. Income
Taxes.
Investment
tax credits have been deferred and are being amortized as a reduction
to the tax
provision over the average lives of the related properties.
Capitalized
and Deferred Interest
The
Company’s capitalized interest totaled $3.2 million in fiscal 2007, $1.1 million
in fiscal 2006 and $594,000 in fiscal 2005 with average interest rates
of 5.4
percent, 4.7 percent and 2.6 percent, respectively. Capitalized interest
included in Utility plant, Real estate properties and other and Investments
in
equity investees on the Consolidated Balance Sheets, and reflected in
the
Consolidated Statements of Income as a reduction to interest charges,
net, are
as follows:
|
September
30,
|
($
in thousands)
|
2007
|
2006
|
2005
|
Capitalized
interest – Utility plant
|
$1,259
|
|
$1,068
|
|
$594
|
|
Weighted
average interest rates
|
5.36
|
%
|
4.69
|
%
|
2.60
|
%
|
|
|
|
|
|
|
|
Capitalized
interest – Real estate properties and other
|
$263
|
|
n/a
|
|
n/a
|
|
Weighted
average interest rates
|
5.45
|
%
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
Capitalized
interest – Investments in equity investees
|
$1,687
|
|
n/a
|
|
n/a
|
|
Weighted
average interest rates
|
5.41
|
%
|
n/a
|
|
n/a
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Through
September 30, 2007, NJNG has not capitalized a cost of equity for its
utility
plant construction activities.
NJR,
through its subsidiary CR&R, capitalizes interest associated with the
development and construction of its commercial buildings. Interest is
also
capitalized associated with the acquisition, development and construction
of a
natural gas storage facility through NJR’s equity investment in Steckman Ridge
(see Note 5. Investments in Equity Investees).
Pursuant
to a BPU order, NJNG is permitted to recover carrying costs on uncollected
balances related to SBC program costs, which include NJCEP, RAC and USF
expenditures. See Note 3. Regulation. Accordingly, Other income
included $3.1 million, $2.8 million and $2.2 million of deferred interest
related to these SBC program costs in fiscal 2007, 2006 and 2005,
respectively.
Sales
Tax Accounting
Sales
tax
and Transitional Energy Facilities Assessment (TEFA) are collected from
customers and presented in both operating revenues and operating expenses
on the
Consolidated Statements of Income as follows:
|
|
September
30,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Sales
Tax
|
|
$ |
48,700
|
|
|
$ |
45,500
|
|
|
$ |
42,300
|
|
TEFA
|
|
|
8,500
|
|
|
|
8,100
|
|
|
|
8,900
|
|
Total
|
|
$ |
57,200
|
|
|
$ |
53,600
|
|
|
$ |
51,200
|
|
Statements
of Cash Flows
For
purposes of reporting cash flows, all temporary investments with maturities
of
three months or less are considered cash equivalents.
Utility
Plant and Depreciation
Regulated
property, plant and equipment is stated at original cost. Costs include
direct
labor, materials and third-party construction contractor costs, allowance
for
capitalized interest and certain indirect costs related to equipment
and
employees engaged in construction. Upon retirement, the cost of depreciable
regulated property, plus removal costs less salvage, is charged to accumulated
depreciation with no gain or loss recorded.
Depreciation
is computed on a straight-line basis for financial statement purposes,
using
rates based on the estimated average lives of the various classes of
depreciable
property. The composite rate of depreciation was 3.02 percent of average
depreciable property in fiscal 2007, 3.03 percent in fiscal 2006 and
3.04
percent in fiscal 2005.
Property
classifications and estimated useful lives, as of September 30, 2007 and
2006, are as follows:
Property Classifications
|
Estimated
Useful Lives
|
Distribution
Facilities
|
31
to 63 years
|
Transmission
Facilities
|
42
to 62 years
|
Storage
Facilities
|
36
to 47 years
|
All
other property
|
5
to 35 years
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Impairment
of Long-Lived Assets
The
Company reviews the carrying amount of an asset for possible impairment
whenever
events or changes in circumstances indicate that such amount may not
be
recoverable.
In
the
fourth quarter of fiscal 2007, NJNG signed a stipulation with the BPU
and Rate
Counsel, which resulted in the disallowance of certain costs that had
previously
been deferred as recoverable pursuant to a regulatory rider associated
with the
remediation of a former manufactured gas plant site. The pre-tax charge
of $4
million is reflected as a component of Operations and maintenance expense
in the
Consolidated Statements of Income. See Note 13 Commitments and
Contingent Liabilities – Legal Proceedings – MGP Remediation.
As
part
of a change in strategy related to CR&R, included in its Retail and Other
segment, the Company determined in fiscal 2005 that 52 acres of undeveloped
land
located in Atlantic County, New Jersey, will no longer be developed by
CR&R,
but will be sold as undeveloped land. As a result, the Company estimated
the
fair value of the land and compared that with its carrying value. Accordingly,
the Company recognized a pre-tax impairment charge of $3.9 million in
fiscal
2005, which is included in Operation and maintenance expense on the
Consolidated Statements of Income. The net book value of the undeveloped
land in
Atlantic County, which totals $2.1 million, is included in Property,
Plant & Equipment, net, on the Consolidated Balance
Sheets.
For
the
years ended September 30, 2007, 2006 and 2005, no other circumstances
indicating impairment were identified.
Available
for Sale Securities
Included
in Investments in equity investees on the Consolidated Balance Sheets
are
certain investments in equity securities that have a fair value of $7.8
million
and $6.7 million as of September 30, 2007 and 2006, respectively.
Unrealized gains associated with these equity securities, which are included
as
a part of Accumulated other comprehensive income, a component of Common
stock
equity, were approximately $1.1 million ($0.6 million, after tax) and
$0.2
million ($0.1 million, after tax) for the fiscal years ended September 30,
2007 and 2006, respectively.
Equity
in Earnings
The
Company accounts for its investment in Iroquois using the equity method
and
records its share of earnings net of tax as Equity in earnings on the
Consolidated Statements of Income. Iroquois is a limited partnership,
which owns
and operates a 412-mile interstate natural gas transmission pipeline
providing
service to local gas distribution companies, electric utilities and electric
power generators, as well as marketers and other end-users, directly
or
indirectly, by connecting with pipelines and interconnects throughout
the
northeastern United States. Taxes netted in Equity in earnings from Iroquois
are
$1.1 million, $1.1 million, and $900,000 and are included in the Consolidated
Statements of Income for the fiscal years ending September 30, 2007, 2006
and 2005, respectively.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Fair
Value of Assets and Liabilities
The
fair
value of cash and temporary investments, accounts receivable, accounts
payable,
commercial paper and borrowings under revolving credit facilities is
estimated
to equal their carrying amounts due to the short maturity of those instruments.
The estimated fair value of long-term debt excluding current maturities
and
capital lease obligations, is based on quoted market prices for similar
issues
and is as follows:
|
|
September 30,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Carrying
value
|
|
$ |
329,800
|
|
|
$ |
279,800
|
|
Fair
market value
|
|
$ |
336,200
|
|
|
$ |
281,800
|
|
Asset
Retirement Obligations (ARO)
NJR
adopted the provisions of FASB-issued Financial Interpretation Number
47,
Accounting for Conditional Asset Retirement Obligations (FIN 47),
effective as of September 30, 2006. FIN 47 clarifies the term “conditional asset
retirement obligation” as used in SFAS No. 143, Accounting for Asset
Retirement Obligations. A conditional asset retirement
obligation refers to a legal obligation to perform an asset retirement
activity
in which the timing and/or method of settlement are conditional on a
future
event that may or may not be within the control of the company. FIN 47
removes
the conditionality surrounding an ARO, such that the obligation to perform
the
asset retirement activity is unconditional even though uncertainty exists
about
the timing and/or method of settlement.
FIN
47
requires NJR to recognize a reasonably estimated liability for the fair
value of
an ARO. The fair value of a liability for an ARO should be recognized
when
incurred, which is generally upon acquisition, construction, development
and/or
through the normal operation of the asset. An asset retirement cost will
be
capitalized concurrently by increasing the carrying amount of the related
asset
by the same amount as the liability. In periods subsequent to the initial
measurement, NJR is required to recognize changes in the liability resulting
from the passage of time (accretion) or due to revisions to either timing
or the
amount of the originally estimated cash flows to settle the conditional
asset retirement obligation.
Pension
and Postemployment Plans
NJR
has
two noncontributory defined pension plans covering substantially all
employees,
including officers. Benefits are based on each employee’s years of service and
compensation. NJR’s funding policy is to contribute annually to these plans at
least the minimum amount required under the Employee Retirement Income
Security
Act (ERISA) of 1974 and not more than can be deducted for federal income
tax
purposes. Plan assets consist of equity securities, fixed-income securities
and
short-term investments. NJR contributed $10 million and $10.9 million
in
aggregate to the plans in fiscal 2006 and 2005, respectively. There were
no
contributions to the pension plans in fiscal 2007.
NJR
also
provides two primarily noncontributory medical and life insurance plans
for
eligible retirees and dependents. Medical benefits, which make up the
largest
component of the plans, are based upon an age and years-of-service vesting
schedule and other plan provisions. Funding of these benefits is made
primarily
into Voluntary Employee Beneficiary Association trust funds. NJR contributed
$685,000, $3.7 million and $638,000 in aggregate to these plans in fiscal
2007,
2006 and 2005, respectively.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Stock
Based Compensation
In
October 2005, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R). This statement requires companies to
record compensation expense for all share-based awards granted subsequent
to the
adoption of SFAS 123R. In addition, SFAS 123R requires the recording
of
compensation expense for the unvested portion of previously granted awards
that
remain outstanding at the date of adoption. In October 2002, the Company
adopted the prospective method of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), and as such has recognized
compensation expense for grants issued subsequent to October 1, 2002 at the
fair value of the options at date of grant. See Note 9. Stock Based
Compensation. The impact from the adoption of SFAS 123R was not material to
the financial statements.
New
Accounting Standards
In
July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), which alters the framework for
recognizing income tax contingencies. Previously, under SFAS No. 5,
Accounting for Contingencies, the focus was on the subsequent liability
recognition for estimated losses from tax contingencies where such losses
were
probable and the related amounts could be reasonably estimated. Under
this new
interpretation, a contingent tax asset (i.e., an uncertain tax position)
may
only be recognized if it is more likely than not that it will ultimately
be
sustained upon audit. The Company will adopt FIN 48 on October 1, 2007.
The
Company has evaluated its tax positions for all jurisdictions and all
years for
which the statute of limitations remains open, and has determined that
the
adoption will have no material impact on its financial position, results
of
operations or cash flows. See Note 12. Income Taxes.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value as the amount that
would be exchanged to sell an asset or transfer a liability, in an orderly
transaction between market participants, and establishes a fair value
hierarchy
of quotes and unobservable data that should be used to develop pricing
assumptions. In addition, for assets and liabilities that are not actively
traded, for example, certain kinds of derivatives, SFAS 157 requires
that a fair
value measurement include an adjustment for risks inherent in a valuation
technique and/or inputs, such as those used in pricing models. SFAS 157
is
effective for fiscal years beginning after November 15, 2007; however,
early adoption is permitted. The Company will adopt the provisions of
the
statement prospectively and is evaluating the adoption date and its effect
on
its financial position and results of operations.
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postemployment
Plans (SFAS
158). The statement requires an employer to recognize the funded status,
measured as the difference between the fair value of plan assets and
the
projected benefit obligation, of its benefit plans. SFAS 158 does not
change how
pensions and other postemployment benefits are accounted for and reported
in the
income statement nor does it change how NJR will measure its assets or
liabilities since NJR’s measurement date coincides with its fiscal year end. The
Company adopted SFAS 158 on a prospective basis on September 30, 2007, and
recognized a net liability of $26.0 million, a regulatory asset of $32.2
million
related to unrecognized service costs that are recoverable in rates and,
therefore, allowed to be treated as a regulatory asset pursuant to SFAS
71, a
deferred tax liability of $2.5 million and a gain, net of tax, in Accumulated
other comprehensive income of $4.2 million. For additional information
on the
effect of adoption on NJR’s Consolidated Balance Sheet, see Note 10.
Employee Benefit Plans.
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
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
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 is effective for fiscal years beginning
after
November 15, 2007; however, early adoption is permitted provided the
provisions
of SFAS 157 are concurrently applied. The Company is evaluating SFAS
159 to
determine its applicability to its current operations and effect, if
any, on its
financial position or results of operations.
In
June
2007, the FASB Emerging Issues Task Force (EITF) reached consensus on
EITF Issue
No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards (EITF 06-11). EITF 06-11 applies to share-based payment
arrangements that entitle employees to receive dividends or dividend
equivalents
and provides that the tax benefit related to dividends on certain share
based
awards be recognized as an increase to additional paid-in capital and
should be
included in the pool of excess tax benefits available to absorb future
tax
deficiencies on share-based payment awards. EITF 06-11 will be applied
prospectively to the income tax benefits of applicable dividends declared
by the
Company for fiscal years beginning after December 15, 2007. The Company
is
currently evaluating the effect of adoption on its statement of financial
position and results of operations.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) used in the United States of America requires
NJR
to make estimates that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosure of contingencies during the
reporting
period. On a continuous basis, NJR evaluates its estimates, including
those
related to the calculation of the fair value of derivative instruments,
unbilled
revenues, allowance for doubtful accounts, provisions for depreciation
and
amortization, regulatory assets and liabilities, income taxes, pensions
and
other postemployment benefits and contingencies related to environmental
matters
and litigation. NJR bases its estimates on historical experience and
on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources.
NJR
has
legal, regulatory and environmental proceedings during the normal course
of
business which can result in loss contingencies. When evaluating the
potential
for a loss, NJR will establish a reserve if a loss is probable in accordance
with SFAS 5, Accounting for Contingencies. Where available information
is sufficient to estimate the amount of the liability, it is NJR’s policy to
accrue the full amount of such estimate. Where the information is sufficient
only to establish a range of probable liability, and no point within
the range
is more likely than any other, it is NJR’s policy to accrue the lower end of the
range.
In
the
normal course of business estimated amounts are subsequently adjusted
to actual
results that may differ from estimates.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
2. RESTATEMENT
OF CONSOLIDATED FINANCIAL STATEMENTS
As
a
result of a review of its accounting treatment surrounding certain of
the
derivative instruments used by unregulated subsidiaries of the Company
in energy
transactions during the process of preparing the consolidated financial
statements for the year ended September 30, 2007, the Company concluded
that it
had incorrectly accounted for these derivative instruments as cash flow
hedges.
Specifically, the Company concluded that it had incorrectly applied the
“critical-terms-match” criteria of SFAS 133 in designating these derivative
instruments as cash flow hedges primarily because the locational terms
did not
match exactly. Accordingly, the Company concluded that the change in
fair value
of these derivative instruments should be recorded as a component of
Gas
purchases, or Operating revenues, as appropriate, in the Consolidated
Statements
of Income and not in Other comprehensive income (OCI) where they had
been
previously recorded. Other Comprehensive income is accumulated as a component
of
Common Stock Equity.
To
correct this accounting error, the Company is restating, herein, the
consolidated financial statements as of and for the years ended September
30,
2006 and 2005.
EFFECTS
OF RESTATEMENT
Prior
to
the restatement, changes in the fair value of derivative instruments
that were
designated as cash flow hedges of forecasted purchases and sales of natural
gas
were recorded in OCI until the forecasted transaction was settled and
recognized
in earnings. Subsequent to the restatement, the changes in fair value
of these
derivative instruments are now recorded in the Consolidated Statements
of
Income.
The
following table sets forth the effects of the restatement on affected
line items
within the Company’s previously reported financial statements for fiscal years
ended 2006 and 2005. Also included in the adjustment columns, and as
separate
line items in the tables below, are certain immaterial corrections that
the
Company made to Other income and Equity in earnings of equity investees,
net of
tax for 2006 and Operation and maintenance for 2005.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Fiscal
years ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
As
Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
|
As
Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
|
Operating
revenue
|
|
$
|
3,299,608
|
|
|
$
|
(28,379 |
) |
|
$
|
3,271,229
|
|
|
$
|
3,148,262
|
|
|
$
|
36,320
|
|
|
$
|
3,184,582
|
|
Gas
purchases
|
|
$
|
2,909,789
|
|
|
$
|
(270,300 |
) |
|
$
|
2,639,489
|
|
|
$
|
2,780,343
|
|
|
$
|
134,044
|
|
|
$
|
2,914,387
|
|
Operation
and maintenance |
|
$
|
121,384 |
|
|
N/A |
|
|
N/A |
|
|
$
|
108,071 |
|
|
$
|
370
|
|
|
$
|
108,441 |
|
Total
operating expenses
|
|
$
|
3,153,145
|
|
|
$
|
(270,300 |
) |
|
$
|
2,882,845
|
|
|
$
|
3,009,894
|
|
|
$
|
134,414
|
|
|
$
|
3,144,308
|
|
Operating
Income
|
|
$
|
146,463
|
|
|
$
|
241,921
|
|
|
$
|
388,384
|
|
|
$
|
138,368
|
|
|
$
|
(98,094 |
) |
|
$
|
40,274
|
|
Other
income
|
|
$
|
7,747
|
|
|
$
|
(3,022 |
) |
|
$
|
4,725
|
|
|
$
|
7,359
|
|
|
$
|
(2,545 |
) |
|
$
|
4,814
|
|
Income
before income taxes and equity in earnings of affiliates
|
|
$
|
128,541
|
|
|
$
|
238,899
|
|
|
$
|
367,440
|
|
|
$
|
125,253
|
|
|
$
|
(100,639 |
) |
|
$
|
24,614
|
|
Income
tax provision
|
|
$
|
50,022
|
|
|
$
|
97,327
|
|
|
$
|
147,349
|
|
|
$
|
48,913
|
|
|
$
|
(41,081 |
) |
|
$
|
7,832
|
|
Equity
in earnings, net of tax
|
|
$
|
—
|
|
|
$
|
1,817
|
|
|
$
|
1,817
|
|
|
$
|
—
|
|
|
$
|
1,753
|
|
|
$
|
1,753
|
|
Net
Income
|
|
$
|
78,519
|
|
|
$
|
143,389
|
|
|
$
|
221,908
|
|
|
$
|
76,340
|
|
|
$
|
(57,805 |
) |
|
$
|
18,535
|
|
Basic
earnings per share
|
|
|
$2.82
|
|
|
|
$5.14
|
|
|
|
$7.96
|
|
|
|
$2.77
|
|
|
|
$(2.10 |
) |
|
|
$0.67
|
|
Diluted
earnings per share
|
|
|
$2.80
|
|
|
|
$5.10
|
|
|
|
$7.90
|
|
|
|
$2.71
|
|
|
|
$(2.05 |
) |
|
|
$0.66
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Fiscal
years ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
As
Previously
Reported
|
|
Adjustment
|
|
Restated
|
|
As
Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
|
Net
Income
|
|
$
|
78,519
|
|
|
$
|
143,389
|
|
|
$
|
221,908
|
|
|
$
|
76,340
|
|
|
$
|
(57,805 |
) |
|
$
|
18,535
|
|
Unrealized
(gain) loss on derivatives
|
|
$
|
(4,935 |
) |
|
$
|
(143,389 |
) |
|
$
|
(148,324 |
) |
|
$
|
3,056
|
|
|
$
|
57,805
|
|
|
$
|
60,861
|
|
CONSOLIDATED
STATEMENTS OF CAPITALIZATION
|
|
Fiscal
years ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
As
Previously
Reported
|
|
Adjustment
|
|
Restated
|
|
As
Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income/(loss), net of tax
|
|
$
|
93,637
|
|
|
$
|
(90,895 |
) |
|
$
|
2,742
|
|
|
$
|
(59,871 |
) |
|
$
|
52,649
|
|
|
$
|
(7,222 |
) |
Treasury
Stock and other
|
|
$
|
(65,194 |
) |
|
$
|
155
|
|
|
$
|
(65,039 |
) |
|
$
|
(24,840
|
) |
|
N/A
|
|
|
N/A
|
|
Retained
earnings
|
|
$
|
267,307
|
|
|
$
|
90,740
|
|
|
$
|
358,047
|
|
|
$
|
228,924
|
|
|
$
|
(52,649 |
) |
|
$
|
176,275
|
|
CONSOLIDATED
STATEMENTS OF COMMON STOCK EQUITY
|
|
Fiscal
years ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
As
Previously
Reported
|
|
Adjustment
|
|
Restated
|
|
As
Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
78,519
|
|
|
$
|
143,389
|
|
|
$
|
221,908
|
|
|
$
|
76,340
|
|
|
$
|
(57,805 |
) |
|
$
|
18,535
|
|
Net
unrealized gain (loss) on derivatives
|
|
$
|
143,048
|
|
|
$
|
(143,544 |
) |
|
$
|
(496 |
) |
|
$
|
(58,010 |
) |
|
$
|
57,805
|
|
|
$
|
(205 |
) |
Treasury
stock and other
|
|
$
|
(46,631 |
) |
|
$
|
155
|
|
|
$
|
(46,476 |
) |
|
$
|
(23,449 |
) |
|
N/A
|
|
|
N/A
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
Fiscal
years ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
As
Previously
Reported
|
|
Adjustment
|
|
Restated
|
|
As
Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
78,519
|
|
|
$
|
143,389
|
|
|
$
|
221,908
|
|
|
$
|
76,340
|
|
|
$
|
(57,805 |
) |
|
$
|
18,535
|
|
Net
unrealized gain (loss) on derivatives
|
|
$
|
143,048
|
|
|
$
|
(143,544 |
|
|
$
|
(496 |
) |
|
$
|
(58,010 |
) |
|
$
|
57,805
|
|
|
$
|
(205 |
) |
Comprehensive
income
|
|
$
|
232,027
|
|
|
$
|
(155
|
)
|
|
$
|
231,872
|
|
|
$
|
18,849
|
|
|
|
N/A
|
|
|
|
N/A
|
|
3. REGULATION
Energy
Deregulation Legislation
The
Electric Discount and Energy Competition Act (EDECA), is the legal framework
for
New Jersey’s public utility and wholesale energy landscape. NJNG is required,
pursuant to a written order by the BPU under EDECA, to have its residential
markets open to competition from third-party natural gas suppliers. Customers
can choose the supplier of their natural gas commodity in NJNG’s service
territory.
As
required by EDECA, NJNG has restructured its prices to segregate BGSS
rates into
two primary components, the commodity portion, which represents the wholesale
cost of natural gas, including the cost for interstate pipeline capacity
to
bring the gas to NJNG’s service territory, and the delivery portion, which
represents the transportation of the commodity portion through NJNG’s gas
distribution system to the end-use customer. NJNG earns no utility gross
margin
on the commodity portion of its natural gas sales. NJNG earns utility
gross
margin through the delivery of natural gas to its customers, regardless
of
whether it or a third-party supplier provides the wholesale natural gas
commodity.
Under
EDECA, the BPU is required to audit the state’s energy utilities every two
years. The primary purpose of the audit is to ensure that utilities and
their
affiliates offering unregulated retail services do not have any unfair
competitive advantage over nonaffiliated providers of similar retail
services. A
combined competitive services and management audit of NJNG began in
November 2006 and is currently pending completion.
Filed
Base Rate Review
Based
upon increases in NJNG’s operating, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base rates for
delivery
service by approximately $58.4 million, which includes a return on equity
component of 11.375 percent. This petition is consistent with NJNG’s objectives
of providing safe and reliable service to its customers and earning a
market-based return on its regulated investments. Based upon statutory
time
frames and potential regulatory lag, it is unlikely that any modification
to its
delivery rates would become effective during fiscal 2008.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Conservation
Incentive Program (CIP)
For
the
reporting periods through September 30, 2006, the impact of weather on
NJNG’s utility gross margin had been significantly mitigated due to its Weather
Normalization Clause (WNC). However, lower customer usage per degree-day
was not
captured by the WNC. NJNG had experienced lower customer usage per degree-day,
which it believed was due primarily to customer conservation resulting
from an
increase in wholesale natural gas commodity costs. In order to minimize
the
impact of the reduction in customer usage, NJNG filed a Conservation
and Usage
Adjustment (CUA) proposal with the BPU in December 2005. In December
2006, the
BPU issued a Decision and Order and approved the stipulation reached
on
September 30, 2006, which modified the CUA proposal into the Conservation
Incentive Program (CIP) effective for October 1, 2006.
The
CIP
is a three-year pilot program, designed to decouple the link between
customer
usage and NJNG’s utility gross margin to allow NJNG to encourage its customers
to conserve energy. The initial term of the CIP is October 1, 2006 through
September 30, 2009. Under certain conditions, the CIP may be extended
one
additional year beyond the initial term. For the term of the pilot, the
WNC has
been suspended and replaced with the CIP tracking mechanism, which addresses
utility gross margin variations related to both weather and customer
usage in
comparison to established benchmarks. Recovery of such utility gross
margin
variations (filed for annually and recovered one year following the end
of the
CIP usage year) is subject to additional conditions, including an earnings
test
and an evaluation of BGSS-related savings.
As
of
September 30, 2007 NJNG has $16.5 million accrued to recover from residential
and small commercial customers, which includes $8.2 million related to
the
weather component of the CIP and $8.3 million related to the usage component
of
the CIP.
To
encourage energy efficiency, NJNG is obligated to initiate and fund programs
to
further customer conservation efforts over the term of the pilot. The
minimum
expected liability for funding these programs was recorded, at its present
value
of $1.8 million, as of September 30, 2006. As a result of the accretion
of
interest and the payment of obligations for this program, the balance
of this
liability is approximately $1.4 million as of September 30, 2007.
The
commencement of the CIP does not have any impact on the collection of
previously
accrued amounts for utility gross margin recovery under the WNC.
The
following are NJNG’s BPU filings and results related to CIP:
Ÿ
|
June
2007 – NJNG filed its CIP Petition for the Annual Review of its CIP
Program for recoverable CIP amounts for fiscal 2007 and to
establish its
CIP recovery rates effective October 1, 2007.
|
|
|
Ÿ
|
August
2007 – NJNG filed an amendment to its June 2007 CIP filing to update
financial information to include actual data.
|
|
|
Ÿ
|
October
2007 – the BPU provisionally approved implementation of NJNG’s initial CIP
rates, which will add 1.1 percent to the average residential
customer’s
bill.
|
In
addition to approving NJNG’s CIP rates, the BPU acted on various matters
relating to other previously filed petitions and stipulations at the
October
2007 meeting. Including the initial CIP rate, the BPU approved a provisional
decrease to NJNG’s periodic BGSS rate and an increase to delivery rates related
to WNC, Universal Service Fund and the New Jersey Clean Energy Program,
as
discussed below. The net effect of the all approved rate changes is a
0.7
percent decrease to the average residential sales customer’s bill effective
October 4, 2007.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Basic
Gas Supply Service
NJNG
is
allowed to recover the commodity cost of its gas purchased for sale to
its
customers through the BGSS rate component of its customers’ bills. NJNG is
required to make an annual filing by June 1 of each year for review of its
BGSS rate with the BPU. At that time NJNG may also request a potential
rate
change to be effective at the beginning of the following fiscal year.
NJNG is
allowed to make two interim filings during the fiscal year period to
subsequently increase residential and small commercial customer BGSS
rates up to
5 percent on a self-implementing and provisional basis, after proper
notice and
BPU action on the June filing. Such increases, if any, are subject to
subsequent BPU review and final approval.
The
cost
of the wholesale natural gas commodity passed through to customers can
fluctuate
significantly based on many factors associated with supply and demand
in the
marketplace. In addition to the annual and interim filings to adjust
BGSS rates,
NJNG is permitted to refund or credit back a portion of the commodity
cost
previously collected from customers when the natural gas commodity cost
decreases in comparison to amounts projected or adjusted as a component
of the
BGSS rates. Before implementing a refund or credit, proper notification
and
supporting documentation is filed with the BPU. Refundable amounts may
also be
subject to interest.
The
following are NJNG’s BGSS filings and related rate adjustments and refunds to
its residential and small commercial customers:
Ÿ
|
June
2005 – NJNG filed its annual BGSS review and requested a 4.2 percent
rate
increase to be effective October 2005, which was subsequently
amended and
approved to be effective September 2005.
|
|
|
Ÿ
|
November
2005 – An additional 23.2 percent price increase related to higher
wholesale natural gas commodity costs was provisionally approved
and
became effective December 2005.
|
|
|
Ÿ
|
January and
March 2006 – NJNG filed notification with the BPU for a bill credit
for the period February 1, 2006 through April 30, 2006,
providing a temporary rate reduction of approximately $28.6
million to its
customers, as the natural gas commodity cost recovered in the
BGSS rate
was higher than the actual cost to acquire natural gas.
|
|
|
Ÿ
|
June
2006 – NJNG filed for a reduction to the BGSS rate that decreased
the
average residential customer’s bill by approximately 6.6 percent as a
result of continued decreases in wholesale natural gas costs,
which was
approved by the BPU on a provisional basis in September
2006.
|
|
|
Ÿ
|
September
2006 – In addition to implementing a rate decrease, NJNG refunded
approximately $22.5 million to its customers, as a result of
lower natural
gas costs.
|
|
|
Ÿ
|
October
2006 – NJNG filed notification for a self-implementing BGSS price
reduction effective November 2006, which lowered customers’ bills by
approximately an additional 4 percent.
|
|
|
Ÿ
|
December
2006 and March 2007 – Customers received refunds approximately $51.5
million and $20 million, respectively, as the prices for wholesale
natural
gas continued to be lower than the BGSS allowed recovery
rate.
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Ÿ
|
June
2007 – NJNG filed its annual review and revision of its BGSS for fiscal
2008 (2008 BGSS filing) and proposed to maintain its periodic
BGSS factor
at its existing levels as a result of a pending self-implementing
BGSS
decrease in conjunction with a stipulation that NJNG entered
into with the
BPU in March 2007 (the March 2007 Stipulation) related to the
Societal
Benefits Clause (SBC) and Weather Normalization Clause (WNC),
both of
which are discussed below under Societal Benefits Clause and Weather
Normalization Clause. NJNG expected to implement the June 1st
proposal for
the BGSS factor in October 2007. The self-implementing decrease
is
designed to offset proposed increases to the SBC and WNC rates,
as
discussed below.
|
|
|
Ÿ
|
August
2007 – NJNG withdrew its notification of its intent to self-implement
the
BGSS decrease and filed an amendment to its 2008 BGSS filing
to request
approval of the BGSS decrease effective in October
2007.
|
|
|
Ÿ
|
October
2007 – the BPU provisionally approved a 3.6 percent decrease to NJNG’s
BGSS rate effective October 4, 2007.
|
|
|
Ÿ
|
November
2007 – NJNG announced its intention to notify the BPU that it will
provide
refunds totaling approximately $30 million, which will be in
the form of a
bill credit.
|
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. The ratio of storage incentive and FRM pre-tax gains and losses
shared
by NJNG customers and NJNG was 80 percent and 20 percent, respectively,
during
fiscal years 2007, 2006 and 2005. The sharing percentage for off-system
sales
and capacity release is on an 85 percent and 15 percent basis during
the fiscal
years ended September 30, 2007, 2006 and 2005.
At
the
October 2007 meeting, the BPU approved an extension of the utility gross
margin-sharing programs mentioned above through October 31, 2008. Concurrently,
the BPU changed NJNG’s FRM sharing percentage to 85 percent to customers and 15
percent to NJNG effective November 1, 2007.
Societal
Benefits Clause (SBC) and Weather Normalization Clause
(WNC)
The
SBC
is comprised of three primary components, a Universal Service Fund rider
(USF),
a Manufactured Gas Plant Remediation Adjustment Clause (RAC), and the
New Jersey
Clean Energy Program (NJCEP). The USF is a permanent statewide program
that was
approved by the BPU in March 2003 for all natural gas and electric
utilities for the benefit of income eligible customers; the RAC is a
rider
approved by the BPU in June 1992 that provides for recovery of actual
expenditures incurred to remediate former gas manufacturing facilities;
and the
NJCEP is a program approved by the BPU in March 2001 and is designed to
promote energy efficiency and renewable energy. Recovery of SBC program
costs is
subject to BPU approval of annual filings that include an updated report
of
expenditures incurred each year.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
In
October 2007, the BPU approved the following:
Ÿ
|
$14.7
million in eligible costs to be recovered annually for MGP
remediation
expenditures incurred through September 30, 2006, except for
$4.0 million
of those expenditures associated with the Mass Tort Litigation
related to
the Long Branch MGP sites (see Note 13. Commitments and Contingent
Liabilities), which was recorded as a charge to Operations and
maintenance expense in the Consolidated Income Statement for
the twelve
months ended September 30, 2007.
|
|
|
Ÿ
|
SBC
and WNC increases, which were originally filed in October 2006
and
subsequently agreed to in a stipulation signed by NJNG, the
BPU and Rate
Counsel in October 2007 as follows:
|
|
|
|
¡
|
An
increase in the recovery related to the NJCEP from $6.3 million
to $13.0
million for the fiscal year 2008.
|
|
|
|
|
¡
|
The
WNC portion of its rates were increased by $8.1 million, or
0.9 percent,
to recover the net amount previously deferred gross margin
associated with
warmer than normal weather for the 2005 through 2006 winter
period and the
colder than normal weather for the 2004 through 2005 winter
period;
and
|
|
|
|
|
¡
|
A
decrease to the USF portion as noted
below.
|
Universal
Service Fund
Through
the USF, eligible customers receive a credit toward their utility bill.
The
credits applied to eligible customers are recovered through the USF rider
in the
SBC. NJNG recovers carrying costs on deferred USF balances. Regulatory
actions
related to the USF rider are as follows:
Ÿ
|
July
2006 – The natural gas utilities filed to increase the statewide USF
recovery rate as a result of higher USF benefits. The request
was
subsequently approved to be effective November 1, 2006 and
resulted in an
approximate 0.9 percent increase to the total bill of residential
sales
customers.
|
|
|
Ÿ
|
June
2007 – The natural gas utilities filed to decrease the statewide USF
recovery rate. At the October 2007 meeting, the BPU approved
the decrease
to the statewide USF recovery rate, which will have a negligible
impact on
customers.
|
New
Jersey Clean Energy Program
The
BPU
has established a statewide NJCEP funding amount, from all New Jersey
utilities,
for the period from January 1, 2005 to December 31, 2008. NJNG’s
obligation to the state of New Jersey, which is recoverable from customers
through the SBC, gradually increases from $4.2 million in fiscal 2005 to
$9.5 million in fiscal 2008. As a result, NJNG has a remaining discounted
liability of $11.5 million and a corresponding Regulatory asset included
in SBC
at September 30, 2007.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Regulatory
Assets & Liabilities
At
September 30, 2007 and 2006, respectively, the Company had the following
regulatory assets, all related to NJNG, on the Consolidated Balance
Sheets:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
Recovery
Period
|
|
Regulatory
assets–current
|
|
|
|
|
|
|
|
|
|
WNC
|
|
$ |
8,105
|
|
|
$ |
8,105
|
|
|
Less
than one year (1)
|
|
CIP
|
|
|
16,529
|
|
|
|
—
|
|
|
Less
than one year (2)
|
|
Total
current
|
|
$ |
24,634
|
|
|
$ |
8,105
|
|
|
|
|
Regulatory
assets–noncurrent
|
|
|
|
|
|
|
|
|
|
|
|
Remediation
costs (Notes 3 and 13)
|
|
|
|
|
|
|
|
|
|
|
|
Expended,
net
|
|
$ |
85,071
|
|
|
$ |
83,746
|
|
|
(3 |
)
|
|
Liability
for future expenditures
|
|
|
105,340
|
|
|
|
105,400
|
|
|
(4 |
)
|
|
Deferred
income and other taxes
|
|
|
13,979
|
|
|
|
13,476
|
|
|
Various
|
|
Derivatives
(Note 4)
|
|
|
51,861
|
|
|
|
82,451
|
|
|
(5 |
)
|
|
Postemployment
benefit costs (Note 10)
|
|
|
33,988
|
|
|
|
2,117
|
|
|
(6 |
)
|
|
SBC
|
|
|
22,130
|
|
|
|
35,796
|
|
|
Various
(7)
|
|
Total
noncurrent
|
|
$ |
312,369
|
|
|
$ |
322,986
|
|
|
|
|
|
(1)
|
Recoverable
as a result of BPU approval in October 2007, without interest.
This
balance reflects the net results from winter 2004-2005 and
2005-2006. No
new WNC activity is being recorded due to the existence of
the CIP, all
previously deferred amounts with the WNC have been approved
for
recovery.
|
(2)
|
Recoverable
or refundable, subject to BPU annual approval, without interest.
Balance
includes approximately $8.2 million relating to the weather
component of
the calculation and approximately $8.3 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.
|
(3)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods. As of
September 30, 2007, this amount is net of actual insurance
proceeds
received of $12.8 million, as the result of a settlement
NJNG reached with
certain parties for recovery of such amounts on January 24,
2007 (see
Note 13. Commitments and Contingent Liabilities – Legal
Proceedings). As of September 30, 2006 this amount is net of an
estimated $10 million in expected insurance proceeds.
|
(4)
|
Estimated
future expenditures. Recovery will be requested when actual
expenditures
are incurred (see Note 13. Commitments and Contingent Liabilities –
Legal Proceedings).
|
(5)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(6)
|
Recoverable
or refundable, subject to BPU approval, without interest.
The increase in
fiscal 2007 is due to the application of SFAS 158, as NJNG
has determined
that unrecognized prior service costs are recoverable in
rates charged to
customers (see Note 10. Employee Benefit
Plans).
|
(7)
|
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.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
At
September 30, 2007 and 2006, the Company had the following regulatory
liabilities, all related to NJNG, on the Consolidated Balance
Sheets:
(Thousands)
|
|
2007
|
|
|
2006
|
|
Regulatory
liability–current
|
|
|
|
|
|
|
Overrecovered
gas costs (1)
|
|
$ |
9,583
|
|
|
$ |
1,710
|
|
Total
current
|
|
$ |
9,583
|
|
|
$ |
1,710
|
|
Regulatory
liabilities–noncurrent
|
|
|
|
|
|
|
|
|
Cost
of removal obligation (2)
|
|
$ |
60,094
|
|
|
$ |
58,161
|
|
Market
development fund (MDF) (3)
|
|
|
1,176
|
|
|
|
6,059
|
|
Total-noncurrent
|
|
$ |
61,270
|
|
|
$ |
64,220
|
|
(1)
|
Refundable,
subject to BPU approval, through BGSS, with interest.
|
(2)
|
NJNG
accrues and collects for cost of removal in rates. This liability
represents collections in excess of actual expenditures. Approximately
$19.5 million, including accretion of $1.3 million for the
fiscal year
ended September 30, 2007, of regulatory assets relating to
asset
retirement obligations have been netted against the cost of
removal
obligation as of September 30, 2007 (see Note 11. Asset Retirement
Obligations).
|
(3)
|
The
MDF provided financial incentives to encourage customers to
switch to
third party suppliers and has supported other unbundling related
initiatives. Balance earned interest at prevailing SBC rate.
The MDF
funding obligations terminated as of October 31, 2006. Approximately
$4.9 million of this fund was credited to the NJCEP, as a result
of the
CIP Decision and Order of the BPU on December 12, 2006. The remaining
balance will be credited back to customers through the BGSS
in October
2007.
|
4. FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT
The
Company and its subsidiaries are subject to market risk due to fluctuations
in
the price of natural gas. To manage the risk of such fluctuations, the
Company
and its subsidiaries enter into futures contracts, option agreements
and swap
agreements to economically hedge future purchases and sales of natural
gas.
Generally,
all of the Company’s commodity contracts for future delivery of natural gas meet
the “normal purchase normal sale” scope exception of SFAS No. 133, and the
related liabilities incurred and assets acquired under these contracts
are
recorded when title to the underlying commodity passes. If these commodity
contracts do not meet the normal purchase normal sale scope exception
they are
recorded at fair value, and any changes to that fair value over time
are
recorded as a component of Gas purchases. All of NJRES’ and NJR Energy’s
financial derivative instruments (financial futures, options or swaps)
are
accounted for at fair value with all changes recorded as a component
of Gas
purchases or Operating revenues, as appropriate, in the Consolidated
Statements
of Income. The change in the fair value of NJNG’s financial derivative
instruments are recorded as a component of regulatory assets or liabilities
in
the Consolidated Balance Sheets.
In
March 1992, NJR Energy entered into a long-term fixed-price contract to
sell natural gas (Gas Sale Contract) to an energy marketing company,
which
expires in 2010. NJR Energy entered into a series of purchase contracts
to
provide additional gas to meet required volumes under the Gas Sale Contract
that
were in excess of the estimated production from natural gas reserves
owned at
the time. NJR Energy also entered into swap agreements that cover various
periods of time ranging from November 2006 to
October 2010.
The
respective obligations of NJR Energy and the counterparties under the
swap
agreements are guaranteed, subject to a maximum amount, by the Company
and the
respective counterparties’ parent corporations. In the event of nonperformance
by the counterparties and their parent corporations, NJR Energy’s financial
results would be impacted by the difference, if any, between the fixed
price it
is receiving under the Gas Sale Contracts and the floating price that
it is
paying under the purchase contract. However, the Company does not anticipate
nonperformance by the counterparties, which are major national energy
companies.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Generally,
exchange-traded futures contracts require a deposit of margin cash, the
amount
of which is subject to change based on market movements and in accordance
with
exchange rules. The Company maintains broker margin accounts for NJNG
and NJRES.
The balances as of September 30, 2007 and 2006 are as follows:
(Thousands)
|
|
2007
|
|
|
2006
|
|
NJNG
broker margin deposit
|
|
$ |
12,345
|
|
|
$ |
30,833
|
|
NJRES
broker margin liability
|
|
$ |
(15,143 |
) |
|
$ |
(14,220 |
) |
5. INVESTMENTS
IN EQUITY INVESTEES
On
March
2, 2007, NJR, through NJR Steckman Ridge Storage Company, a wholly-owned
subsidiary of NJR Energy Holdings, entered into a series of joint venture
agreements with subsidiaries of Spectra Energy Corporation (Spectra)
and formed
the Steckman Ridge partnership. The purpose of the partnership is to
develop and
operate an anticipated 20 Bcf natural gas storage facility in western
Pennsylvania, which will serve the Northeastern and Mid-Atlantic regions
of the
United States. NJR and Spectra each own 50 percent of the equity interests
in
Steckman Ridge and are required to fund 50 percent of total acquisition
and
development costs up to a maximum of $125 million each. As NJR has the
ability
to exert significant influence, but not control, it uses the equity method
of
accounting for its investment in Steckman Ridge.
NJR’s
Investments in equity investees as of September 30, 2007 and 2006, respectively,
include the following investments:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
Steckman
Ridge
|
|
$ |
56,726
|
|
|
$ |
—
|
|
Iroquois
|
|
|
22,073
|
|
|
|
20,414
|
|
Other
|
|
|
7,944
|
|
|
|
6,794
|
|
Total
|
|
$ |
86,743
|
|
|
$ |
27,208
|
|
The
following is summarized financial information for Iroquois for the fiscal
years
ended September 30:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
revenues
|
|
$ |
119.1
|
|
|
$ |
117.6
|
|
|
$ |
112.9
|
|
Operating
income
|
|
$ |
57.7
|
|
|
$ |
60.5
|
|
|
$ |
55.9
|
|
Net
income
|
|
$ |
21.9
|
|
|
$ |
22.3
|
|
|
$ |
25.4
|
|
Total
assets
|
|
$ |
814.3
|
|
|
$ |
798.1
|
|
|
$ |
838.7
|
|
Steckman
Ridge is currently under development. As such, there are no earnings
currently
associated with the investment in Steckman Ridge, and the invested balance
to
date represents the Company’s share of total acquisition and development costs
incurred to acquire the natural gas storage rights, engineering and site
preparation, legal and other third party direct charges and capitalized
interest. Other investments represent investments in equity securities
of
publicly traded energy companies, all of which are immaterial on an individual
basis, and are accounted for as available for sale securities, with any
change
in the value of such investments recorded as Accumulated other comprehensive
income, a component of Common Stock Equity.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
6. EARNINGS
PER SHARE
The
following table presents the calculation of the Company’s basic and diluted
earnings per share for the fiscal years ended September 30:
(Thousands,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
Income, as reported
|
|
$ |
65,281
|
|
|
$ |
221,908
|
|
|
$ |
18,535
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
|
|
27,903
|
|
|
|
27,862
|
|
|
|
27,591
|
|
Basic
earnings per common share
|
|
|
$2.34
|
|
|
|
$7.96
|
|
|
|
$0.67
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
|
|
27,903
|
|
|
|
27,862
|
|
|
|
27,591
|
|
Incremental
shares (1)
|
|
|
172
|
|
|
|
219
|
|
|
|
530
|
|
Weighted
average shares of common stock outstanding–diluted
|
|
|
28,075
|
|
|
|
28,081
|
|
|
|
28,121
|
|
Diluted
earnings per common share
|
|
|
$2.33
|
|
|
|
$7.90
|
|
|
|
$0.66
|
|
(1) Incremental
shares consist of stock options, stock awards and performance
units
7. LONG-TERM
DEBT, DIVIDENDS AND RETAINED EARNINGS RESTRICTIONS
Annual
long-term debt, excluding capital leases, redemption requirements are
as follows
(in millions):
September 30,
|
Redemption
|
2008
|
—
|
|
2009
|
$ 55.0
|
|
2010
|
—
|
|
2011
|
$ 20.0
|
|
2012
|
—
|
|
Thereafter
|
$254.8
|
|
NJNG
First Mortgage Bonds
NJNG’s
mortgage secures its First Mortgage Bonds and represents a lien on substantially
all of its property, including natural gas supply contracts. Certain
indentures
supplemental to the mortgage include restrictions as to cash dividends
and other
distributions on NJNG’s common stock that apply as long as certain series of
First Mortgage Bonds are outstanding. Under the most restrictive provision,
approximately $178 million of NJNG’s retained earnings were available for such
purposes at September 30, 2007.
NJNG
enters into loan agreements with the New Jersey Economic Development
Authority
(the EDA) under which the EDA issues tax-exempt bonds and the proceeds
are
loaned to NJNG to fund capital expenditures for certain portions of its
natural
gas service territory. To secure its loans from the EDA, NJNG issues
First
Mortgage Bonds to the EDA with interest rates and maturity dates identical
to
those of the EDA Bonds.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
In
October 2005, NJNG entered into a loan agreement under which the EDA loaned
NJNG the proceeds from $35.8 million of tax-exempt EDA Bonds consisting
of $10.3
million, 4.5 percent (Series 2005A) and $10.5 million, 4.6 percent
(Series 2005B) Revenue Refunding Bonds; and $15.0 million, 4.9 percent
(Series 2005C) Natural Gas Facilities Revenue Bonds. The EDA’s
Series 2005A bonds are supported by NJNG’s 4.5 percent Series II bonds
with a maturity date of August 1, 2023. The EDA’s Series 2005B bonds
are supported by NJNG’s 4.6 percent Series JJ bonds with a maturity date of
August 1, 2024. The EDA’s Series 2005C bonds are supported by NJNG’s
4.9 percent Series KK bonds with a maturity date of October 1,
2040.
NJNG
used
the proceeds from the Series A and B bonds to refinance NJNG’s $10.3
million, 5.38 percent Series W First Mortgage Bonds and its $10.5 million,
6.25 percent Series Y First Mortgage Bonds, respectively. The proceeds from
the Series 2005C bonds were deposited into a construction fund. NJNG drew
down $6.5 million from the construction fund in fiscal 2006 and $4.3
million in
fiscal 2007.
In
July 2006, NJNG purchased interest rate caps with several banks to hedge
the interest rate exposure on its $97.0 million of tax-exempt, variable
rate
long-term debt with various maturity dates ranging from 2027 to 2033.
The
interest rate caps expire in July 2009 and limit NJNG’s variable rate debt
exposure for the tax-exempt EDA Bonds at 4.5 percent. The interest rate
caps are
treated as cash flow hedges, with changes in fair value accounted for
in
Accumulated other comprehensive income. At September 30, 2007 and 2006, the
weighted average interest rate on NJNG’s variable rate EDA Bonds was 3.9 percent
and 3.3 percent, respectively.
NJNG
Medium Term Notes
In
May
2007, NJNG petitioned the BPU requesting authorization to issue and sell,
in one
or more series, an aggregate of $125 million in medium-term notes through
July
31, 2010. The notes may be issued on a secured or unsecured basis and
maturities
can range from one to forty years. The proceeds from the issuance of
the notes
will be used to refinance short-term debt, which has been incurred to
fund
capital expenditure requirements and pension and other post-employment
benefit
programs. In August 2007, the BPU approved NJNG’s petition and the notes are
anticipated to be issued during the second quarter of fiscal
2008.
NJNG
Sale-Leasebacks
NJNG’s
master lease agreement for its headquarters building has a 25.5-year
term with
two 5-year renewal options. The present value of the agreement’s minimum lease
payments is reflected as both a capital lease asset and a capital lease
obligation, which are included in Utility plant and Long-term debt,
respectively, on the Consolidated Balance Sheets. In accordance with
its
ratemaking treatment, NJNG records rent expense as if the lease was an
operating
lease.
NJNG
received $5.5 million, $4.1 million and $4.9 million for fiscal year
2007, 2006
and 2005, 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.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Contractual
commitments for lease payments, under both sale-leasebacks for the meters
and
the building, as of the fiscal year end are as follows (in
millions):
Fiscal Year Ended
September 30,
|
Lease
Payments
|
2008
|
$ 8.0
|
|
2009
|
8.0
|
|
2010
|
8.2
|
|
2011
|
12.0
|
|
2012
|
6.0
|
|
Thereafter
|
41.2
|
|
Subtotal
|
$83.4
|
|
Less:
interest component
|
(25.7)
|
|
Total
|
$57.7
|
|
NJR
Debt
NJR
had
no long-term variable-rate debt outstanding at September 30, 2007 and
2006.
On
September 24, 2007, NJR issued $50 million of Unsecured Senior Notes
which will
be used for financing its initial investment in Steckman Ridge and general
corporate purposes including refinancing short-term debt. These notes
have a
10-year maturity and an interest rate of 6.05 percent.
8. SHORT-TERM
DEBT AND CREDIT FACILITIES
A
summary
of NJR’s and NJNG’s committed credit facilities, which require commitment fees
on the unused amounts, and NJRES’ committed facility that does not require a
fee, are as follows:
|
|
September
30,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
NJR
|
|
|
|
|
|
|
Bank
credit facilities
|
|
$ |
325,000
|
|
|
$ |
325,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
$ |
40,250
|
|
|
$ |
129,200
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
|
6.17 |
% |
|
|
6.00 |
% |
NJNG
(1)
|
|
|
|
|
|
|
|
|
Bank
credit facilities
|
|
$ |
250,000
|
|
|
$ |
250,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
$ |
175,700
|
|
|
$ |
151,500
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
5.19 |
% |
|
|
4.70 |
% |
NJRES
|
|
|
|
|
|
|
|
|
Bank
credit facilities
|
|
$ |
30,000
|
|
|
$ |
—
|
|
Amount
outstanding at end of period
|
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
$ |
30,000
|
|
|
$ |
—
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
|
5.78 |
% |
|
|
— |
% |
(1)
|
The
table includes only committed credit facilities for short term
borrowings.
Also included in short term debt on the consolidated balance
sheet as of
September 30, 2007, is $10.5 million related to an uncommitted
credit
facility.
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NJR
As
of
September 30, 2007, NJR has a $325 million committed credit facility
with
several banks, with a 3-year term, expiring in December 2007. These
facilities provide liquidity to meet the working capital and external
debt-financing requirements of NJR and its nonregulated companies. NJR
expects
to replace this facility in the first quarter of fiscal 2008 with a 5-year
committed credit facility.
As
of
September 30, 2007, NJR had three letters of credit outstanding on behalf
of NJRES, one of which expired on November 30, 2007. A $14.0 million letter
of credit was related to margin requirements for NJRES’ natural gas transactions
and was not renewed. There are two remaining letters of credit outstanding
on behalf of NJRES that expire on December 31, 2007. These two letters of
credit are comprised of a $4.0 million letter of credit that was renewed on
August 1, 2007, in conjunction with a long-term natural gas storage agreement,
and a $500,000 letter of credit that was entered into on September 28,
2007 for
an additional storage transaction.
NJR
also
has a $675,000 letter of credit outstanding on behalf of CR&R, which expired
on December 3, 2007, in conjunction with development activities. This
letter of
credit will be renewed during the first quarter of fiscal 2008.
These
letters of credit reduce the amount available under NJR’s committed credit
facility by the same amount. NJR does not anticipate that these letters
of
credit will be drawn upon by the counterparties and they will be renewed
as
necessary.
NJNG
As
of
September 30, 2007, NJNG has a $250 million committed facility with several
banks, with a 5-year term expiring in December 2009. This facility is used
to support NJNG’s commercial paper program.
As
of
September 30, 2007, NJNG had a $34 million letter of credit outstanding
that will expire on December 31, 2007, in conjunction with a long-term swap
agreement. The long-term swap agreement was entered into as a hedge related
to
an offsetting physical purchase of natural gas for the same time period
and
volume. This letter of credit was replaced on November 30, 2007, by a
stand
alone letter of credit, expiring in December 31, 2007, which does not
reduce the
amount available to be borrowed under NJNG’s credit facility. NJNG does not
anticipate that this letter of credit will be drawn upon by the counterparty,
and it will be renewed as necessary, upon its expiration.
In
April
2007, NJNG entered into a 3-year, $30 million uncommitted credit facility
with a
multinational financial institution, of which $10.5 million was outstanding
as
of September 30, 2007.
NJRES
In
October 2006, NJRES entered into a 3-year, $30 million committed credit
facility
with a multinational financial institution. Borrowings under this facility,
which totaled $30 million at September 30, 2007, are guaranteed by
NJR.
Neither
NJNG nor the results of its operations are obligated or pledged to support
the
NJR or NJRES credit facilities.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
9. STOCK
BASED COMPENSATION
Effective
January 24, 2007, the shareholders of NJR approved the NJR 2007 Stock
Award and
Incentive Plan (2007 Plan), which replaced the 2002 Employee and Outside
Director Long-Term Incentive Plan (Long-Term Plan). The Long-Term Plan
had
591,471 and 87,280 shares, respectively, reserved for employees and directors,
which were rolled into the 2007 Plan. In addition to those shares, the
2007 Plan
reserved an additional 750,000 shares for issuance to employees for a
total
reserve of 1,341,471 and 87,280, respectively, for employees and directors,
which provides for a broader range of equity awards. As of September
30, 2007,
1,327,098 and 79,227 shares, respectively, remain available for future
awards to
employees and directors.
The
following table summarizes all stock-based compensation expense recognized
during the fiscal years ended September 30, 2007, 2006 and 2005
respectively:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
278
|
|
|
$ |
430
|
|
|
$ |
328
|
|
Performance
units
|
|
|
292
|
|
|
|
270
|
|
|
|
(1,075 |
) |
Restricted
stock
|
|
|
747
|
|
|
|
21
|
|
|
|
—
|
|
Compensation
expense included in Operation and Maintenance expense
|
|
|
1,317
|
|
|
|
721
|
|
|
|
(747 |
) |
Income
tax benefit
|
|
|
(541 |
) |
|
|
(294 |
) |
|
|
305
|
|
Total,
net of tax
|
|
$ |
776
|
|
|
$ |
427
|
|
|
$ |
(442 |
) |
In
fiscal
2005, the Company recognized compensation expense for options granted
prior to
October 1, 2002, based upon the intrinsic value method as prescribed
in
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees.
The
following table presents the pro-forma impacts on net income and earnings
per
share in fiscal 2005 as if fair value recognition provisions of SFAS
123R had
been applied to options granted prior to October 1, 2002:
(Thousands)
|
|
2005
|
|
Net
income, as restated
|
|
$18,535
|
|
Add:
Stock-based employee compensation expense included in reported
net income,
net of related tax effects
|
|
194
|
|
Deduct:
Total stock-based employee compensation expense determined
under the fair
value-based method for all awards, net of related tax
effects
|
|
(404
|
)
|
Pro
forma net income
|
|
$18,325
|
|
|
|
2005
|
|
Basic–earnings
per share, as restated
|
|
$0.67
|
|
Basic–earnings
per share, pro forma
|
|
$0.66
|
|
Diluted–earnings
per share, as restated
|
|
$0.66
|
|
Diluted–earnings
per share, pro forma
|
|
$0.65
|
|
Included
in operations and maintenance expense is $1.3 million and $0.7 million
related
to stock-based compensation for fiscal 2007 and 2006, respectively. As
of
September 30, 2007, there is approximately $1.7 million of deferred compensation
related to unvested shares and options, which is expected to be recognized
over
the next three years.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Stock
Options
There
were no stock options granted in fiscal 2007. The following table summarizes
the
assumptions used in the Black-Scholes option-pricing model and the resulting
weighted average fair value of the stock options issued during fiscal years
2006 and 2005:
|
|
2007
|
|
2006
|
|
2005
|
Dividend
yield
|
|
|
— |
% |
|
|
3.2 |
% |
|
|
3.0 |
% |
Volatility
|
|
|
— |
% |
|
|
13.2 |
% |
|
|
12.7 |
% |
Expected
life (years)
|
|
|
—
|
|
|
|
7
|
|
|
|
7
|
|
Risk-free
interest rate
|
|
|
— |
% |
|
|
4.6 |
% |
|
|
4.3 |
% |
Weighted
average fair value
|
|
|
—
|
|
|
$ |
5.44
|
|
|
$ |
4.14
|
|
The
following table summarizes the stock option activity for the past three
fiscal
years:
|
Shares
|
Weighted
Average
Exercise
Price
|
Outstanding
at September 30, 2004
|
1,687,678
|
|
$26.90
|
Granted
|
177,500
|
|
$45.01
|
Exercised
|
(269,234
|
)
|
$24.06
|
Forfeited
|
(50,287
|
)
|
$32.17
|
Outstanding
at September 30, 2005
|
1,545,657
|
|
$29.29
|
Granted
|
28,200
|
|
$42.83
|
Exercised
|
(883,779
|
)
|
$26.23
|
Forfeited
|
(18,247
|
)
|
$36.69
|
Outstanding
at September 30, 2006
|
671,831
|
|
$33.67
|
Granted
|
—
|
|
—
|
Exercised
|
(199,527
|
)
|
$29.11
|
Forfeited
|
(3,750
|
)
|
$28.52
|
Outstanding
at September 30, 2007
|
468,554
|
|
$35.65
|
Exercisable
at September 30, 2007
|
369,204
|
|
$33.30
|
Exercisable
at September 30, 2006
|
485,806
|
|
$30.53
|
Exercisable
at September 30, 2005
|
1,259,270
|
|
$26.88
|
For
the
stock options listed above, there are $441,000 in costs related to unvested
options that are expected to be recognized over the next 3 years.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
The
following table summarizes stock options outstanding and exercisable
as of
September 30, 2007:
|
Outstanding
|
Exercisable
|
Exercise Price Range
|
Number
of Stock
Options
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in thousands)
|
Number
of Stock
Options
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in thousands)
|
$18.22
– $22.78
|
7,500
|
0.9
|
$22.75
|
$ 201
|
7,500
|
$22.75
|
$ 201
|
$22.78
– $27.33
|
69,530
|
2.2
|
$25.93
|
1,645
|
69,530
|
$25.93
|
1,645
|
$27.33
– $31.89
|
174,124
|
4.4
|
$29.95
|
3,421
|
173,124
|
$29.94
|
3,402
|
$31.89
– $36.44
|
9,000
|
5.6
|
$33.85
|
142
|
9,000
|
$33.85
|
142
|
$36.44
– $41.00
|
19,500
|
6.4
|
$38.04
|
224
|
14,500
|
$38.17
|
165
|
$41.00
– $45.55
|
188,900
|
7.6
|
$44.84
|
898
|
95,550
|
$44.78
|
460
|
Total
|
468,554
|
5.4
|
$35.65
|
$6,531
|
369,204
|
$33.30
|
$6,015
|
Performance
Units
The
Company has issued performance units, which are market conditions awards,
to
various officers. The following table summarizes the Performance Unit
activity
under the Employee and Outside Director Long-Term Incentive Compensation
Plan
for the past three fiscal years:
|
Units(1)
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested
and outstanding at September 30, 2004
|
69,475
|
|
$30.62
|
Granted
|
36,750
|
|
$45.55
|
Vested
|
(14,475
|
)
|
$27.33
|
Cancelled/forfeited
|
(55,000
|
)
|
$31.49
|
Non-vested
and outstanding at September 30, 2005
|
36,750
|
|
$45.55
|
Granted
|
7,200
|
|
$42.80
|
Vested
|
—
|
|
—
|
Cancelled/forfeited
|
(2,250
|
)
|
$45.55
|
Non-vested
and outstanding at September 30, 2006
|
41,700
|
|
$45.08
|
Granted
|
—
|
|
—
|
Vested
|
(10,425
|
)
|
$45.08
|
Cancelled/forfeited
|
(20,850
|
)
|
$45.08
|
Non-vested
and outstanding at September 30, 2007
|
10,425
|
|
$45.08
|
(1)
|
The
number of common shares issued related to performance units
may range from
zero to 150 percent of the number of units shown in the table
above based
on the Company’s achievement of performance goals associated with NJR
total shareowner return relative to a selected peer group of
companies.
Based on the Company’s performance as of September 30, 2007, the number of
common shares to be issued is 50 percent. This amount is reflected
in the
activity listed above for fiscal
2007.
|
The
Company measures compensation expense related to performance units based
on the
fair value of these awards at their date of grant. Compensation expense
for
performance units is recognized for awards that ultimately vest, and
is not
adjusted based on actual achievement of the performance goals. The Company
estimated the fair value of the performance units on the date of grant
using a
Lattice model.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
There
are
$187,000 in costs related to unvested performance units that are expected
to be
recognized over the next two years.
Restricted
Stock
In
fiscal
2007, the Company issued 36,687 shares of Restricted Stock under the
2007 Plan,
which vest in equal annual installments over three years, subject to
certain
conditions, and 17,741 restricted shares that vested immediately.
There
are
$1.1 million in costs related to unvested restricted stock shares that
are
expected to be recognized over the next three years.
10. EMPLOYEE
BENEFIT PLANS
Pension
and Other Postemployment Benefit Plans (OPEB)
NJR
has
two trusteed, noncontributory defined benefit retirement plans covering
regular
represented and nonrepresented employees with more than one year of service.
All
represented employees of NJRHS hired on or after October 1, 2000, are
covered by an enhanced defined contribution plan instead of the defined
benefit
plan.
Defined
benefit plan benefits are based on years of service and average compensation
during the highest 60 consecutive months of employment.
The
Company also maintains an unfunded nonqualified pension equalization
plan (PEP)
that was established to provide employees with the full level of benefits
as
stated in the qualified plan without reductions due to various limitations
imposed by the provisions of federal income tax laws and regulations.
There were
no plan assets in the nonqualified plan due to the nature of the
plan.
The
Company provides postemployment medical and life insurance benefits to
employees
who meet certain eligibility requirements.
NJR’s
funding policy for its pension plans is to contribute at least the minimum
amount required by the Employment Retirement Income Security Act of 1974,
as
amended. In fiscal 2007 and 2006, the Company had no minimum funding
requirements; however, NJR made a discretionary contribution of $10 million
in
fiscal 2006 to the pension plans. The Company elected to make this discretionary
tax-deductible contribution to improve the funded status of the pension
plans.
The Company currently has no plans to fund the pension plans over the
next
five years, however, funding requirements are uncertain and can depend
significantly on changes in actuarial assumptions, returns on plan assets
and
changes in the demographics of eligible employees and covered
dependents.
NJR
made
tax-deductible contributions of $685,000 in fiscal 2007 and $3.7 million
in
fiscal 2006 to the OPEB plans. It is anticipated that the funding level
to the
OPEB plans will be approximately $600,000 annually over the next
five years.
As
of
September 30, 2006, NJR adopted SFAS 158, Employers’ Accounting for Defined
Benefit Pension and Other Postemployment Plans. Under SFAS 158, companies
are required to recognize an asset for its overfunded plans and a liability
for
any underfunded plans. As a result, at September 30, 2007, NJR recognized
a
liability of $26.0 million for its previously unrecognized pension and
OPEB
actuarial losses and prior service costs, as well as its OPEB transition
costs,
and a deferred tax liability of $2.5 million. NJR recorded a regulatory
asset of
$32.2 million for the portion of the liability that is related to unrecognized
prior service costs at NJNG that are recoverable through allowed rates
charged
to customers.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
The
balance of $4.2 million, net of tax, was offset in Accumulated other
comprehensive income. There is no impact from adoption to net periodic
benefit
costs. Amounts reflected in Accumulated other comprehensive income will
continue
to be recognized in net periodic benefit costs in accordance with SFAS
No. 87, Employers Accounting for Pension (SFAS 87) and SFAS
No. 106, Employers’ Accounting for Postretirement Benefits
Other Than Pensions (SFAS 106).
The
incremental effect of applying SFAS 158 on NJR’s Consolidated Balance Sheet as
of September 30, 2007, is as follows:
(Thousands)
|
September
30,
2006
|
Fiscal
2007
Activity
|
Sub-totals
|
SFAS
158
Fiscal
2007
Adjustment
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
pension asset
|
$21,045
|
|
|
$(2,425
|
)
|
$18,620
|
|
$(18,620
|
)
|
—
|
|
Postemployment
benefit (liability)
|
|
|
|
|
|
|
|
|
|
|
|
Current
(2)
|
—
|
|
|
—
|
|
—
|
|
$(217
|
)
|
$(217
|
)
|
Non-current
|
$(2,141
|
)
|
(1)
|
$54
|
|
$(2,087
|
)
|
$(182
|
)
|
$(2,269
|
)
|
Regulatory
asset
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
—
|
|
|
—
|
|
—
|
|
$17,351
|
|
$17,351
|
|
Deferred
tax asset (liability)
|
$(7,767
|
)
|
|
$975
|
|
$(6,792
|
)
|
$685
|
|
$(6,107
|
)
|
Accumulated
other comprehensive income, net of tax
|
—
|
|
|
—
|
|
—
|
|
$983
|
|
$983
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postemployment
benefit asset (liability)
|
|
|
|
|
|
|
|
|
|
|
Current
(2)
|
—
|
|
—
|
|
—
|
|
$(83
|
)
|
$(83
|
)
|
Non-current
|
$245
|
|
$(3,580
|
)
|
$(3,335
|
)
|
$(20,138
|
)
|
$(23,473
|
)
|
Regulatory
asset
|
|
|
|
|
|
|
|
|
|
|
Current
|
—
|
|
—
|
|
—
|
|
$54
|
|
$54
|
|
Non-current
|
—
|
|
—
|
|
—
|
|
$14,768
|
|
$14,768
|
|
Deferred
tax asset (liability)
|
$(101
|
)
|
$1,471
|
|
$1,370
|
|
$2,218
|
|
$3,588
|
|
Accumulated
other comprehensive income, net of tax
|
—
|
|
—
|
|
—
|
|
$3,181
|
|
$3,181
|
|
(1) Amount
included in Other assets as of September 30, 2006
(2) Amount
included in Accounts payable and other as of September 30,
2007
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
The
funded status of the plans, including the reconciliation of NJR’s fiscal year
2006 funded status to the amounts recognized on the Consolidated Balance
Sheets,
is presented below, using a measurement date of September 30:
|
|
Pension
(1)
|
|
|
OPEB
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Change
in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
105,746
|
|
|
$ |
101,986
|
|
|
$ |
51,375
|
|
|
$ |
43,602
|
|
Service
cost
|
|
|
2,932
|
|
|
|
3,034
|
|
|
|
1,819
|
|
|
|
1,582
|
|
Interest
cost
|
|
|
6,217
|
|
|
|
5,746
|
|
|
|
3,028
|
|
|
|
2,472
|
|
Plan
participants’ contributions
|
|
|
55
|
|
|
|
57
|
|
|
|
6
|
|
|
|
—
|
|
Actuarial
loss
|
|
|
(2,218 |
) |
|
|
(726 |
) |
|
|
(1,545 |
) |
|
|
5,245
|
|
Benefits
paid, net of retiree subsidies received
|
|
|
(4,857 |
) |
|
|
(4,351 |
) |
|
|
(1,652 |
) |
|
|
(1,526 |
) |
Benefit
obligation at end of year
|
|
$ |
107,875
|
|
|
$ |
105,746
|
|
|
$ |
53,031
|
|
|
$ |
51,375
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$ |
95,835
|
|
|
$ |
82,596
|
|
|
$ |
26,570
|
|
|
$ |
22,380
|
|
Actual
return on plan assets
|
|
|
14,106
|
|
|
|
7,296
|
|
|
|
3,946
|
|
|
|
2,026
|
|
Employer
contributions
|
|
|
250
|
|
|
|
10,237
|
|
|
|
685
|
|
|
|
3,690
|
|
Benefits
paid, net of plan participants’ contributions
|
|
|
(4,802 |
) |
|
|
(4,294 |
) |
|
|
(1,726 |
) |
|
|
(1,526 |
) |
Fair
value of plan assets at end of year
|
|
$ |
105,389
|
|
|
$ |
95,835
|
|
|
$ |
29,475
|
|
|
$ |
26,570
|
|
Reconciliation
of funded status at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
assets less obligation
|
|
$ |
(2,486 |
) |
|
$ |
(9,911 |
) |
|
$ |
(23,556 |
) |
|
$ |
(24,805 |
) |
Unrecognized
actuarial loss
|
|
|
—
|
|
|
|
28,325
|
|
|
|
—
|
|
|
|
22,095
|
|
Unrecognized
transition obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,527
|
|
Unrecognized
prior service cost
|
|
|
—
|
|
|
|
490
|
|
|
|
—
|
|
|
|
428
|
|
Net
amount recognized
|
|
$ |
(2,486 |
) |
|
$ |
18,904
|
|
|
$ |
(23,556 |
) |
|
$ |
245
|
|
Amounts
recognized on Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
pension asset
|
|
|
—
|
|
|
|
18,904
|
|
|
|
—
|
|
|
|
—
|
|
Postemployment
employee benefit asset/(liability)
|
|
|
(2,486 |
) |
|
|
—
|
|
|
|
(23,556 |
) |
|
|
245
|
|
Net
amount recognized (2)
|
|
$ |
(2,486 |
) |
|
$ |
18,904
|
|
|
$ |
(23,556 |
) |
|
$ |
245
|
|
(1)
|
Includes
NJR’s Pension Equalization
Plan.
|
(2)
|
As
of September 30, 2007, NJR had a current and non-current liability
of
$217,000 and $2.3 million, respectively, related to its pension
obligations, including its Pension Equalization Plan, and a
current and
non-current liability of $83,000 and $23.5 million, respectively,
related
to its OPEB obligations.
|
The
change in unrecognized net gain (loss) is one measure of the degree to
which
important assumptions have coincided with actual experience. During fiscal
2007,
the unrecognized net loss decreased by 9.6 percent of the September 30,
2006
projected benefit obligation. The Company changes important assumptions
whenever
conditions warrant. The discount rate is typically changed annually and
the
expected long-term return on plan assets will typically be revised every
three
to five years. Other material assumptions include the compensation increase
rates, rates of employee termination, and rates of participant
mortality.
The
accumulated benefit obligation (ABO) for the pension plans, including
the
Pension Equalization Plan, at September 30, 2007 and 2006, was $95.5
million and $92.8 million, respectively.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
Amounts
included in Accumulated other comprehensive income as of September 30,
2007, as
well as the amounts expected to be recognized as components of net period
benefit cost in fiscal 2008 are as follows:
|
|
Pension
|
|
OPEB
|
(Thousands)
|
|
2007
Balance
|
2008
Amortization
|
|
2007
Balance
|
2008
Amortization
|
Net
actuarial loss
|
|
$
|
1,578
|
|
|
$
|
129
|
|
|
$
|
4,920
|
|
|
$
|
206
|
|
Prior
service cost
|
|
|
89
|
|
|
|
16
|
|
|
|
39
|
|
|
|
9
|
|
Net
transition obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
442
|
|
|
|
71
|
|
Total,
before tax effects
|
|
$
|
1,667
|
|
|
$
|
145
|
|
|
$
|
5,401
|
|
|
$
|
286
|
|
As
of
September 30, 2006, there were no deferred costs, related to NJR's pension
and
OPEB plans, included in Accumulated other comprehensive income.
The
components of the net periodic cost for pension benefits, including NJR’s
Pension Equalization Plan, and OPEB costs (principally health care and
life
insurance) for employees and covered dependents were as follows:
|
Pension
|
OPEB
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Service
cost
|
|
$ |
2,932
|
|
|
$ |
3,034
|
|
|
$ |
2,611
|
|
|
$ |
1,819
|
|
|
$ |
1,582
|
|
|
$ |
1,297
|
|
Interest
cost
|
|
|
6,217
|
|
|
|
5,746
|
|
|
|
5,437
|
|
|
|
3,028
|
|
|
|
2,472
|
|
|
|
2,181
|
|
Expected
return on plan assets
|
|
|
(8,208 |
) |
|
|
(7,127 |
) |
|
|
(6,404 |
) |
|
|
(2,161 |
) |
|
|
(1,832 |
) |
|
|
(1,700 |
) |
Recognized
actuarial loss
|
|
|
1,596
|
|
|
|
1,731
|
|
|
|
1,045
|
|
|
|
1,063
|
|
|
|
—
|
|
|
|
682
|
|
Recognized
net initial obligation
|
|
|
—
|
|
|
|
(11 |
) |
|
|
(112 |
) |
|
|
357
|
|
|
|
357
|
|
|
|
357
|
|
Prior
service cost amortization
|
|
|
84
|
|
|
|
85
|
|
|
|
118
|
|
|
|
78
|
|
|
|
78
|
|
|
|
78
|
|
Special
termination benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
1,785
|
|
|
|
—
|
|
|
|
834
|
|
|
|
72
|
|
Net
periodic cost
|
|
$ |
2,621
|
|
|
$ |
3,458
|
|
|
$ |
4,480
|
|
|
$ |
4,184
|
|
|
$ |
3,491
|
|
|
$ |
2,967
|
|
The
weighted average assumptions used to determine benefit costs and obligations
as
of September 30 are as follows:
|
Pension
|
|
OPEB
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Benefit
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
Expected
asset return
|
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
Compensation
increase
|
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected
asset return
|
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
Compensation
increase
|
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
|
|
3.75 |
% |
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
In
selecting an assumed discount rate, NJR uses a modeling process that
involves
selecting a portfolio of high-quality corporate debt issuances (AA- or
better)
whose cash flows (via coupons or maturities) match the timing and amount
of
NJR’s expected future benefit payments. NJR considers the results of this
modeling process, as well as overall rates of return on high-quality
corporate
bonds and changes in such rates over time, in determination of its assumed
discount rate.
NJR’s
general approach for determining the overall expected long-term rate
of return
on assets considers historical and expected future asset returns, the
current
and future targeted asset mix of the plan assets, historical and future
expected
real rates of return for equities and fixed income securities, and historical
and expected inflation statistics. The expected long-term rate of return
on plan
assets to be used to develop net periodic benefit costs for fiscal 2007
is 9.0
percent for pension costs and 8.5 percent for OPEB costs.
Information
relating to the assumed health care cost trend rate (HCCTR) used to determine
expected OPEB benefits as of September 30, and the effect of a 1 percent
change
in the rate are as follows:
($
in thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
HCCTR
|
|
|
10.0 |
% |
|
|
10.0 |
% |
|
|
9.0 |
% |
Ultimate
HCCTR
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
4.5 |
% |
Year
ultimate HCCTR reached
|
|
2013
|
|
|
2013
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of a 1 percentage point increase in the HCCTR on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end
benefit obligation
|
|
$ |
8,493
|
|
|
$ |
8,096
|
|
|
$ |
7,523
|
|
Total
service and interest cost
|
|
$ |
959
|
|
|
$ |
921
|
|
|
$ |
734
|
|
Effect
of a 1 percentage point decrease in the HCCTR on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end
benefit obligation
|
|
$ |
(6,850 |
) |
|
$ |
(6,489 |
) |
|
$ |
(5,995 |
) |
Total
service and interest costs
|
|
$ |
(752 |
) |
|
$ |
(721 |
) |
|
$ |
(520 |
) |
The
expected long-term rate of return is based on the asset categories in
which the
Company invests and the current expectations and historical performance
for
these categories.
The
mix
and targeted allocation of the pension and OPEB plans’ assets are as
follows:
|
|
2008
Target
|
|
Assets
at
September 30,
|
Asset Allocation
|
|
Allocation
|
|
2007
|
|
2006
|
U.S.
equity securities
|
|
|
53 |
% |
|
|
53 |
% |
|
|
53 |
% |
International
equity securities
|
|
|
19
|
|
|
|
19
|
|
|
|
18
|
|
Fixed
income
|
|
|
28
|
|
|
|
28
|
|
|
|
29
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid during the following years:
(Thousands)
|
Pension
|
|
OPEB
|
2008
|
$ 4,663
|
|
$ 2,174
|
2009
|
$ 4,905
|
|
$ 2,334
|
2010
|
$ 5,118
|
|
$ 2,394
|
2011
|
$ 5,330
|
|
$ 2,471
|
2012
|
$ 5,724
|
|
$ 2,639
|
2013-2017
|
$32,391
|
|
$15,596
|
NJR’s
OPEB plans provide prescription drug benefits that are actuarially equivalent
to
those provided by Medicare Part D, therefore, under the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 NJR qualifies for federal
subsidies.
The
estimated subsidy payments are:
Fiscal
Year
|
Estimated Subsidy Payment
(Thousands)
|
2008
|
$ 134
|
|
2009
|
$ 150
|
|
2010
|
$ 169
|
|
2011
|
$ 187
|
|
2012
|
$ 207
|
|
2013-2017
|
$1,267
|
|
Defined
Contribution Plan
The
Company offers an Employees’ Retirement Savings Plan (Savings Plan) to eligible
employees. The Company matches 50 percent of participants’ contributions up to 6
percent of base compensation.
For
represented NJRHS employees who are not eligible for participation in
the
defined benefit plan, the Company contributes between 2 and 3 percent
of base
compensation, depending on years of service, into the Savings Plan on
their
behalf.
The
amount expensed and contributed for the matching provision of the Savings
Plan
was $1.2 million in fiscal 2007 and $1.1 million in fiscal 2006 and
2005.
11. ASSET
RETIREMENT OBLIGATIONS (ARO)
Liability
and Estimated Accretion as of September 30, 2007
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 pipeline out of
service.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
The
following is an analysis of the change in the ARO liability for the fiscal
year
ended September 30, 2007, in thousands:
|
|
Balance
at October 1, 2006
|
$23,293
|
Accretion
|
1,322
|
Additions
|
160
|
Retirements
|
(880)
|
Balance
at September 30, 2007
|
$23,895
|
Accretion
amounts are not reflected as an expense on NJR’s Consolidated Statements of
Income, but rather are deferred as a regulatory asset and netted against
NJNG’s
regulatory liabilities, for presentation purposes, on the Consolidated
Balance
Sheet.
Accretion
for the next five years is estimated to be as follows:
(Thousands) |
|
Fiscal Year
Ended September 30,
|
Estimated
Accretion
|
2008
|
$1,395
|
|
2009
|
$1,471
|
|
2010
|
$1,550
|
|
2011
|
$1,631
|
|
2012
|
$1,720
|
|
Adoption
of FIN 47
On
September 30, 2006, NJNG recorded liabilities of approximately $5.1 million
related to the present value of ARO and $18.2 million related to accumulated
accretion. NJR believes that ARO-related amounts represent timing differences
in
the recognition of legal retirement costs that are currently being recovered
in
NJNG’s rates and, therefore, is deferring such differences as a regulatory
asset
under SFAS 71. The $18.2 million related to accumulated accretion, which
represents a regulatory asset, has been netted against NJNG’s cost of removal
regulatory liability on the Consolidated Balance Sheet.
The
pro
forma amounts of the liabilities for asset retirement obligations for
the
periods ended September 30, 2006, and 2005, respectively, are presented in
the following table. These amounts were calculated using information,
assumptions and interest rates as of September 30, 2006:
|
|
Pro-Forma
|
|
|
|
September 30,
|
|
(Thousands)
|
|
2006
|
|
|
2005
|
|
Beginning
of period ARO liability
|
|
$ |
22,029
|
|
|
$ |
20,841
|
|
Accretion
(1)
|
|
|
1,264
|
|
|
|
1,188
|
|
End
of period ARO liability
|
|
$ |
23,293
|
|
|
$ |
22,029
|
|
(1) Accretion
is not
reflected on NJR’s Consolidated Statements of Operations as it is deferred and
recovered in rate base.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
12. INCOME
TAXES
The
Company’s federal income tax returns through fiscal 2004 have either been
reviewed by survey, examined by the Internal Revenue Service (IRS), or
the
related statute of limitations has expired and all matters have been
settled.
The fiscal 2005 federal income tax return is currently under audit.
A
reconciliation of the United States federal statutory rate of 35 percent
to the
effective rate from operations for the fiscal years ended September 30,
2007, 2006 and 2005 is as follows:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statutory
income tax expense
|
|
$ |
37,343
|
|
|
$ |
129,662
|
|
|
$ |
9,635
|
|
Change
resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
State
income taxes
|
|
|
7,109
|
|
|
|
21,766
|
|
|
|
1,925
|
|
Change
in tax rate
|
|
|
(221 |
) |
|
|
(216 |
) |
|
|
—
|
|
Depreciation
and cost of removal
|
|
|
(1,774 |
) |
|
|
(1,674 |
) |
|
|
(1,641 |
) |
Investment
tax credits
|
|
|
(322 |
) |
|
|
(322 |
) |
|
|
(322 |
) |
Other
|
|
|
(720 |
) |
|
|
(662 |
) |
|
|
(603 |
) |
Income
tax provision (1)
|
|
$ |
41,415
|
|
|
$ |
148,554
|
|
|
$ |
8,994
|
|
Effective
income tax rate
|
|
|
38.8 |
% |
|
|
40.1 |
% |
|
|
32.7 |
% |
(1)
|
Income
tax provision includes taxes associated with investments in
Equity
investees of $1.1 million, $1.2 million and $1.2 million for
the years
ended September 30, 2007, 2006 and 2005, respectively. These
amounts are
reported as part of Equity in earnings of Equity investees,
net of tax, in
the consolidated statements of
income.
|
The
Income tax provision (benefit) from operations consists of the
following:
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
36,846
|
|
|
$ |
37,631
|
|
|
$ |
45,142
|
|
State
|
|
|
12,282
|
|
|
|
11,636
|
|
|
|
14,327
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(5,758 |
) |
|
|
78,088
|
|
|
|
(38,785 |
) |
State
|
|
|
(1,633 |
) |
|
|
21,521
|
|
|
|
(11,368 |
) |
Investment
tax credits
|
|
|
(322 |
) |
|
|
(322 |
) |
|
|
(322 |
) |
Income
tax provision
|
|
$ |
41,415
|
|
|
$ |
148,554
|
|
|
$ |
8,994
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
The
temporary differences, which give rise to deferred tax assets and liabilities,
consist of the following:
(Thousands)
|
|
2007
|
|
|
2006
|
|
Current
|
|
|
|
|
|
|
Underrecovered
gas costs
|
|
$ |
(3,937 |
) |
|
$ |
(702 |
) |
WNC/CIP
|
|
|
10,120
|
|
|
|
3,330
|
|
Conservation
program
|
|
|
2,766
|
|
|
|
4,112
|
|
Other
|
|
|
(2,009 |
) |
|
|
(1,772 |
) |
Current
deferred tax liability, net
|
|
$ |
6,940
|
|
|
$ |
4,968
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
Property-related
items
|
|
$ |
135,884
|
|
|
$ |
128,835
|
|
Customer
contributions
|
|
|
(1,271 |
) |
|
|
(1,421 |
) |
Capitalized
overhead and interest
|
|
|
(1,324 |
) |
|
|
(2,677 |
) |
Unamortized
investment tax credits
|
|
|
(4,046 |
) |
|
|
(4,219 |
) |
Remediation
costs
|
|
|
28,905
|
|
|
|
30,919
|
|
Deferred
service contract revenue
|
|
|
(2,452 |
) |
|
|
(2,317 |
) |
Deferred
gain
|
|
|
(1,990 |
) |
|
|
(2,512 |
) |
Fair
value of derivatives
|
|
|
47,204
|
|
|
|
63,220
|
|
Other
|
|
|
15,348
|
|
|
|
17,272
|
|
Total
non-current deferred tax liabilities, net
|
|
|
216,258
|
|
|
|
227,100
|
|
Total
deferred tax liabilities, net
|
|
$ |
223,198
|
|
|
$ |
232,068
|
|
13. COMMITMENTS
AND CONTINGENT LIABILITIES
Cash
Commitments
NJNG
has
entered into long-term contracts, expiring at various dates through 2022,
for
the supply, storage and delivery of natural gas. These contracts include
current
annual fixed charges of approximately $81.4 million at current contract
rates
and volumes, which are recovered through the BGSS.
As
of
September 30, 2007, there were NJR guarantees covering approximately $289
million of natural gas purchases and demand fee commitments of NJRES
and NJNG
not yet reflected in Accounts payable on the Consolidated Balance Sheet.
Commitments as of September 30, 2007 for natural gas purchases and future
demand
fees, for the next five fiscal year periods, are as follows:
(Thousands)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
NJRES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas purchases
|
|
$ |
473,941
|
|
|
$ |
263,601
|
|
|
$ |
130,089
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$
|
—
|
|
Storage
demand fees
|
|
|
34,404
|
|
|
|
17,865
|
|
|
|
15,093
|
|
|
|
10,420
|
|
|
|
6,027
|
|
|
|
3,023
|
|
Pipeline
demand fees
|
|
|
64,725
|
|
|
|
29,377
|
|
|
|
15,857
|
|
|
|
13,229
|
|
|
|
6,866
|
|
|
|
10,123
|
|
Sub-total
NJRES
|
|
$ |
573,070
|
|
|
$ |
310,843
|
|
|
$ |
161,039
|
|
|
$ |
23,649
|
|
|
$ |
12,893
|
|
|
$
|
13,146
|
|
NJNG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas purchases
|
|
$ |
30,781
|
|
|
$ |
967
|
|
|
$ |
3,042
|
|
|
$ |
412
|
|
|
$ |
—
|
|
|
$
|
—
|
|
Storage
demand fees
|
|
|
24,439
|
|
|
|
23,835
|
|
|
|
20,951
|
|
|
|
12,198
|
|
|
|
5,390
|
|
|
|
2,737
|
|
Pipeline
demand fees
|
|
|
56,970
|
|
|
|
70,425
|
|
|
|
55,491
|
|
|
|
51,400
|
|
|
|
43,616
|
|
|
|
69,101
|
|
Sub-total
NJNG
|
|
$ |
112,190
|
|
|
$ |
95,227
|
|
|
$ |
79,484
|
|
|
$ |
64,010
|
|
|
$ |
49,006
|
|
|
$
|
71,838
|
|
Total
|
|
$ |
685,260
|
|
|
$ |
406,070
|
|
|
$ |
240,523
|
|
|
$ |
87,659
|
|
|
$ |
61,899
|
|
|
$
|
84,984
|
|
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NJNG’s
capital expenditures are estimated at $80.9 million, of which approximately
$5.1
million has been committed and $77.4 million in fiscal 2008 and 2009,
respectively, and consist primarily of its construction program to support
customer growth, maintenance of its distribution system and replacement
needed
under pipeline safety regulations.
The
Company’s future minimum lease payments under various operating leases are less
than $3.8 million annually for the next five years and $670,000 in the
aggregate
for all years thereafter.
Legal
Proceedings
Manufactured
Gas Plant Remediation
NJNG
is
responsible for the remedial cleanup plan of three Manufactured Gas Plant
(MGP)
sites, dating back to 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) with respect to two of the sites, as well as participating
in
various studies and investigations by outside consultants to determine
the
nature and extent of any such contaminated residues and to develop appropriate
programs of remedial action, where warranted, under Administrative Consent
Orders or Memoranda of Agreement with the NJDEP.
NJNG
may,
subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to a remediation
adjustment
clause (RAC) approved by the BPU. In October 2007, the BPU approved $14.7
million in eligible costs to be recovered annually for MGP remediation
expenditures incurred through September 30, 2006. As of September 30,
2007,
$85.1 million of previously incurred remediation costs, net of recoveries
from
customers and insurance proceeds, are included in Regulatory assets on
the
Consolidated Balance Sheet.
In
September 2007, with the assistance of an outside consulting firm, NJNG
updated
an environmental review of the MGP sites, including a review of potential
liability for investigation and remedial action. Based on this review,
NJNG
estimated at the time of the review that, exclusive of any insurance
recoveries,
total future expenditures to remediate and monitor the three MGP sites
for which
it is responsible will range from approximately $105.3 million to $164.8
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 $105.3 million on the
Consolidated Balance Sheet. The actual costs to be incurred by NJNG are
dependent upon several factors, including final determination of remedial
action, changing technologies and governmental regulations, the ultimate
ability
of other responsible parties to pay and any insurance recoveries.
NJNG
is
presently investigating the potential settlement of alleged Natural Resource
Damage claims that might be brought by the NJDEP concerning the three
MGP sites.
NJDEP has not made any specific demands for compensation for alleged
injury to
groundwater or other natural resources. NJNG’s evaluation of these potential
claims is in the early stages, and it is not yet possible to quantify
the amount
of compensation, if any that NJDEP might seek to recover. NJNG anticipates
any
costs associated with this matter would be recoverable through the
RAC.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
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.
BPU
Order Regarding Long Branch Mass Tort Litigation-Related
Costs
Beginning
in July 2003, a series of complaints were filed in the New Jersey Superior
Court
against NJNG, the Registrant, Jersey Central Power & Light Company
(JCP&L) and FirstEnergy Corporation (FirstEnergy). The complaints were, as
of February 2004, designated as a Mass Tort Litigation (the Mass Tort
Litigation). Among other things, the complaints alleged personal injuries,
wrongful death, survivorship actions, property damage and claims for
medical
monitoring stemming from the operation and remediation of the former
MGP site in
Long Branch, New Jersey.
In
December 2005, a confidential settlement between NJNG and the plaintiffs
in the
Mass Tort Litigation was finalized and approved by the New Jersey Superior
Court. A separate lawsuit (the Lawsuit) was filed by NJNG for declaratory
relief
against Kemper Indemnity Insurance Company (Kemper) arising from Kemper’s
refusal to honor its obligations related to the Mass Tort Litigation
under
insurance policies procured by the NJNG that were intended to limit NJNG’s
liability for third party claims for bodily injury and property damage,
legal
defense costs and remediation costs arising from environmental contamination
and
remediation at the former MGP sites in Long Branch and Toms River, New
Jersey.
The
Lawsuit was settled in January 2007. Pursuant to the terms of the settlement,
NJNG received a payment in the amount of $12.8 million from Kemper and
certain
of its affiliates (the Settlement Payment). The Settlement Payment was
made in
exchange for a general release of all claims asserted in the Lawsuit;
no portion
of the Settlement Payment was allocated to any particular claim.
Pursuant
to the RAC, NJNG sought to recover the remaining litigation and settlement
costs
related to the Mass Tort Litigation and the Lawsuit. Under a written
order by
the BPU, dated October 3, 2007, approving a stipulation among NJNG, the
BPU and
the State of New Jersey Department of the Public Advocate, Division of
Rate
Counsel, NJNG will be allowed to recover litigation and settlement costs
related
to the Mass Tort Litigation and the Lawsuit to the extent that such costs
exceed
$4.0 million. $4.0 million is the portion of the costs NJNG incurred
to litigate
and settle the Mass Tort Litigation and the Lawsuit that is reasonably
reflective of and attributable to personal injury claims. Personal injury
claims
are not recoverable under the RAC. The pre-tax settlement charge of $4.0
million
was recognized in the fourth quarter of fiscal 2007 and is reflected
in
Operations and maintenance expense in the Consolidated Statements of
Income.
General
The
Company is party to various other claims, legal actions and complaints
arising
in the ordinary course of business. In the Company’s opinion, other than as
disclosed above, the ultimate disposition of these matters will not have
a
material adverse effect on its financial condition, results of operations
or
cash flows.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
14.
BUSINESS SEGMENT DATA
Information
related to the Company’s various business segments, excluding capital
expenditures, which are presented in the Consolidated Statements of Cash
Flows,
is detailed below.
The
Natural Gas Distribution segment consists of regulated energy and off-system,
capacity and storage management operations. The Energy Services segment
consists
of unregulated wholesale energy operations. The Retail and Other segment
consists of appliance and installation services, commercial real estate
development, investments and other corporate activities.
(Thousands) |
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
1,005,588
|
|
|
$ |
1,138,774
|
|
|
$ |
1,138,280
|
|
Energy
Services
|
|
|
1,994,682
|
|
|
|
2,133,540
|
|
|
|
1,973,268
|
|
Retail
and Other
|
|
|
21,776
|
|
|
|
(811 |
) |
|
|
73,220
|
|
Subtotal
|
|
|
3,022,046
|
|
|
|
3,271,503
|
|
|
|
3,184,768
|
|
Intersegment
Revenues (1)
|
|
|
(281 |
) |
|
|
(274 |
) |
|
|
(186 |
) |
Total
|
|
$ |
3,021,765
|
|
|
$ |
3,271,229
|
|
|
$ |
3,184,582
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
35,648
|
|
|
$ |
34,146
|
|
|
$ |
32,905
|
|
Energy
Services
|
|
|
214
|
|
|
|
211
|
|
|
|
253
|
|
Retail
and Other
|
|
|
373
|
|
|
|
396
|
|
|
|
517
|
|
Total
|
|
$ |
36,235
|
|
|
$ |
34,753
|
|
|
$ |
33,675
|
|
Operating
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
88,528
|
|
|
$ |
88,029
|
|
|
$ |
97,408
|
|
Energy
Services
|
|
|
40,913
|
|
|
|
324,045
|
|
|
|
(102,625 |
) |
Retail
and Other
|
|
|
(2,191 |
) |
|
|
(23,690 |
) |
|
|
45,491
|
|
Total
|
|
$ |
127,250
|
|
|
$ |
388,384
|
|
|
$ |
40,274
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
44,480
|
|
|
$ |
46,870
|
|
|
$ |
53,376
|
|
Energy
Services
|
|
|
21,298
|
|
|
|
188,372
|
|
|
|
(62,805 |
) |
Retail
and Other
|
|
|
(497 |
) |
|
|
(13,334 |
) |
|
|
27,964
|
|
Total
|
|
$ |
65,281
|
|
|
$ |
221,908
|
|
|
$ |
18,535
|
|
The
Company’s assets for the various business segments are detailed
below:
(Thousands)
|
|
2007
|
|
|
2006
|
|
Assets
as of September 30,
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
1,565,566
|
|
|
$ |
1,586,934
|
|
Energy
Services
|
|
|
487,482
|
|
|
|
714,867
|
|
Retail
and Other
|
|
|
194,644
|
|
|
|
107,213
|
|
Intersegment
Assets (1)
|
|
|
(16,947 |
) |
|
|
(10,086 |
) |
Total
|
|
$ |
2,230,745
|
|
|
$ |
2,398,928
|
|
(1) Consists
of transactions between subsidiaries that are eliminated in
consolidation.
New
Jersey Resources
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
15. SELECTED
QUARTERLY DATA (UNAUDITED)
A
summary
of financial data for each quarter of fiscal 2007 and 2006 follows. Due
to the
seasonal nature of the Company’s businesses, quarterly amounts vary
significantly during the fiscal year. In the opinion of management, the
information furnished reflects all adjustments necessary for a fair presentation
of the results of the interim periods.
|
Quarter
Ended
|
|
31-Dec
|
31-Mar
|
30-Jun
|
30-Sep
|
(Thousands, except per
share data)
|
As
Previously
Reported
|
As
Restated
(See
Note 2)
|
As
Previously
Reported
|
As
Restated
(See
Note 2)
|
As
Previously
Reported
|
As
Restated
(See
Note 2)
|
As
Previously
Reported
|
As
Restated*
(See
Note 2)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$741,465
|
|
$737,401
|
|
$1,024,636
|
|
$1,029,043
|
|
$665,358
|
|
$662,218
|
|
|
|
$593,103
|
|
Operating
income (loss)
|
$52,144
|
|
$54,830
|
|
$139,441
|
|
$16,271
|
|
$(5,573
|
)
|
$46,548
|
|
|
|
$9,601
|
|
Net
income (loss)
|
$28,124
|
|
$29,434
|
|
$80,527
|
|
$7,961
|
|
$(4,952
|
)
|
$25,377
|
|
|
|
$2,509
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$1.01
|
|
$1.06
|
|
$2.89
|
|
$.29
|
|
$(.18
|
)
|
$.91
|
|
|
|
$.09
|
|
Diluted
|
$1.01
|
|
$1.05
|
|
$2.87
|
|
$.28
|
|
$(.18
|
)
|
$.90
|
|
|
|
$.09
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$1,164,576
|
|
$1,162,187
|
|
$1,064,422
|
|
$1,052,762
|
|
$536,103
|
|
$530,786
|
|
$534,507
|
|
$525,494
|
|
Operating
income (loss)
|
$61,669
|
|
$177,586
|
|
$103,688
|
|
$155,194
|
|
$(3,570
|
)
|
$(32,915
|
)
|
$(15,324
|
)
|
$88,519
|
|
Net
income (loss)
|
$34,264
|
|
$102,828
|
|
$60,201
|
|
$90,667
|
|
$(3,975
|
)
|
$(21,321
|
)
|
$(11,971
|
)
|
$49,734
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$1.24
|
|
$3.73
|
|
$2.16
|
|
$3.26
|
|
$(.14
|
)
|
$(.76
|
)
|
$(.43
|
)
|
$1.77
|
|
Diluted
|
$1.23
|
|
$3.68
|
|
$2.14
|
|
$3.22
|
|
$(.14
|
)
|
$(.75
|
)
|
$(.43
|
)
|
$1.76
|
|
* Restated
for 2006 only.
The
sum
of quarterly earnings per share may not equal annual earnings per share
due to
rounding.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Under
the
supervision and with the participation of the Company’s management, including
the principal executive officer and principal financial officer, the
Company
conducted an evaluation of the effectiveness of the design and operation
of its
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) (the Exchange
Act), as of
the end of the period covered by this report. Based on this evaluation,
the
Company’s principal executive officer and principal financial officer concluded
that, as of end of the period covered by this report, the Company’s disclosure
controls and procedures were not effective due to a material weakness
in
internal control over financial reporting described below, to ensure
that
information required to be disclosed by the Company in the reports that
it files
or submits under the Exchange Act, is recorded, processed, summarized
and
reported, within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to the Company’s
management, including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
New
Jersey Resources
Part
II
ITEM
9A. CONTROLS AND PROCEDURES (Continued)
In
connection with the Company’s preparation of its consolidated financial
statements for the fiscal year ended September 30, 2007, the Company
reassessed
its accounting treatment and disclosures for its derivative instruments
under
Statement of Financial Accounting Standards 133 “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”). As a result of this
accounting assessment, the Company determined that certain of its derivative
instruments have not qualified as cash flow hedges under SFAS 133 as
they did
not meet the definition for “critical-terms-match,” as defined under paragraph
65 of SFAS 133 and related authoritative accounting literature issued
by various
standard setting bodies and their related interpretations for all fiscal
periods. As the Company has determined the hedging relationships did
not meet
the “critical-terms-match,” the related derivative instruments did not qualify
as cash flow hedges and the unrealized gains or losses on the derivative
instruments are required to be reflected in the Consolidated Statement
of Income
for each period rather than recorded in Comprehensive Income and included
as a
component of “accumulated other comprehensive income,” a component of Total
Common Stock Equity in the Consolidated Balance Sheets, until the forecasted
transaction is settled. Therefore, because of this material weakness,
the
Company amended and restated certain of its historical consolidated financial
statements and made appropriate changes in the preparation of its consolidated
financial statements for the year ended September 30, 2007.
The
Company continually reviews its disclosure controls and procedures and
makes
changes, as necessary, to ensure the quality of its financial reporting.
The
Company’s independent registered public accounting firm, Deloitte &
Touche LLP, and management have discussed these issues with the Company’s Audit
Committee. As detailed below, the Company has implemented certain additional
controls that it believes will significantly reduce the potential for
similar
issues to arise in the future.
Management’s
Annual Report on Internal Control over Financial Reporting
The
report of management required under this ITEM 9A is contained in ITEM
8 of this
Form 10-K under the caption “Management’s Report on Internal Control over
Financial Reporting.”
Attestation
Report of Registered Public Accounting Firm
The
attestation report required under this ITEM 9A is contained in ITEM 8
of this
10-K under the caption “Report of Independent Registered Public Accounting
Firm.”
Changes
in Internal Control over Financial Reporting
There
has
been no change in internal control over financial reporting (as such
term is
defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter
ended
September 30, 2007, that has materially affected, or is reasonably likely
to
materially affect, internal control over financial reporting.
Remediation
of Material Weakness
Management
and the Board of Directors are committed to the remediation of the material
weakness set forth above as well as the continued improvement of the
Company’s
overall system of internal control over financial reporting. Management
is in
the process of actively addressing and remediating the material weakness
in
internal control over financial reporting described above. Subsequent
to the
quarter and fiscal year ended September 30, 2007,
New
Jersey Resources
Part
II
ITEM
9A. CONTROLS AND PROCEDURES (Continued)
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
|
improve
training, education and accounting reviews for all relevant
personnel
involved in the accounting treatment and disclosures for the
Company’s
derivative instruments to ensure compliance with generally
accepted
accounting principles, including SFAS 133 and its related
interpretations;
|
|
|
Ÿ
|
ensure
the Company has the accounting technical expertise requirements
necessary
for compliance with SFAS 133;
|
|
|
Ÿ
|
retest
the Company’s internal control over financial reporting with respect to
the types of hedging transactions affected by the restatement
to ensure
compliance with generally accepted accounting principles, including
SFAS
133 and its related interpretations;
|
|
|
Ÿ
|
initiate
a thorough review of the design of the internal control over
financial
reporting related to the accounting of derivative instruments
which will
incorporate an analysis of the current staffing levels, job
assignments
and the design of all internal control processes for the accounting
for
derivative instruments and implement new and improved processes
and
controls, if warranted; and
|
|
|
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 2008 assessment of internal control over financial
reporting, management will conduct sufficient testing and evaluation
of the
controls to be implemented as part of this remediation plan to ascertain
that
they operate effectively. The Company anticipates that these remediation
actions
represent ongoing improvement measures. While the Company has taken steps
to
remediate the material weakness, these steps may not be adequate to fully
remediate the material weakness, and additional measures may be required.
The
effectiveness of its 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 as of September
30, 2008.
The Company believes, however, these measures will fully remediate the
above
identified material weakness in its internal control over financial
reporting.
None
New
Jersey Resources
Part
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
required by this item, including information concerning the Board of
Directors
of the Company, the members of the Company’s Audit Committee, the Company’s
Audit Committee Financial Expert, compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, and shareholder proposals,
is
incorporated by reference to the Company’s Proxy Statement for the 2008 Annual
Meeting of Shareholders, which will be filed with Securities and Exchange
Commission (SEC) pursuant to Regulation 14A within 120 days after September
30,
2007. The information regarding executive officers is included in this
report
following Item 4, as Item 4A, under the caption “Executive Officers of the
Company.”
The
Board
of Directors has adopted the Principal Executive Officer and Senior Financial
Officers Code of Ethics governing the chief executive officer and senior
financial officers, in compliance with the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) and SEC regulations and the Code of Conduct, a code
for all
directors, officers and employees as required by the New York Stock Exchange,
or
NYSE, rules (collectively, the Codes). Copies of both Codes are available
free
of charge on the Company’s website at
http://investor.njresources.com under the caption “Corporate
Governance.” A printed copy of each Code is available free of charge to any
shareholder who requests it by contacting the Corporate Secretary at
1415
Wyckoff Road, Wall, New Jersey 07719. The Company will disclose any amendments
to, or waivers from, a provision of the Codes that applies to the principal
executive officer, principal financial officer, principal accounting
officer or
controller, or persons performing similar functions that relates to any
element
of the Codes as defined in Item 406 of Regulation S-K by posting such
information on the Company’s website.
Because
the Company’s common stock is listed on the NYSE, the chief executive officer is
required to make, and he has made, an annual certification to the NYSE
stating
that he was not aware of any violation by the Company of the corporate
governance listing standards of the NYSE. The chief executive officer
made his
annual certification to that effect to the NYSE as of February 23, 2007.
In
addition, the Company has filed, as exhibits to the Annual Report on
Form 10-K,
the certifications of the principal executive officer and principal financial
officer required under Sections 906 and 302 of the Sarbanes-Oxley to
be filed
with the SEC regarding the quality of our public disclosure.
Information
required by this Item is incorporated by reference from the Registrant’s
Proxy Statement.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED
STOCKHOLDER
MATTERS
|
Information
required by this Item is incorporated by reference from the Registrant’s
Proxy Statement.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
Information
required by this Item is incorporated by reference from the Registrant’s
Proxy Statement.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Information
required by this Item is incorporated by reference from the Registrant’s
Proxy Statement.
New
Jersey Resources
Part
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)
1.
|
Financial
Statements.
|
All
Financial Statements of the Registrant are filed as part of this report
and
included in Item 8 of Part II of this Form 10-K.
(a)
2.
|
Financial
Statement Schedules–See Index to Financial Statement Schedules in
Item 8.
|
|
|
(a)
3.
|
Exhibits–See
Exhibit Index on page
118.
|
|
Page
|
Schedule
II—Valuation and qualifying accounts and reserves for each of
the three years in the period ended September 30,
2007.
|
116
|
Schedules
other than those listed above are omitted because they are not required
or are
not applicable, or the required information is shown in the financial
statements
or notes thereto.
Schedule
II
VALUATION
AND QUALIFYING ACCOUNTS
YEARS
ENDED SEPTEMBER 30, 2007, 2006 and 2005
(Thousands)
|
CLASSIFICATION
|
BALANCE
AT
BEGINNING
OF
YEAR
|
ADDITIONS
CHARGED
TO
EXPENSE
|
OTHER
(1)
|
BALANCE
AT
END OF
YEAR
|
2007:
|
|
|
|
|
|
|
|
|
Regulatory
asset reserve
|
$ 678
|
|
$2,025
|
|
$ —
|
|
$2,703
|
|
Allowance
for Doubtful Accounts
|
$2,679
|
|
$3,174
|
|
$(2,687)
|
|
$3,166
|
|
2006:
|
|
|
|
|
|
|
|
|
Regulatory
asset reserve
|
$ 290
|
|
$ 388
|
|
$ —
|
|
$ 678
|
|
Allowance
for Doubtful Accounts
|
$5,297
|
|
$3,612
|
|
$(6,230)
|
|
$2,679
|
|
2005:
|
|
|
|
|
|
|
|
|
Regulatory
asset reserve
|
$ —
|
|
$ 290
|
|
$ —
|
|
$ 290
|
|
Allowance
for Doubtful Accounts
|
$5,304
|
|
$6,128
|
|
$(6,135)
|
|
$5,297
|
|
(1) Uncollectible
accounts written off, less recoveries and changes to adjust reserve to
appropriate level.
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:
December 10, 2007
|
|
|
By:/s/
Glenn C. Lockwood
|
|
Glenn
C. Lockwood
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the Registrant in
the
capacities and on the dates indicated:
December
10, 2007
|
/s/
Laurence M. Downes
|
December
10, 2007
|
/s/
Glenn C. Lockwood
|
|
Laurence
M. Downes
Chairman,
President and
Chief
Executive Officer
Director
|
|
Glenn
C. Lockwood
Senior
Vice President and
Chief
Financial Officer
(Principal
Accounting Officer)
|
|
|
|
|
December
10, 2007
|
/s/
Nina Aversano
|
December
10, 2007
|
/s/
J. Terry Strange
|
|
Nina
Aversano
Director
|
|
J.
Terry Strange
Director
|
|
|
|
|
December
10, 2007
|
/s/
Lawrence R. Codey
|
December
10, 2007
|
/s/
David A. Trice
|
|
Lawrence
R. Codey
Director
|
|
David
A. Trice
Director
|
|
|
|
|
December
10, 2007
|
/s/ M.
William Howard, Jr.
|
December
10, 2007
|
/s/
William H. Turner
|
|
M.
William Howard, Jr.
Director
|
|
William
H. Turner
Director
|
|
|
|
|
December
10, 2007
|
/s/
Jane M. Kenny
|
December
10, 2007
|
/s/ George R. Zoffinger
|
|
Jane
M. Kenny
Director
|
|
George
R. Zoffinger
Director
|
|
|
|
|
December
10, 2007
|
/s/
Alfred C. Koeppe
|
December
10, 2007
|
|
|
Alfred
C. Koeppe
Director
|
|
Gary
W. Wolf
Director
|
Exhibit
Number
|
Exhibit Description
|
|
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended (incorporated
by
reference to Exhibit 3-1 to the Annual Report on Form 10-K for
the year ended September 30, 1996, as filed on December 30,
1996)
|
|
|
3.2
|
By-Laws
of the Company, as amended on November 14, 2007 (incorporated
by reference
to Exhibit 3.2 to the Current Report on Form 8-K, as filed on
November 15, 2007)
|
|
|
4.1
|
Specimen
Common Stock Certificates (incorporated by reference to Exhibit 4-1
to Registration Statement No. 033-21872)
|
|
|
4.2
|
Indenture
of Mortgage and Deed of Trust between NJNG and Harris Trust
and Savings
Bank, as Trustee, dated April 1, 1952, as supplemented by twenty-one
Supplemental Indentures (incorporated by reference to
Exhibit 4(g) to Registration Statement
No. 002-9569)
|
|
|
4.2(a)
|
Twenty-Second
Supplemental Indenture, dated as of October 1, 1993 (incorporated by
reference to Exhibit 4.2(V) to the 1993 Annual Report on
Form 10-K for the year ended September 30,
1994)
|
|
|
4.2(b)
|
Twenty-Fifth
Supplemental Indenture, dated as of July 15, 1995 (incorporated by
reference to Exhibit 4.2(Y) to the Annual Report on
Form 10-K for the year ended September 30, 1995, as filed on
December 29, 1995)
|
|
|
4.2(c)
|
Twenty-Sixth
Supplemental Indenture, dated as of October 1, 1995 (incorporated by
reference to Exhibit 4.2(X) to the Annual Report on
Form 10-K for the year ended September 30, 1995, as filed on
December 29, 1995)
|
|
|
4.2(d)
|
Twenty-Seventh
Supplemental Indenture, dated as of September 1, 1997 (incorporated
by reference to Exhibit 4.2(J) to the Annual Report on
Form 10-K as filed on December 29, 1997)
|
|
|
4.2(e)
|
Twenty-Eighth
Supplemental Indenture, dated as of January 1, 1998 (incorporated by
reference to Exhibit 4.2(K) to the Annual Report on
Form 10-K for the year ended September 30, 1998, as filed on
December 24, 1998)
|
|
|
4.2(f)
|
Twenty-Ninth
Supplemental Indenture, dated as of April 1, 1998 (incorporated by
reference to Exhibit 4.2(L) to the Annual Report on
Form 10-K for the year ended September 30, 1988, as filed on
December 24, 1998)
|
|
|
4.2(g)
|
Thirtieth
Supplemental Indenture, dated as of December 1, 2003 (incorporated by
reference to Exhibit 4.2(J) to the Annual Report on
Form 10-K for the year ended September 30, 2003, as filed on
December 16, 2003)
|
|
|
4.2(h)
|
Thirty-First
Supplemental Indenture, dated as of October 1, 2005 (incorporated by
reference to Exhibit 4.2(I) to the Annual Report on
Form 10-K for the year ended September 30, 2005, as filed on
November 29, 2005)
|
|
|
4.3
|
$225,000,000
Revolving Credit Facility Credit Agreement (the “$225,000,000 Revolving
Credit Facility”) by and among NJNG, PNC Bank, NA as Administrative Agent,
the banks party thereto, JPMorgan Chase Bank, NA and Fleet
National Bank,
as Syndication Agents, Bank Of Tokyo-Mitsubishi Trust Company
and Citicorp
North America, Inc., As Documentation Agents and PNC Capital
Markets, Inc., as Lead Arranger, dated as of December 16, 2004
(incorporated by reference to Exhibit 4-2 to the Quarterly Report on
Form 10-Q as filed on February 7, 2005)
|
|
|
4.3(a)
|
First
Amendment dated as of August 31, 2005 to the $225,000,000 Revolving
Credit Facility, dated as of December 16, 2004 (incorporated by
reference to Exhibit 4-3A to the Annual Report on Form 10-K for
the year ended September 30, 2005, as filed on November 29,
2005)
|
|
|
4.3(b)
|
Second
Amendment and Consent dated as of November 15, 2005 to the
$225,000,000 Revolving Credit Facility, dated as of December 16, 2004
(incorporated by reference to Exhibit 4-3B to the Annual Report on
Form 10-K for the year ended September 30, 2005, as filed on
November 29, 2005)
|
|
|
4.4
|
$275,000,000
Revolving Credit Facility Credit Agreement (the “$275,000,000 Revolving
Credit Facility”) by and among the Company, PNC Bank, NA as Administrative
Agent, the banks party thereto, JPMorgan Chase Bank, NA and
Fleet National
Bank, as Syndication Agents, Bank Of Tokyo-Mitsubishi Trust
Company and
Citicorp North America, Inc., As Documentation Agents and PNC Capital
Markets, Inc., as Lead Arranger, dated as of December 16, 2004
(incorporated by reference to Exhibit 4-1 to the Quarterly Report on
Form 10-Q as filed on February 7,
2005)
|
New
Jersey Resources
Exhibit
Number
|
Exhibit Description
|
|
|
4.4(a)
|
First
Amendment dated as of November 15, 2005 to the $275,000,000 Revolving
Credit Facility, dated as of December 16, 2004 (incorporated by
reference to Exhibit 4-4A to the Annual Report on Form 10-K for
the year ended September 30, 2005, as filed on November 29,
2005)
|
|
|
4.5
|
$30,000,000
Credit Agreement by and among the Company, NJR Energy Services
Company, as
the Borrowers, and Bank of Tokyo-Mitsubishi UFJ Trust Company,
as the
Bank, dated as of October 12, 2006
|
|
|
4.6
|
$60,000,000
Note Purchase Agreement by and among NJNG and J.P. Morgan Securities
Inc.,
as Placement Agent, dated March 15, 2004 (incorporated by reference
to Exhibit 4-1 to the Quarterly Report on Form 10-Q as filed on
May 10, 2004)
|
|
|
4.7
|
$25,000,000
Note Purchase Agreement by and among NJR and J.P. Morgan Securities
Inc.,
as Placement Agent, dated March 15, 2004 (incorporated by reference
to Exhibit 4-2 to the Quarterly Report on Form 10-Q as filed on
May 10, 2004)
|
|
|
4.8*
|
$50,000,000
Note Purchase Agreement by and among the Company, New York
Life Insurance
Company and New York Life Insurance and Annuity Company
|
|
|
10.2**
|
Retirement
Plan for Represented Employees, as amended on October 1, 1984
(incorporated by reference to Registration Statement
No. 002-73181)
|
|
|
10.3**
|
Retirement
Plan for Non-Represented Employees, as amended October 1, 1985
(incorporated by reference to Registration Statement
No. 002-73181)
|
|
|
10.4**
|
Supplemental
Retirement Plans covering each of the Executive Officers (incorporated
by
reference to Exhibit 10.9 to the Annual Report on Form 10-K for
the year ended September 30, 1986)
|
|
|
10.5(a)
|
Service
Agreement for Rate Schedule FTS-4 by and between NJNG and Texas
Eastern
Transmission Company, dated as of June 21, 1995 (incorporated by
reference to Exhibit 10-5A to the Annual Report on Form 10-K for
the year ended September 30, 1996, as filed on December 30,
1996)
|
|
|
10.5(b)
|
Service
Agreement for Rate Schedule SS-1by and between NJNG and Texas
Eastern
Transmission Company, dated as of June 21, 1995 (incorporated by
reference to Exhibit 10-5B to the Annual Report on Form 10-K for
the year ended September 30, 1996, as filed on December 30,
1996)
|
|
|
10.5(c)
|
Service
Agreement for Rate Schedule CDS by and between NJNG and Texas
Eastern
Transmission Company, dated as of November 15, 1995 (incorporated by
reference to Exhibit 10-5C to the Annual Report on Form 10-K for
the year ended September 30, 1996, as filed on December 30,
1996)
|
|
|
10.6**
|
The
Company’s Officer Incentive Plan effective as of October 1, 1986
(incorporated by reference to Exhibit 10-6 to the Annual Report on
Form 10-K for the year ended September 30, 1996, as filed on
December 30, 1996)
|
|
|
10.7
|
Lease
Agreement between NJNG, as Lessee and State Street Bank and
Trust Company
of Connecticut, National Association, as Lessor for NJNG’s Headquarters
Building dated December 21, 1995 (incorporated by reference to
Exhibit 10-7 to the Annual Report on Form 10-K for the year
ended September 30, 1996, as filed on December 30,
1996)
|
|
|
10.10**
|
The
Company’s Long-Term Incentive Compensation Plan, as amended, effective
as
of October 1, 1995 (incorporated by reference to Appendix A to the
Proxy Statement for the 1996 Annual Meeting as filed on January 4,
1996)
|
|
|
10.12**
|
Employment
Continuation Agreement between the Company and Laurence M.
Downes dated
February 20, 2007 (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, as filed on February 26,
2007)
|
|
|
10.12(a)**
|
Schedule
of Employee Continuation Agreements (incorporated by reference
to Exhibit
10.2 to the Current Report on Form 8-K, as filed on February 26,
2007)
|
|
|
10.13
|
Gas
Sales Agreements between NJNG and Alberta Northeast Gas Limited
dated as
of February 7, 1991 (incorporated by reference to Exhibit 10-13
to the Annual Report on Form 10-K for the year ended
September 30, 1992)
|
|
|
10.14
|
Gas
Transportation Contract for Firm Reserved Service between NJNG
and
Iroquois Gas Transmission System, L.P., dated February 7, 1991
(incorporated by reference to Exhibit 10-14 to the Annual Report on
Form 10-K for the year ended September 30,
1992)
|
New
Jersey Resources
Exhibit
Number
|
Exhibit Description
|
|
|
10.15
|
Service
Agreement between NJNG and CNG Transmission Corporation dated
as of
December 1, 1993 (incorporated by reference to Exhibit 10-15 to
the Annual Report on Form 10-K for the year ended September 30,
1996, as filed on December 30, 1996)
|
|
|
10.15(a)
|
Service
Agreement between NJNG and CNG Transmission Corporation dated
as of
December 1, 1993 (incorporated by reference to Exhibit 10-15A to
the Annual Report on Form 10-K for the year ended September 30,
1996, as filed on December 30,
1996)
|
|
|
10.15(b)
|
Service
Agreement between NJNG and CNG Transmission Corporation dated
December 1, 1993 and, as amended, as of December 21, 1993
(incorporated by reference to Exhibit 10-15B to the Annual Report on
Form 10-K for the year ended September 30, 1996, as filed on
December 30, 1996)
|
|
|
10.16**
|
Summary
of Company’s Non-Employee Director Compensation (incorporated by reference
to Exhibit 10.16 to the Current Report on Form 8-K as filed on
November 15, 2007)
|
|
|
10.17**
|
The
Company’s 2007 Stock Award and Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K as filed
on January 12,
2007)
|
|
|
10.18**
|
2007
Stock Award and Incentive Plan Form of Stock Option Agreement
(incorporated by reference to Exhibit 10.1 to the Current Report
on Form
8-K as filed on January 25, 2007)
|
|
|
10.19**
|
2007
Stock Award and Incentive Plan Form of Performance Units Agreement
(incorporated by reference to Exhibit 10.2 to the Current Report
on Form
8-K as filed on January 25, 2007)
|
|
|
10.20**
|
2007
Stock Award and Incentive Plan Form of Restricted Stock Agreement
(incorporated by reference to Exhibit 10.3 to the Current Report
on Form
8-K as filed on January 25, 2007)
|
|
|
10.21
|
Settlement
Agreement and Mutual Release dated January 24, 2007 by and
between NJNG
and Lumbermens Mutual Casualty Company and its subsidiaries
and
affiliates, including but not limited to, American Motorists
Insurance
Company, American Manufacturers Mutual Company and Kemper Indemnity
Insurance Company (incorporated by reference to Exhibit 10.1
to the
Quarterly Report on Form 10-Q as filed on February 7,
2007)
|
|
|
10.22
|
Limited
Liability Company Agreement of Steckman Ridge GP, LLC dated
as of March 2,
2007 (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on
Form 10-Q, as filed on May 3, 2007)
|
|
|
10.23
|
Limited
Partnership Agreement of Steckman Ridge, LP dated as of March
2, 2007
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form
10-Q, as filed on May 3, 2007).
|
|
|
21.1
|
Subsidiaries
of the Registrant*
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm*
|
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act*
|
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act*
|
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act* †
|
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act* †
|
** Denotes compensatory plans or arrangements or management
contracts
† This
certificate accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company
for
purposes of Section 18 or any other provision of the Securities Exchange
Act of 1934, as amended.