form_10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
TRANSITION PERIOD FROM
TO
Commission
file number 001-8359
NEW
JERSEY RESOURCES CORPORATION
(Exact
name of registrant as specified in its charter)
New
Jersey
|
|
22-2376465
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
|
|
|
1415
Wyckoff Road, Wall, New Jersey 07719
|
|
732-938-1480
|
(Address
of principal
executive
offices)
|
|
(Registrant’s
telephone number,
including
area code)
|
|
Securities
registered pursuant to Section 12 (b) of the Act:
|
Common
Stock - $2.50 Par Value
|
|
New
York Stock Exchange
|
(Title
of each class)
|
|
(Name
of each exchange on which
registered)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes:
x No:
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes:
o No:
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer: x Accelerated
filer: o Non-accelerated
filer: o Smaller
reporting company: o
(Do
not check if a smaller
reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes:
o No:
x
The
number of shares outstanding of $2.50 par value Common Stock as of February 2,
2010, was 41,417,220.
New
Jersey Resources Corporation
TABLE
OF CONTENTS
Page
|
Information
Concerning Forward-Looking
Statements
|
1
|
|
|
PART
I – FINANCIAL INFORMATION
|
|
ITEM
1.
|
Unaudited
Condensed Consolidated Financial
Statements
|
2
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7
|
|
Note
1 |
General
|
7
|
|
Note
2 |
Regulation
|
9
|
|
Note
3 |
Derivative
Instruments
|
13
|
|
Note
4 |
Fair
Value
|
16
|
|
Note
5 |
Investments
In Equity Investees
|
17
|
|
Note
6 |
Earnings
Per Share
|
18
|
|
Note
7 |
Debt
|
18
|
|
Note
8 |
Capitalized
Financing Costs And Deferred Interest
|
20
|
|
Note
9 |
Stock-Based
Compensation
|
20
|
|
Note
10 |
Employee
Benefit Plans
|
21
|
|
Note
11 |
Asset
Retirement Obligations
|
21
|
|
Note
12 |
Income
Taxes
|
21
|
|
Note
13 |
Commitments
And Contingent Liabilities
|
22
|
|
Note
14 |
Business
Segment and Other Operations Data
|
23
|
|
Note
15 |
Related
Party Transactions
|
26
|
|
Note
16 |
Other
|
26
|
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
for the Three Months Ended December 31, 2009
|
26
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
46
|
ITEM
4.
|
Controls
and Procedures
|
49
|
|
|
PART
II – OTHER INFORMATION
|
|
ITEM
1.
|
Legal
Proceedings
|
50
|
ITEM
1A.
|
Risk
Factors
|
50
|
ITEM
2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
50
|
ITEM
4. |
Submission of Matters to a Vote of Security Holders |
51 |
ITEM
6.
|
Exhibits
|
52
|
|
Signatures
|
53
|
New
Jersey Resources Corporation
Part
I
INFORMATION
CONCERNING FORWARD-LOOKING STATEMENTS
|
Certain
statements contained in this report, including, without limitation, statements
as to management expectations and beliefs presented in Part I, Item 2.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures about
Market Risk,” Part II, Item I. “Legal Proceedings” and in the notes to the
financial statements are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements can
also be identified by the use of forward-looking terminology such as “may,”
“intend,” “expect,” “believe” or “continue” or comparable terminology and are
made based upon management’s expectations and beliefs concerning future
developments and their potential effect upon New Jersey Resources Corporation
(NJR or the Company). There can be no assurance that future developments will be
in accordance with management’s expectations or that the effect of future
developments on the Company will be those anticipated by
management.
The
Company cautions readers that the assumptions that form the basis for
forward-looking statements regarding customer growth, customer usage, financial
condition, results of operations, cash flows, capital requirements, market risk
and other matters for fiscal 2010 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
|
NJR’s
dependence on operating subsidiaries;
|
Ÿ
|
demographic
changes in the New Jersey Natural Gas (NJNG) service
territory;
|
Ÿ
|
the
rate of NJNG customer growth;
|
Ÿ
|
volatility
of natural gas and other commodity prices and their impact on customer
usage, NJR Energy Services’ (NJRES) operations and on the Company’s risk
management efforts;
|
Ÿ
|
changes
in rating agency requirements and/or credit ratings and their effect on
availability and cost of capital to the Company;
|
Ÿ
|
the
impact of volatility in the credit markets that would result in the
increased cost and/or limit the availability of credit at NJR to fund and
support physical gas inventory purchases and other working capital needs
at NJRES, and all other non-regulated subsidiaries, as well as negatively
affect access to the commercial paper market and other short-term
financing markets at NJNG to allow it to fund its commodity purchases and
meet its short-term obligations as they come due;
|
Ÿ
|
the
ability to comply with debt covenants;
|
Ÿ
|
continued
failures in the market for auction rate securities;
|
Ÿ
|
the
impact to the asset values and resulting higher costs and funding
obligations of NJR’s pension and postemployment benefit plans as a result
of downturns in the financial markets;
|
Ÿ
|
the
ability to maintain effective internal controls;
|
Ÿ
|
accounting
effects and other risks associated with hedging activities and use of
derivatives contracts;
|
Ÿ
|
commercial
and wholesale credit risks, including the availability of creditworthy
customers and counterparties and liquidity in the wholesale energy trading
market;
|
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
level and rate at which costs and expenses are incurred and the extent to
which they are allowed to be recovered from customers through the
regulatory process in connection with constructing, operating and
maintaining NJNG’s natural gas distribution system;
|
Ÿ
|
dependence
on third-party storage and transportation facilities;
|
Ÿ
|
operating
risks incidental to handling, storing, transporting and providing
customers with natural gas;
|
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;
|
Ÿ
|
the
disallowance of recovery of environmental-related expenditures and other
regulatory changes; and
|
Ÿ
|
environmental-related
and other litigation and other
uncertainties.
|
While the
Company periodically reassesses material trends and uncertainties affecting the
Company’s results of operations and financial condition in connection with its
preparation of management’s discussion and analysis of results of operations and
financial condition contained in its Quarterly and Annual Reports, the Company
does not, by including this statement, assume any obligation to review or revise
any particular forward-looking statement referenced herein in light of future
events.
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
Three
Months Ended
December
31,
|
(Thousands,
except per share data)
|
2009
|
2008
|
OPERATING
REVENUES
|
|
|
|
|
Utility
|
$258,475
|
|
$340,908
|
|
Nonutility
|
351,071
|
|
460,396
|
|
Total
operating revenues
|
609,546
|
|
801,304
|
|
OPERATING
EXPENSES
|
|
|
|
|
Gas
purchases:
|
|
|
|
|
Utility
|
154,950
|
|
230,452
|
|
Nonutility
|
294,443
|
|
440,638
|
|
Operation
and maintenance
|
36,291
|
|
36,408
|
|
Regulatory
rider expenses
|
13,673
|
|
13,561
|
|
Depreciation
and amortization
|
7,869
|
|
7,361
|
|
Energy
and other taxes
|
16,935
|
|
23,633
|
|
Total
operating expenses
|
524,161
|
|
752,053
|
|
OPERATING
INCOME
|
85,385
|
|
49,251
|
|
Other
income
|
1,119
|
|
858
|
|
Interest
expense, net of capitalized interest
|
5,417
|
|
6,547
|
|
INCOME
BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
|
81,087
|
|
43,562
|
|
Income
tax provision
|
30,929
|
|
15,804
|
|
Equity
in earnings of affiliates, net of tax
|
1,744
|
|
514
|
|
NET
INCOME
|
$ 51,902
|
|
$ 28,272
|
|
EARNINGS
PER COMMON SHARE
|
|
|
|
|
BASIC
|
$1.25
|
|
$0.67
|
|
DILUTED
|
$1.24
|
|
$0.67
|
|
DIVIDENDS
PER COMMON SHARE
|
$0.34
|
|
$0.31
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
BASIC
|
41,615
|
|
42,170
|
|
DILUTED
|
42,001
|
|
42,495
|
|
See Notes
to Condensed Unaudited Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2009
|
2008
|
CASH
FLOWS USED IN OPERATING ACTIVITIES
|
|
|
|
|
Net
income
|
$51,902
|
|
$28,272
|
|
Adjustments
to reconcile net income to cash flows from operating
activities:
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments and related
transactions
|
(6,633
|
)
|
11,499
|
|
Depreciation
and amortization
|
8,103
|
|
7,581
|
|
Allowance
for equity used during construction
|
(384
|
)
|
—
|
|
Allowance
for bad debt expense
|
847
|
|
1,280
|
|
Deferred
income taxes
|
28,656
|
|
5,765
|
|
Manufactured
gas plant remediation costs
|
(1,479
|
)
|
(5,875
|
)
|
Equity
in earnings of affiliates, net of distributions
|
(960
|
)
|
(514
|
)
|
Cost
of removal – asset retirement obligations
|
(38
|
)
|
(19
|
)
|
Contributions
to postemployment benefit plans
|
(4,550
|
)
|
(182
|
)
|
Changes
in:
|
|
|
|
|
Components
of working capital
|
(136,542
|
)
|
(73,901
|
)
|
Other
noncurrent assets
|
4,302
|
|
(38,448
|
)
|
Other
noncurrent liabilities
|
4,577
|
|
27,582
|
|
Cash
flows used in operating activities
|
(52,199
|
)
|
(36,960
|
)
|
CASH
FLOWS USED IN INVESTING ACTIVITIES
|
|
|
|
|
Expenditures
for:
|
|
|
|
|
Utility
plant
|
(10,326
|
)
|
(18,207
|
)
|
Real
estate properties and other
|
(17
|
)
|
(145
|
)
|
Cost
of removal
|
(1,097
|
)
|
(1,462
|
)
|
Investments
in equity investees
|
(4,300
|
)
|
(21,000
|
)
|
Release
from restricted cash construction fund
|
—
|
|
4,200
|
|
Cash
flows used in investing activities
|
(15,740
|
)
|
(36,614
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
Proceeds
from issuance of common stock
|
3,109
|
|
6,196
|
|
Tax
benefit from stock options exercised
|
224
|
|
972
|
|
Proceeds
from sale-leaseback transaction
|
4,925
|
|
6,268
|
|
Payments
of long-term debt
|
(1,346
|
)
|
(30,973
|
)
|
Purchases
of treasury stock
|
(8,994
|
)
|
(1,126
|
)
|
Payments
of common stock dividends
|
(13,249
|
)
|
(11,776
|
)
|
Net
proceeds from short-term debt
|
57,400
|
|
87,350
|
|
Cash
flows from financing activities
|
42,069
|
|
56,911
|
|
Change
in cash and temporary investments
|
(25,870
|
)
|
(16,663
|
)
|
Cash
and temporary investments at beginning of period
|
36,186
|
|
42,626
|
|
Cash
and temporary investments at end of period
|
$10,316
|
|
$25,963
|
|
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
|
|
|
|
Receivables
|
$(153,756
|
)
|
$(98,006
|
)
|
Inventories
|
(34,096
|
)
|
73,156
|
|
Recovery
of gas costs
|
(22,351
|
)
|
25,017
|
|
Gas
purchases payable
|
99,141
|
|
(41,081
|
)
|
Prepaid
and accrued taxes
|
18,777
|
|
43,830
|
|
Accounts
payable and other
|
(11,159
|
)
|
(6,541
|
)
|
Restricted
broker margin accounts
|
14,496
|
|
(51,882
|
)
|
Customers’
credit balances and deposits
|
(31,574
|
)
|
(24,957
|
)
|
Other
current assets
|
(16,020
|
)
|
6,563
|
|
Total
|
$(136,542
|
)
|
$(73,901
|
)
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
Interest
(net of amounts capitalized)
|
$1,285
|
|
$4,185
|
|
Income
taxes
|
—
|
|
$1,427
|
|
See Notes
to Condensed Unaudited Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS
|
December
31,
|
September
30,
|
(Thousands)
|
2009
|
2009
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
Utility
plant, at cost
|
$1,452,096
|
|
$1,438,945
|
|
Real
estate properties and other, at cost
|
30,214
|
|
30,195
|
|
|
1,482,310
|
|
1,469,140
|
|
Accumulated
depreciation and amortization
|
(411,295
|
)
|
(404,701
|
)
|
Property,
plant and equipment, net
|
1,071,015
|
|
1,064,439
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
Cash
and temporary investments
|
10,316
|
|
36,186
|
|
Customer
accounts receivable
|
|
|
|
|
Billed
|
181,505
|
|
101,945
|
|
Unbilled
revenues
|
79,103
|
|
8,616
|
|
Allowance
for doubtful accounts
|
(3,202
|
)
|
(6,064
|
)
|
Regulatory
assets
|
5,037
|
|
5,878
|
|
Gas
in storage, at average cost
|
331,329
|
|
297,464
|
|
Materials
and supplies, at average cost
|
6,257
|
|
6,026
|
|
Prepaid
state taxes
|
21,108
|
|
37,886
|
|
Derivatives,
at fair value
|
104,285
|
|
131,070
|
|
Restricted
broker margin account
|
11,754
|
|
26,250
|
|
Deferred
taxes
|
10,984
|
|
20,801
|
|
Other
|
29,679
|
|
18,131
|
|
Total
current assets
|
788,155
|
|
684,189
|
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
|
Investments
in equity investees
|
166,375
|
|
160,508
|
|
Regulatory
assets
|
384,172
|
|
391,025
|
|
Derivatives,
at fair value
|
10,767
|
|
9,536
|
|
Other
|
11,145
|
|
11,333
|
|
Total
noncurrent assets
|
572,459
|
|
572,402
|
|
Total
assets
|
$2,431,629
|
|
$2,321,030
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
CAPITALIZATION
AND LIABILITIES
|
December
31,
|
September
30,
|
|
(Thousands)
|
2009
|
2009
|
|
CAPITALIZATION
|
|
|
|
|
Common
stock equity
|
$ 722,851
|
|
$ 689,726
|
|
Long-term
debt
|
438,412
|
|
455,492
|
|
Total
capitalization
|
1,161,263
|
|
1,145,218
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Current
maturities of long-term debt
|
27,169
|
|
6,510
|
|
Short-term
debt
|
200,800
|
|
143,400
|
|
Gas
purchases payable
|
229,253
|
|
130,112
|
|
Accounts
payable and other
|
34,794
|
|
44,448
|
|
Dividends
payable
|
14,148
|
|
13,026
|
|
Deferred
and accrued taxes
|
5,474
|
|
3,475
|
|
Regulatory
liabilities
|
13,852
|
|
36,203
|
|
New
Jersey clean energy program
|
10,955
|
|
10,920
|
|
Derivatives,
at fair value
|
58,347
|
|
94,853
|
|
Customers’
credit balances and deposits
|
41,643
|
|
73,218
|
|
Total
current liabilities
|
636,435
|
|
556,165
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
Deferred
income taxes
|
262,432
|
|
243,593
|
|
Deferred
investment tax credits
|
6,790
|
|
6,870
|
|
Deferred
revenue
|
7,467
|
|
8,203
|
|
Derivatives,
at fair value
|
5,250
|
|
6,250
|
|
Manufactured
gas plant remediation
|
146,700
|
|
146,700
|
|
Postemployment
employee benefit liability
|
87,866
|
|
89,035
|
|
Regulatory
liabilities
|
55,874
|
|
56,450
|
|
New
Jersey clean energy program
|
27,718
|
|
28,449
|
|
Asset
retirement obligation
|
25,450
|
|
25,097
|
|
Other
|
8,384
|
|
9,000
|
|
Total
noncurrent liabilities
|
633,931
|
|
619,647
|
|
Commitments
and contingent liabilities (Note 13)
|
|
|
|
|
Total
capitalization and liabilities
|
$2,431,629
|
|
$2,321,030
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2009
|
2008
|
|
|
|
|
|
Unrealized
gain on available for sale securities, net of tax of $(264) and $(380),
respectively (1)
|
|
|
|
|
Net
unrealized (loss) on derivatives, net of tax of $23 and $18,
respectively
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
(1)
|
Available
for sale securities are included in Investments in equity investees in the
Unaudited Condensed Consolidated Balance
Sheets.
|
See Notes
to Unaudited Condensed Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
The
accompanying Unaudited Condensed Consolidated Financial Statements have been
prepared by New Jersey Resources Corporation (NJR or the Company) in accordance
with the rules and regulations of the Securities and Exchange Commission (SEC).
The September 30, 2009 Balance Sheet data is derived from the audited financial
statements of the Company. These Unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the financial statements and the
notes thereto included in NJR’s 2009 Annual Report on Form 10-K.
The
Unaudited Condensed Consolidated Financial Statements include the accounts of
NJR and its subsidiaries. NJR provides regulated gas distribution services and
certain non-regulated businesses primarily through the following
subsidiaries:
New
Jersey Natural Gas Company (NJNG) provides natural gas utility service in
central and northern New Jersey and is subject to rate regulation by the New
Jersey Board of Public Utilities (BPU). NJNG comprises the Natural Gas
Distribution segment;
NJR
Energy Services Company (NJRES) comprises the Energy Services segment and 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;
NJR
Energy Holdings Corporation (NJREH) primarily invests in energy-related ventures
through its subsidiaries, NJNR Pipeline Company (Pipeline), which holds the
Company’s 5.53 percent ownership interest in Iroquois Gas and Transmission
System, L.P. (Iroquois) and 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
began commercial operation in April 2009. Effective October 1, 2009, Iroquois
and Steckman Ridge comprise the Midstream Assets segment;
NJR
Retail Holdings Corporation (Retail Holdings), which has two principal
subsidiaries, NJR Home Services Company (NJRHS) and Commercial Realty &
Resources Corporation (CR&R) along with NJR Energy Corporation (NJR Energy)
are included in Retail and Other operations.
Intercompany
transactions and accounts have been eliminated.
In the
opinion of management, the accompanying Unaudited Condensed Consolidated
Financial Statements reflect all adjustments necessary, for a fair presentation
of the results of the interim periods presented. These adjustments are of a
normal and recurring nature. Because of the seasonal nature of NJR’s utility and
wholesale energy services operations, in addition to other factors, the
financial results for the interim periods presented are not indicative of the
results that are to be expected for the fiscal year ended September 30,
2010.
Change
in Reportable Segments
Effective
October 1, 2009, NJR established Midstream Assets as a new reportable segment to
reflect the way it currently views and manages growth opportunities associated
with investments in natural gas transportation and storage facilities.
Consequently, the results of operations, assets and other financial information
for Iroquois and Steckman Ridge, previously included in Retail and Other
operations, are now reported as components of the Midstream Assets segment. As
required, prior year information for both Midstream Assets and Retail and Other
operations has been restated throughout this report to be consistent with
current year presentation (see Note 14. Business Segment and Other
Operations Data and Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations).
Subsequent
Events
The
Company evaluates subsequent events through the date it issues its financial
statements. Accordingly, for the period ended December 31, 2009, events
occurring between December 31, 2009 and February 3, 2010, have been reviewed to
determine appropriate recognition and disclosures. See Note 2. Regulation and Note 15. Related Party
Transactions, for subsequent events disclosures.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Gas
in Storage
The
following table summarizes Gas in storage by company as of:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
($
in thousands)
|
Assets
|
Bcf
|
Assets
|
Bcf
|
NJNG
|
$143,499
|
17.6
|
$175,201
|
21.9
|
NJRES
|
187,830
|
40.4
|
122,263
|
36.3
|
Total
|
$331,329
|
58.0
|
$297,464
|
58.2
|
Gas in
storage increased during the three months ended December 31, 2009, due primarily
to an increase in the average cost of gas at NJRES coupled with optimization
activities that allowed NJRES to purchase and inject additional volumes, offset
by a 19.7 percent decrease in NJNG’s inventory volumes due to the start of the
winter heating season.
Customer
Accounts Receivable
Customer
accounts receivable include outstanding billings from the following subsidiaries
as of:
|
December
31,
|
September
30,
|
(Thousands)
|
2009
|
2009
|
NJNG
|
$ 21,912
|
|
12
|
%
|
$ 21,239
|
|
21
|
%
|
NJRES
|
151,305
|
|
83
|
|
73,451
|
|
72
|
|
NJRHS
and other
|
8,288
|
|
5
|
|
7,255
|
|
7
|
|
Total
|
$181,505
|
|
100
|
%
|
$101,945
|
|
100
|
%
|
Accounts
receivable increased during the three months ended December 31, 2009, due
primarily to the impact of higher commodity prices on NJRES’
receivables.
Recent
Updates to the Accounting Standards Codification (ASC)
Topic
715, Compensation—Retirement Benefits:
On
December 30, 2008, the FASB issued guidance that requires additional disclosures
surrounding postretirement benefit plans to provide users of financial
statements information related to a company’s plan assets, investment policies
and strategies and significant concentrations of risk. Disclosures will include
information related to the fair value of plan assets, including inputs and
valuation techniques that are used to measure plan assets and the effect of
Level 3 measurements on changes in plan assets. The guidance is effective for
fiscal years ending after December 15, 2009. As it is a disclosure only
standard, it will have no impact on the Company’s statement of financial
position, results of operations or cash flows.
Topic
810, Consolidation:
On
December 4, 2007, the FASB amended consolidation guidance relating to the
accounting and reporting for minority interests and clarified that a
non-controlling interest in a subsidiary is considered to be an ownership
interest in the consolidated entity and, therefore, should be reported as equity
in the consolidated financial statements. The guidance is effective for fiscal
years beginning after December 15, 2008, and early adoption is prohibited. The
guidance became effective for the Company on October 1, 2009. There was no
impact to the Company’s statement of financial position, results of operations
or cash flows upon adoption.
In June
2009, the FASB issued guidance requiring qualitative evaluations, which will
replace the quantitative assessments currently in practice, when determining
whether a company has a controlling financial interest in a variable interest
entity (VIE). In addition, the assessments will be required on an ongoing basis,
rather than limiting the reassessments to when certain triggering events occur.
Additional disclosures will provide information on a company’s involvement with
VIE’s. The guidance is effective at the beginning of a company’s annual
reporting period that begins after November 15, 2009, including interim
reporting periods. The Company will adopt the provisions of the statement
prospectively during its first quarter of fiscal 2011 and is evaluating the
effect on its financial position, results of operations and cash
flows.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Topic
820, Fair Value Measurements and Disclosures:
In August
2009, the FASB issued additional guidance for measuring the fair value of
liabilities and clarifies that the quoted price for the identical liability,
when traded as an asset in an active market, is a Level 1 measurement, providing
there are no adjustments to the quoted price. Alternatively, when no quoted
price is available, the guidance affirms the use of other permitted valuation
techniques. The guidance became effective for the Company on October 1, 2009.
There was no impact to the Company’s statement of financial position, results of
operations or cash flows upon adoption.
Base
Rates
In
October 2008, the BPU unanimously approved and made effective certain changes in
the design of NJNG’s base rates. As a result, NJNG received a revenue increase
in its base rates of $32.5 million, which is inclusive of an approximate $13
million impact of a change to the Conservation Incentive Program (CIP) baseline
usage rate. Other changes included an allowed rate of return of 7.76 percent
that includes a return on equity component of 10.3 percent and a reduction to
NJNG’s depreciation expense component.
Conservation
Incentive Program (CIP)
The CIP
allows NJNG to recover utility gross margin variations related to both weather
and customer usage. Recovery of such utility gross margin variations (filed for
annually and recovered in the year following the end of the CIP usage year) is
subject to additional conditions, including an earnings test and an evaluation
of Basic Gas Supply Service (BGSS) related savings.
As of
December 31, 2009, under the CIP, NJNG has $8 million accrued to recover from
residential and commercial customers, which includes $2.4 million related to the
weather component of the CIP and $5.6 million related to the usage component of
the CIP.
The
following are NJNG’s BPU filings and results during fiscal 2009 and 2010 related
to CIP:
Ÿ
|
October
2008 – The BPU provisionally approved, effective October 3, 2008, NJNG’s
CIP petition filed in May 2008 requesting an additional $6.8 million and
modification to its CIP recovery rates. The additional amount brought the
total recovery requested to $22.4 million and included amounts accrued and
estimated through September 30, 2008.
|
|
|
Ÿ
|
April
2009 – NJNG submitted a proposal to extend its CIP mechanism, as currently
structured, until October 1, 2010. The extension was requested due to the
continuing nature of energy efficiency programs at the state and federal
levels in concert with the issuance of the economic stimulus programs. As
a result of no action taken by the BPU as of September 30, 2009, the CIP
remained in effect for an additional year or until a final order was
issued by the BPU.
|
|
|
Ÿ
|
June
2009 – The BPU issued their final order approving NJNG’s recovery of $6.8
million of CIP rates for fiscal 2008. In addition, NJNG filed its annual
BGSS and CIP filing for recoverable CIP amounts for fiscal 2009,
requesting approval to modify its CIP recovery rates effective October 1,
2009, resulting in total annual recovery requested for fiscal 2009 of $6.9
million, representing amounts accrued and estimated through September 30,
2009. NJNG also included a request to reduce the WNC rate to facilitate
recovery of its remaining balance in fiscal 2010. The rates included in
the filing were provisionally approved on September 16,
2009.
|
|
|
Ÿ
|
December
2009 – NJNG submitted a petition requesting approval from the BPU for an
extension of its CIP mechanism, as currently structured, through September
30, 2013. On January 20, 2010, the BPU approved an extension to NJNG’s CIP
through September 30, 2013.
In
addition, NJNG and NJRES entered into an asset management agreement that
begins in January 2010 and ends in March 2013. Under the terms of this
agreement, NJNG will release certain transportation and storage contracts
to NJRES for the entire term of the agreement. NJNG also will sell
approximately 1 Bcf of natural gas in storage at cost to NJRES. In return,
NJNG will receive capacity release payments and will also have the option
to purchase index priced gas at certain delivery locations to maintain
operational reliability. These
capacity release payments provide BGSS savings pursuant to the terms of
the CIP as approved in the January 20, 2010 BPU Board Order, and reduce
costs to NJNG’s BGSS customers.
|
In
conjunction with the CIP, NJNG incurs costs related to its obligation to fund
programs that promote customer conservation efforts during the pilot program. As
of December 31, 2009, NJNG had a remaining liability of $207,000 related to
these programs.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Basic
Gas Supply Service (BGSS)
BGSS is a
BPU-approved rate mechanism designed to allow for the recovery of natural gas
commodity costs. NJNG occasionally adjusts its periodic BGSS rates for its
residential and small commercial customers to reflect increases or decreases in
the cost of natural gas sold to customers.
The
following are NJNG’s BGSS filings during fiscal 2009 and 2010 related to its
requested rate adjustments and refunds to its residential and small commercial
customers:
Ÿ
|
December
2008 – NJNG provided notice that it would implement a $30 million
BGSS-related rate credit that would lower residential and small commercial
sales customers’ bills in January and February 2009. This rate credit was
due primarily to a decline in wholesale commodity costs subsequent to the
October 2008 BGSS price change. On February 20, 2009, NJNG provided notice
to the BPU that its BGSS-related rate credit would be extended through
March 31, 2009, to reduce BGSS charges by an additional $15
million.
|
|
|
Ÿ
|
June
2009 – NJNG filed its annual BGSS and CIP filing (2010 BGSS/CIP filing)
proposing a decrease of 17.6 percent for the average residential heating
customer of which 15.7 percent is due to the reduction in commodity costs
based on the continuing decline in the wholesale natural gas market. The
balance of the rate change is related to changes to the CIP rate, as
discussed above, and a minor reduction to the rate related to collecting
the remaining balance under the Weather Normalization Clause (WNC). On
September 16, 2009, the BPU approved on a provisional basis a decrease of
approximately 19 percent to the average residential heating customer of
which 17.2 percent is due to the reduction to the BGSS price and the
balance of rate change is related to the CIP and WNC rates as discussed
above.
|
|
|
Ÿ
|
October
2009 – NJNG provided refunds of approximately $37.4 million to residential
and small commercial customers due to the decline in the wholesale price
of natural gas.
|
|
|
Ÿ
|
January
2010 – NJNG notified the BPU that bill credits in the amount of $37.5
million will be provide to residential and small commercial customers,
based on individual customer usage, in February 2010 and March
2010.
|
Other
Incentive Programs
NJNG is
eligible to receive financial incentives for reducing BGSS costs through a
series of utility gross margin-sharing programs that include Off-System Sales,
Capacity Release, Storage Incentive and Financial Risk Management (FRM)
programs. In October 2008, the BPU approved the extension of the incentive
programs through October 31, 2011, along with an increase to certain annual cost
and volume limitations.
Societal
Benefits Clause (SBC)
The SBC
is comprised of three primary components, a Universal Service (USF) rider, a
Manufactured Gas Plant (MGP) Remediation Rider (RA) and the New Jersey Clean
Energy Program (NJCEP). The USF is a permanent statewide program for all natural
gas and electric utilities for the benefit of income-eligible customers; the RA
is a rider that provides for recovery of actual expenditures incurred to
remediate former gas manufacturing facilities; and the NJCEP is a program
designed to promote energy efficiency and renewable energy. Recovery of SBC
program costs is subject to BPU approval based on annual filings that include an
updated report of expenditures incurred each year.
On
January 27, 2009, NJNG filed an application (January 2009 SBC filing) regarding
its SBC to increase its RA factor and its NJCEP factor while maintaining its
effective rate on USF. This filing, if approved, will result in an overall
increase of approximately 0.48 percent per month for an average residential
bill. The January 2009 SBC filing is subject to BPU Staff and Rate Counsel
review and must be approved by the BPU prior to implementing the new SBC
rates.
USF
Through
the USF, eligible customers receive a credit toward their utility bill. The
credits applied to eligible customers are recovered through the USF rider in the
SBC. NJNG recovers carrying costs on deferred USF balances.
In June
2008, the natural gas utilities in New Jersey collectively filed with the BPU to
increase the statewide USF recovery, which was provisionally approved by the BPU
in October 2008. In addition, the BPU approved changes associated with interest
collected on USF deferred balances. The changes had a negligible impact on
NJNG’s customers.
In June
2009, the natural gas utilities in the State of New Jersey collectively filed
with the BPU to decrease the statewide USF, which was approved by the BPU on a
provisional basis, effective October 12, 2009. The USF change decreases the
average monthly bill of a residential heating customer by 0.6
percent.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
MGP
In June
2009, the BPU approved the February 2008 SBC filing, which included recovery of
MGP remediation expenditures incurred through June 30, 2007, resulting in an
expected total annual recovery of $17.7 million. The January 2009 SBC filing
included MGP remediation expenditures incurred through June 30, 2008, resulting
in an expected total annual recovery of $20.7 million. The review of the January
2009 filing is currently pending before the BPU.
NJCEP
The BPU
has established a statewide program to promote energy efficiency and renewable
energy. All New Jersey utilities are required to share in the funding for the
program, which is recoverable from customers through the SBC.
In
October 2008, the BPU released a final Order, updating state utilities’ funding
obligations for the period from January 1, 2009, to December 31, 2012. As a
result, NJNG recorded an obligation and a corresponding regulatory asset at a
present value of $44.3 million in the Unaudited Condensed Consolidated Balance
Sheets. As of December 31, 2009, NJNG had a $38.7 million obligation
remaining.
The
January 2009 SBC filing included an increase to the NJCEP factor. The proposed
factor is expected to recover $12.9 million annually.
Economic
Stimulus
In
January 2009, NJNG filed two petitions with the BPU seeking approval to
implement programs designed to both stimulate the state and local economy
through infrastructure investments and encourage energy efficiency. The
Accelerated Infrastructure Program (AIP) was approved in April 2009, and allows
NJNG to expedite 14 previously planned infrastructure projects, with a cost of
approximately $70.8 million. The projects are designed to maintain safe and
reliable service to NJNG’s customers while creating the opportunity for
approximately 75 to 100 new jobs. Approved as a 2-year program, the AIP will be
funded through an annual adjustment to customers’ base rates with the first
adjustment expected in October 2010. The second filing, for an Energy Efficiency
(EE) Program and associated cost recovery mechanism, requested BPU approval to
implement various programs to encourage energy efficiency for residential and
commercial customers. NJNG proposed to recover the EE Program costs over a
4-year period through a clause mechanism similar to the SBC, of $21.1 million,
if fully subscribed. A true-up to actual EE Program investments and costs is to
be filed with the BPU on an annual basis. The BPU approved the EE Program in
July 2009. Both the AIP and EE Programs include the recovery of NJNG’s overall
weighted average cost of capital on these investments.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Regulatory
Assets & Liabilities
The
Company had the following regulatory assets, all related to NJNG, on the
Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
|
December
31,
2009
|
September
30,
2009
|
Recovery
|
Regulatory
assets–current
|
|
|
|
|
|
WNC
|
$ 60
|
|
$ 78
|
|
(1)
|
CIP
|
4,977
|
|
5,800
|
|
(2)
|
Total
current
|
$ 5,037
|
|
$ 5,878
|
|
|
Regulatory
assets–noncurrent
|
|
|
|
|
|
Remediation
costs (Note 13)
|
|
|
|
|
|
Expended,
net of recoveries
|
$ 81,461
|
|
$ 85,461
|
|
(3)
|
Liability
for future expenditures
|
146,700
|
|
146,700
|
|
(4)
|
CIP
|
3,036
|
|
—
|
|
(2)
|
Deferred
income and other taxes
|
11,560
|
|
11,560
|
|
(2)
|
Derivatives,
net (Note 3)
|
5,763
|
|
8,073
|
|
(5)
|
Energy
Efficiency Program
|
—
|
|
1,174
|
|
(6)
|
New
Jersey Clean Energy Program
|
38,673
|
|
39,369
|
|
(6)
|
Pipeline
Integrity Management (PIM)
|
448
|
|
448
|
|
(7)
|
Postemployment
benefit costs (Note 10)
|
94,570
|
|
94,305
|
|
(8)
|
Other
regulatory assets
|
1,961
|
|
3,935
|
|
(6)
|
Total
noncurrent
|
$384,172
|
|
$391,025
|
|
|
(1)
|
Recoverable
as a result of BPU approval in October 2008, without interest. This
balance reflects the net results from winter period of fiscal 2006. No new
WNC activity is being recorded since October 1, 2006 due to the existence
of the CIP.
|
(2)
|
Recoverable,
subject to BPU annual approval, without interest.
|
(3)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods.
|
(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
with interest, subject to BPU approval.
|
(7)
|
Recoverable,
subject to BPU review and approval in the next base rate case. NJNG is
limited annually to recording a regulatory asset that does not exceed
$700,000. In addition, to the extent that project costs are lower than the
approved PIM annual expense of $1.4 million, NJNG will record a regulatory
liability that will be refundable as a credit to customer’s gas costs when
the net cumulative liability exceeds $1.0 million.
|
(8)
|
Recoverable, subject
to BPU approval, without interest. Includes unrecognized service costs
recorded, that NJNG has determined are recoverable in rates charged to
customers (see Note
10. Employee Benefit
Plans).
|
If there
are any changes in regulatory positions that indicate the recovery of regulatory
assets is not probable, the related cost would be charged to income in the
period of such determination.
The
Company had the following regulatory liabilities, all related to NJNG, on the
Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
|
December
31, 2009
|
September
30, 2009
|
Regulatory
liabilities–current
|
|
|
|
|
Overrecovered
gas costs
(1)
|
$13,852
|
|
$36,203
|
|
Total
current
|
$13,852
|
|
$36,203
|
|
Regulatory
liabilities–noncurrent
|
|
|
|
|
Cost
of removal obligation (2)
|
$55,747
|
|
$56,450
|
|
Energy
Efficiency Program (3)
|
127
|
|
—
|
|
Total
noncurrent
|
$55,874
|
|
$56,450
|
|
(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
$22.8 million, including accretion of $400,000 for the quarter ended
December 31, 2009, of regulatory assets relating to asset retirement
obligations have been netted against the cost of removal obligation as of
December 31, 2009 (see Note
11. Asset Retirement Obligations).
|
(3)
|
Refundable
with interest, subject to BPU
approval.
|
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
3.
|
DERIVATIVE
INSTRUMENTS
|
The
Company and its subsidiaries are subject to commodity price risk due to
fluctuations in the market price of natural gas. To manage this risk, the
Company and its subsidiaries enter into a variety of derivative instruments
including, but not limited to, futures contracts, physical forward contracts,
financial options and swaps to economically hedge the commodity price risk
associated with its existing and anticipated commitments to purchase and sell
natural gas. These contracts, with a few exceptions as described below, are
accounted for as derivatives in accordance with the Derivatives and Hedging
topic (ASC 815) of the ASC. Accordingly, all of the financial and certain of the
Company’s physical derivative instruments are recorded at fair value in the
Unaudited Condensed Consolidated Balance Sheets. Since the Company chooses not
to designate its derivatives as accounting hedges, changes in the fair value of
the derivative instruments are concurrently recorded as a component of gas
purchases or operating revenues, as appropriate for NJRES and NJR Energy, in the
Unaudited Condensed Consolidated Statements of Income as unrealized gains or
losses. For NJRES at settlement, realized gains and losses on all financial
derivative instruments are recognized as a component of gas purchases and
realized gains and losses on all physical derivatives follow the presentation of
the related unrealized gains and losses as a component of either gas purchases
or operating revenues. For NJR Energy, realized gains and losses on all
financial derivatives are recorded as a component of operating
revenues.
Changes
in fair value of NJNG’s derivative instruments, however, are recorded as a
component of regulatory assets or liabilities in accordance with ASC 980 in the
Unaudited Condensed Consolidated Balance Sheets, as NJNG has received regulatory
approval to recover these amounts through future BGSS rates as an increase or
decrease to the cost of natural gas in NJNG’s tariff. For a more detailed
discussion of the Company’s fair value measurement policies and level
disclosures associated with the NJR’s derivative instruments (see Note 4. Fair
Value).
As a
result of entering into transactions to borrow gas, commonly referred to as
“park and loans,” an embedded derivative is created related to potential
differences between the fair value of the amount borrowed and the fair value of
the amount that may ultimately be repaid, based on changes in forward natural
gas prices during the contract term. This embedded derivative is accounted for
as a forward sale in the month in which the repayment of the borrowed gas is
expected to occur, and is considered a physical derivative transaction that is
recorded at fair value on the balance sheet, with changes in value recognized in
current period earnings.
The
Company continues to elect normal treatment on all physical commodity contracts
when appropriate at NJNG and NJR Energy. These contracts are accounted for on an
accrual basis.
The
following table reflects the fair value of NJR's derivative assets and
liabilities recognized in the Unaudited Condensed Consolidated Balance
Sheets:
|
|
Fair
Value
|
|
|
December
31, 2009
|
|
September
30, 2009
|
(Thousands)
|
Balance
Sheet Location
|
Asset
Derivatives
|
Liability
Derivatives
|
|
Asset
Derivatives
|
Liability
Derivatives
|
Derivatives
not designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
NJNG:
|
|
|
|
|
|
|
Financial
derivative commodity contracts
|
Derivatives
- current
|
$ 2,853
|
$ 8,616
|
|
$ 15,801
|
$24,274
|
|
Derivatives
- noncurrent
|
—
|
—
|
|
1,077
|
677
|
NJRES:
|
|
|
|
|
|
|
Physical
forward commodity contracts
|
Derivatives
- current
|
16,298
|
9,478
|
|
22,674
|
10,044
|
|
Derivatives
- noncurrent
|
5,339
|
58
|
|
3,878
|
214
|
Financial
derivative commodity contracts
|
Derivatives
- current
|
82,315
|
39,935
|
|
89,140
|
60,054
|
|
Derivatives
- noncurrent
|
5,428
|
5,192
|
|
4,157
|
5,316
|
NJR
Energy:
|
|
|
|
|
|
|
Financial
derivative commodity contracts
|
Derivatives
- current
|
2,819
|
318
|
|
3,455
|
481
|
|
Derivatives
- noncurrent
|
—
|
—
|
|
424
|
43
|
Total
fair value of derivatives
|
|
$115,052
|
$63,597
|
|
$140,606
|
$101,103
|
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
NJRES
utilizes financial derivatives to economically hedge the margin associated with
the purchase of physical gas for injection into storage and the subsequent sale
of physical gas at a later date. Upon settlement of the financial transaction,
the previously recognized unrealized amounts are adjusted to reflect the final
realized gains (losses) in earnings. However, the gains (losses) on the
financial transactions that are economic hedges of the cost of the purchased gas
are recognized prior to the gains (losses) on the physical transaction, which
are recognized in earnings when the natural gas is sold. Therefore, mismatches
between the timing of the recognition of realized gains or losses on the
financial derivative instruments and gains (losses) associated with the actual
sale of the natural gas that is being economically hedged creates volatility in
the results of NJRES, although the Company’s intended economic results relating
to the entire transaction are unaffected.
Gains
(losses) recognized at NJRES and NJR Energy are as follows:
(Thousands)
|
Location
of Gain or (Loss) Recognized in Income on Derivative
|
Amount
of Gain or (Loss) Recognized in Income on Derivative
|
Derivatives
not designated as hedging instruments under ASC 815:
|
Three
Months Ended
|
|
|
December
31, 2009 (1)
|
|
NJRES:
|
|
|
|
Physical
commodity contracts
|
Operating
revenues
|
$ (354
|
)
|
|
Physical
commodity contracts
|
Gas
purchases
|
(619
|
)
|
|
Financial
derivatives
|
Gas
purchases
|
23,938
|
|
|
Subtotal
NJRES
|
|
22,965
|
|
|
NJR
Energy:
|
|
|
|
|
Financial
derivatives
|
Operating
revenues
|
(1,745
|
)
|
|
Total
NJRES and NJR Energy unrealized and realized gains
|
|
$21,220
|
|
|
(1) Since
the provisions of ASC 815-10-50 did not become effective for NJR until January
1, 2009, there is no comparative data for the three months ended December 31,
2008.
Not
included in the table above, are losses associated with NJNG’s financial
derivatives that totaled $7.9 million for the three months ended December 31,
2009. These derivatives are part of its regulated risk management activities
that serve to mitigate BGSS costs passed on to its customers. As these
transactions are entered into pursuant to and recoverable through regulatory
riders, any changes in the value of NJNG’s financial derivatives are deferred in
regulatory assets or liabilities in accordance with ASC 980 and there is no
impact to earnings.
As of
December 31, 2009 and September 30, 2009, NJNG, NJRES and NJR Energy had the
following outstanding long (short) derivatives:
|
|
Volume
(Bcf)
|
|
|
December
31, 2009
|
September
30, 2009
|
NJNG
|
Futures
|
20.3
|
|
21.4
|
|
|
Swaps
|
(10.0
|
)
|
(14.5
|
)
|
|
Options
|
2.9
|
|
8.0
|
|
NJRES
|
Futures
|
(23.5
|
)
|
(19.8
|
)
|
|
Swaps
|
3.8
|
|
(23.2
|
)
|
|
Options
|
4.6
|
|
4.0
|
|
|
Physical
|
55.1
|
|
58.6
|
|
NJR
Energy
|
Swaps
|
1.9
|
|
2.6
|
|
Generally,
exchange-traded futures contracts require posted collateral, referred to as
margin, usually in the form of cash. The amount of margin required is comprised
of a fixed initial amount based on the contract and a variable amount based on
market price movements from the initial trade price. The Company maintains
broker margin for NJNG and NJRES. The balances are as follows:
(Thousands)
|
Balance Sheet Location
|
December
31, 2009
|
September
30, 2009
|
NJNG
broker margin deposit
|
Broker
margin – Current assets
|
$10,226
|
|
$16,458
|
|
NJRES
broker margin deposit
|
Broker margin – Current assets
|
$ 1,528
|
|
$ 9,792
|
|
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy are exposed to credit risk as a result of their wholesale
marketing activities. NJR monitors and manages the credit risk of its wholesale
marketing operations through credit policies and procedures that management
believes reduce overall credit risk. These policies include a review and
evaluation of current and prospective counterparties’ financial statements
and/or credit ratings, daily monitoring of counterparties’ credit limits and
exposure, daily communication with traders regarding credit status and the use
of credit mitigation measures, such as collateral requirements and netting
agreements. Examples of collateral include letters of credit and cash received
for either prepayment or margin deposit. Collateral may be requested due to
NJR’s election not to extend credit or because exposure exceeds defined
thresholds. Most of NJR’s wholesale marketing contracts contain standard netting
provisions. These contracts include those governed by the International Swaps
and Derivatives Association (ISDA) and the North American Energy Standards Board
(NAESB). The netting provisions refer to payment netting, whereby receivables
and payables with the same counterparty are offset and the resulting net amount
is paid to the party to which it is due.
As a
result of the inherent volatility in the prices of natural gas commodities and
derivatives, the market value of contractual positions with individual
counterparties could exceed established credit limits or collateral provided by
those counterparties. If a counterparty failed to perform the obligations under
its contract (for example, failed to deliver or pay for natural gas), then the
Company could sustain a loss.
The
following is a summary of gross credit exposures grouped by investment and
noninvestment grade counterparties, as of December 31, 2009. Internally-rated
exposure applies to counterparties that are not rated by Standard & Poor’s
(S&P) or Moody’s Investors Service, Inc. (Moody’s). In these cases, the
company’s or guarantor’s financial statements are reviewed, and similar
methodologies and ratios used by S&P and/or Moody’s are applied to arrive at
a substitute rating. Gross credit exposure is defined as the unrealized fair
value of physical and financial derivative commodity contracts plus any
outstanding receivable for the value of natural gas delivered for which payment
has not yet been received. The amounts presented below have not been reduced by
any collateral received or netting and exclude accounts receivable for retail
natural gas sales and services.
(Thousands)
|
Gross
Credit
Exposure
|
Investment
grade
|
$194,779
|
|
Noninvestment
grade
|
9,725
|
|
Internally
rated investment grade
|
29,665
|
|
Internally
rated noninvestment grade
|
7,930
|
|
Total
|
$242,099
|
|
Conversely,
certain of NJNG’s, NJRES’ and NJR Energy’s derivative instruments are tied to
agreements containing provisions that would require cash collateral payments
from the Company if certain events occur. These provisions vary based upon the
terms in individual counterparty agreements and can result in cash payments if
NJNG’s credit rating were to fall below its current level. NJNG’s credit rating,
with respect to S&P’s, reflects the overall corporate credit profile.
Specifically, most, but not all, of these additional payments will be triggered
if NJNG’s debt is downgraded by the major credit agencies, regardless of
investment grade status. As well, some of these agreements include threshold
amounts that would result in additional collateral payments if the values of
derivative liabilities were to exceed the maximum values provided for in
relevant counterparty agreements. Other provisions include payment features that
are not specifically tied to ratings, but are based on certain financial
metrics.
Collateral
amounts associated with any of these conditions, are determined based on a
sliding scale and are contingent upon the degree to which the Company’s credit
rating and/or financial metrics deteriorate, and the extent to which liability
amounts exceed applicable threshold limits. The aggregate fair value of all
derivative instruments with credit-risk-related contingent features that were in
a liability position on December 31, 2009 and September 30, 2009 is $8.3 million
and $22.3 million, respectively, for which the Company had not posted any
collateral. If all the thresholds related to the credit-risk-related contingent
features underlying these agreements had been invoked on December 31, 2009 or
September 30, 2009, the Company would not have been required to post any
additional collateral to its counterparties. These amounts differ from the
respective net derivative liabilities reflected in the Unaudited Condensed
Consolidated Balance Sheets because the credit agreements also include clauses,
commonly known as “Rights of Offset,” that would permit the Company to offset
its derivative assets against its derivative liabilities for determining
additional collateral to be posted.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 are estimated
to equal their carrying amounts due to the short maturity of those instruments.
The estimated fair value of long-term debt, excluding current maturities, is
based on quoted market prices for similar issues and is as follows:
|
December
31,
|
September
30,
|
(Thousands)
|
2009
|
2009
|
Carrying
value
|
$465,600
|
$462,000
|
Fair
market value
|
$480,000
|
$477,900
|
NJR
applies the fair value measurement provisions of ASC 820 to its financial assets
and liabilities, as appropriate, which include financial derivatives and
physical commodity contracts qualifying as derivatives, available for sale
securities and other financial assets and liabilities. In addition, ASC 820
prescribes the use of a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value based on the source of the data
used to develop the price inputs. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
and the lowest priority to inputs that are based on unobservable market data and
include the following:
Level
1
|
Unadjusted
quoted prices for identical assets or liabilities in active markets; NJR’s
Level 1 assets and liabilities include exchange traded financial
derivative contracts, listed equities, and money market
funds.
|
|
|
Level
2
|
Significant
price data, other than Level 1 quotes, that is observed either directly or
indirectly; NJR’s Level 2 assets and liabilities include over-the-counter
physical forward commodity contracts and swap contracts or derivatives
that are initially valued using observable quotes and are subsequently
adjusted to include time value, credit risk or estimated transport pricing
components. These additional adjustments are not considered to be
significant to the ultimate recognized values.
|
|
|
Level
3
|
Inputs
derived from a significant amount of unobservable market data; these
include NJR’s best estimate of fair value and are derived primarily
through the use of internal valuation methodologies. Certain of NJR’s
physical commodity contracts that are to be delivered to inactively traded
points on a pipeline are included in this
category.
|
NJNG’s,
NJRES’ and NJR Energy’s financial derivatives portfolios consist mainly of
futures, options and swaps. NJR primarily uses the market approach and its
policy is to use actively quoted market prices when available. The principal
market for its derivative transactions is the natural gas wholesale market,
therefore, the primary source for its price inputs is the New York Mercantile
(NYMEX) exchange. NJRES also uses Natural Gas Exchange (NGX) for Canadian
delivery points and Platts and NYMEX ClearPort for certain over-the-counter
physical forward commodity contracts. However, NJRES also engages in
transactions that result in transporting natural gas to delivery points for
which there is no actively quoted market price. In these cases, NJRES’ policy is
to use the best information available to determine fair value based on internal
pricing models, which include estimates extrapolated from broker quotes or
pricing services.
NJR
Energy uses NYMEX settlement prices to value its long-dated swap contracts. NJR
also has available for sale securities and other financial assets that include
listed equities, mutual funds and money market funds for which there are active
exchange quotes available.
When NJR
determines fair values, measurements are adjusted, as needed, for credit risk
associated with its counterparties, as well as its own credit risk. NJR
determines these adjustments by using historical default probabilities that
correspond to the applicable Standard and Poor’s issuer ratings, while also
taking into consideration collateral and netting arrangements that serve to
mitigate risk.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Assets
and liabilities measured at fair value on a recurring basis are summarized as
follows:
|
Quoted
Prices in Active
Markets
for Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|
(Thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
As of December 31,
2009:
|
|
|
|
|
Assets:
|
|
|
|
|
Physical
forward commodity contracts
|
$ —
|
|
$21,637
|
|
$—
|
$ 21,637
|
Financial
derivative contracts
|
32,424
|
|
60,991
|
|
—
|
93,415
|
Available
for sale securities
(1)
|
8,514
|
|
—
|
|
—
|
8,514
|
Other
assets
|
1,856
|
|
—
|
|
—
|
1,856
|
Total
assets at fair value
|
$42,794
|
|
$82,628
|
|
$—
|
$125,422
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Physical
forward commodity contracts
|
$ —
|
|
$9,536
|
|
$—
|
$9,536
|
Financial
derivative contracts
|
17,748
|
|
36,313
|
|
—
|
54,061
|
Other
liabilities
|
1,493
|
|
—
|
|
—
|
1,493
|
Total
liabilities at fair value
|
$19,241
|
|
$45,849
|
|
$—
|
$65,090
|
|
|
|
|
|
|
|
As of September 30, 2009:
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Physical
forward commodity contracts
|
$ —
|
|
$26,552
|
|
$—
|
$ 26,552
|
Financial
derivative contracts
|
81,215
|
|
32,839
|
|
—
|
114,054
|
Available
for sale securities
(1)
|
7,872
|
|
—
|
|
—
|
7,872
|
Other
assets
|
1,467
|
|
—
|
|
—
|
1,467
|
Total
assets at fair value
|
$90,554
|
|
$59,391
|
|
$—
|
$149,945
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Physical
forward commodity contracts
|
$ —
|
|
$10,258
|
|
$—
|
$ 10,258
|
Financial
derivative contracts
|
68,443
|
|
22,402
|
|
—
|
90,845
|
Other
liabilities
|
1,467
|
|
—
|
|
—
|
1,467
|
Total
liabilities at fair value
|
$69,910
|
|
$32,660
|
|
$—
|
$102,570
|
(1)
|
Included
in Investments in equity investees in the Unaudited Condensed Consolidated
Balance Sheets.
|
There
were no Level 3 measurements during the three months ended December 31, 2009. A
reconciliation of the beginning and ending balances of NJRES’ derivatives
measured at fair value based on significant unobservable inputs as of December
31, 2008 is as follows:
|
Fair
Value Measurements Using
|
|
Significant
Unobservable Inputs
|
(Thousands)
|
(Level
3)
|
Balance
at October 1, 2008
|
$937
|
|
Total
gains realized and unrealized
|
241
|
|
Purchases,
sales, issuances and settlements, net
|
(572
|
)
|
Net
transfers in and/or out of Level 3
|
(483
|
)
|
Balance
at December 31, 2008
|
$ 123
|
|
|
|
|
Net
unrealized gains included in net loss relating to derivatives still
held
|
$ 123
|
|
5.
|
INVESTMENTS
IN EQUITY INVESTEES
|
NJR’s
Investments in equity investees include the following investments:
(Thousands)
|
December
31,
2009
|
September
30,
2009
|
Steckman
Ridge
|
$135,741
|
|
$131,555
|
|
Iroquois
|
22,120
|
|
21,081
|
|
Other
|
8,514
|
|
7,872
|
|
Total
|
$166,375
|
|
$160,508
|
|
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
NJR uses
the equity method of accounting for its investments in Steckman Ridge and
Iroquois.
NJR’s
investment in Steckman Ridge increased $4.2 million during the three months
ended December 31, 2009, including cash investments of $4.3 million and equity
in earnings of $2.9 million, less cash distributions received of $3 million.
Steckman Ridge became commercially operational during the third quarter of
fiscal 2009 with approximately two-thirds of eventual capacity available for
customer injections.
NJR’s
investment in Iroquois increased as a result of equity in earnings of $1.1
million during the first three months ended December 31, 2009.
NJRES and
NJNG have entered into transportation, storage and park and loan agreements with
Iroquois and Steckman Ridge. See Note 15. Related Party Transactions
for more information on these intercompany transactions.
Other
consists of an investment in equity securities of a publicly traded energy
company and is accounted for as available for sale securities, with any change
in the value of such investment recorded in accumulated other comprehensive
income, a component of common stock equity. Unrealized gains associated with
these equity securities were approximately $378,000, net of tax of $(264,000)
and $545,000, net of tax of $(380,000) for the three months ended December 31,
2009 and 2008, respectively.
The
following table sets forth the calculation of the Company’s basic and diluted
earnings per share:
|
Three
Months Ended
December
31,
|
(Thousands,
except per share amounts)
|
2009
|
2008
|
Net
income, as reported
|
$51,902
|
|
$28,272
|
|
Basic
earnings per share
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,615
|
|
42,170
|
|
Basic
earnings per common share
|
$1.25
|
|
$0.67
|
|
Diluted
earnings per share
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,615
|
|
42,170
|
|
Incremental
shares
(1)
|
386
|
|
325
|
|
Weighted
average shares of common stock outstanding–diluted
|
42,001
|
|
42,495
|
|
Diluted
earnings per common share (2)
|
$1.24
|
|
$0.67
|
|
(1) Incremental
shares consist of stock options, stock awards and performance
units.
(2) There
were no anti-dilutive shares excluded from the calculation of diluted earnings
per share for the three months ended December 2009 and 2008.
NJR
On March
15, 2009, NJR repaid its $25 million, 3.75 percent, Unsecured Senior notes at
maturity.
NJR has a
$325 million unsecured committed credit facility expiring in December 2012. As
of December 31, 2009, NJR had $200.8 million in borrowings outstanding under the
facility.
As of
December 31, 2009, NJR has one letter of credit outstanding, totaling $4
million, on behalf of NJRES, which was used for margin requirements for natural
gas transactions and will expire on June 30, 2010. NJR also has a $675,000
letter of credit outstanding on behalf of CR&R, which will expire on
December 3, 2010. The letter of credit is in place to support development
activities. These letters of credit reduce the amount available under NJR’s
committed credit facility by the same amount. NJR does not anticipate that these
letters of credit will be drawn upon by the counterparties, and they will be
renewed as necessary.
NJNG
On
November 1, 2008, NJNG repaid its $30 million, 6.27 percent, Series X First
Mortgage bonds at maturity.
NJNG’s
agreement for standby letters of credit of up to $50 million expired on December
15, 2009 and was not renewed.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
NJNG’s
$250 million committed credit facility expired in December 2009 and was replaced
with a new $200 million 3-year revolving unsecured committed credit facility on
December 11, 2009. The credit facility is used to support NJNG’s commercial
paper program and provides for the issuance of letters of credit. As of December
31, 2009, NJNG had no outstanding borrowings under the credit
facility.
In August
2009, NJNG filed a petition with the BPU, requesting authorization over a
three-year period to issue debt, renew its expiring credit facility, enter into
interest rate hedging transactions and increase the size of its meter leasing
program should the necessity arise. On December 1, 2009, NJNG received approval
to renew its expiring credit facility, with an allowed duration of up to three
years. The other three requests have authorization from the BPU through
September 30, 2011.
NJNG
received $4.9 million and $6.3 million in December 2009 and 2008, 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.
Neither
NJNG’s assets nor the results of its operations are obligated or pledged to
support the NJR credit facility.
NJRES
NJRES had
a 3-year, $30 million committed credit facility that expired in October 2009 and
was not renewed.
A summary
of NJR’s and NJNG’s long-term debt, committed credit facilities, which require
annual commitment fees, and NJRES’ committed facility that does not require a
commitment fee, are as follows:
|
December
31,
|
September
30,
|
(Thousands)
|
2009
|
2009
|
NJR
|
|
|
|
|
Long
- term debt
|
$ 50,000
|
|
$ 50,000
|
|
Bank
credit facilities (1)
|
$325,000
|
|
$325,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
Notes
payable to banks
|
$200,800
|
|
$143,400
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Notes
payable to banks
|
0.53
|
%
|
0.57
|
%
|
NJNG
|
|
|
|
|
Long
- term debt (2)
|
$349,000
|
|
$349,000
|
|
Bank
credit facilities (1)
|
$200,000
|
|
$250,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
Commercial
paper
|
$ —
|
|
$ —
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Commercial
paper
|
—
|
%
|
—
|
%
|
NJRES
|
|
|
|
|
Bank
credit facilities
(3)
|
$ —
|
|
$30,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
Notes
payable to banks
|
$ —
|
|
$ —
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Notes
payable to banks
|
—
|
%
|
—
|
%
|
(1) Company
is subject to commitment fees on outstanding and unused
amounts.
|
(2) Long-term
debt excludes lease obligations of $65.7 million and $62.2 million at
December 31, 2009 and September 30, 2009, respectively.
|
(3) Facility
expired in October 2009 and was not
renewed.
|
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
8.
|
CAPITALIZED
FINANCING COSTS AND DEFERRED
INTEREST
|
The
Company’s capitalized financing costs totaled $535,000 and $1.1 million for the
three months ended December 31, 2009 and 2008, respectively with average
interest rates of 6.5 percent and 4.8 percent, respectively. Included in the
Unaudited Condensed Consolidated Balance Sheets are capitalized amounts
associated with the debt and equity components of NJNG’s Allowance for funds
used during construction, (AFUDC), which are recorded in utility plant, as well
as capitalized interest recorded in investments in equity investees.
Corresponding amounts recognized in interest expense and other income, as
appropriate, in the Unaudited Condensed Consolidated Statements of Income are as
follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
AFUDC
– Utility plant
|
$535
|
|
$258
|
|
Weighted
average rate
|
6.49
|
%
|
4.00
|
%
|
|
|
|
|
|
Capitalized
interest – Investments in equity investees
|
$ —
|
|
$843
|
|
Weighted
average interest rates
|
—
|
%
|
5.50
|
%
|
NJNG’s
base rates include the ability for NJNG to recover an incremental cost of equity
associated with its AFUDC during periods when its short-term debt balances are
lower than its construction work in progress (CWIP). During the three months
ended December 31, 2009, due to a reduction in NJNG's commercial paper
borrowings relative to its CWIP, NJNG's capitalized costs included $384,000
related to the equity portion of AFUDC. Interest capitalized in utility plant
for the three months ended December 31, 2008, only included the debt component
of AFUDC.
Also
included above is $843,000 of capitalized interest recognized during fiscal 2009
related to NJR’s acquisition, development and construction of the Steckman Ridge
natural gas storage facility, which became operational during the third quarter
of fiscal 2009 (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, RA and USF
expenditures (see Note 2.
Regulation). Accordingly, other income included $470,000 and $563,000 of
interest related to these SBC program costs for the three months ended December
31, 2009 and 2008, respectively.
9.
|
STOCK-BASED
COMPENSATION
|
On
November 18, 2009, the Company granted 29,865 performance shares, which are
market condition awards and 24,312 performance shares, which are subject to
meeting certain performance milestones. Both performance share grants vest on
September 30, 2012 subject to the certain conditions. Also, on November 18, 2009
the Company granted 24,312 restricted shares which vest in three equal
installments on October 15, 2010, and on each of the two subsequent
anniversaries of that date. As of December 31, 2009, 2,249,289 and 94,762 shares
remain available for future issuance to employees and directors,
respectively.
During
the first three months of fiscal 2010, included in operation and maintenance
expense is $630,000 related to stock based compensation. There is approximately
$3.4 million of deferred compensation expense related to unvested shares,
options and performance units that are expected to be recognized over the next
three years.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
10.
|
EMPLOYEE
BENEFIT PLANS
|
Pension
and Other Postemployment Benefit Plans (OPEB)
The
components of the net periodic cost for pension benefits, including NJR’s
Pension Equalization Plan, and OPEB costs (principally health care and life
insurance) for employees and covered dependents were as follows:
|
Pension
|
OPEB
|
|
Three
Months Ended
December
31,
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Service
cost
|
$ 992
|
|
$ 678
|
|
$ 704
|
|
$ 584
|
|
Interest
cost
|
2,049
|
|
1,937
|
|
1,204
|
|
1,006
|
|
Expected
return on plan assets
|
(2,577
|
)
|
(2,188
|
)
|
(485
|
)
|
(647
|
)
|
Recognized
actuarial loss
|
681
|
|
139
|
|
570
|
|
319
|
|
Prior
service cost amortization
|
14
|
|
14
|
|
19
|
|
20
|
|
Transition
obligation amortization
|
—
|
|
—
|
|
89
|
|
89
|
|
Net
periodic cost
|
$1,159
|
|
$ 580
|
|
$2,101
|
|
$1,371
|
|
The
Company does not expect to be required to make additional contributions to fund
the pension plans over the next three fiscal years based on current actuarial
assumptions; 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. In
addition, as in the past, the Company may elect to make contributions in excess
of the minimum required amount to the plans. NJR made a discretionary
contribution of $4.4 million to the pension plans on October 1, 2009. It is
anticipated that the annual funding level to the OPEB plans will range from $6.1
million to $6.4 million over the next three years. Additional contributions may
vary based on market conditions and various assumptions.
11.
|
ASSET
RETIREMENT OBLIGATIONS (ARO)
|
NJR
recognizes AROs related to the costs associated with cutting and capping its
main and service gas distribution pipelines of NJNG, which is required by New
Jersey law when taking such gas distribution pipelines out of
service.
The
following is an analysis of the change in the ARO liability for the three month
period ended December 31, 2009:
(Thousands)
Balance
at October 1, 2009
|
$25,097
|
|
Accretion
|
391
|
|
Additions
|
—
|
|
Retirements
|
(38
|
)
|
Balance
at December 31, 2009
|
$25,450
|
|
Accretion
amounts are not reflected as an expense on NJR’s Unaudited Condensed
Consolidated Statements of Income, but rather are deferred as a regulatory asset
and netted against NJNG’s regulatory liabilities, for presentation purposes, on
the Unaudited Condensed Consolidated Balance Sheet.
The
Company’s federal income tax returns through fiscal 2006 have either been
reviewed by the Internal Revenue Service (IRS), or the related statute of
limitations has expired and all matters have been settled. The IRS has not yet
begun to examine returns subsequent to fiscal 2006. Currently the Company has no
reason to believe that there will be any new additions to the reserve related to
uncertain tax positions.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
13.
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
Cash
Commitments
NJNG has
entered into long-term contracts, expiring at various dates through 2024, for
the supply, storage and delivery of natural gas. These contracts include current
annual fixed charges of approximately $98.6 million at current contract rates
and volumes, which are recoverable through the BGSS.
For the
purpose of securing adequate storage and pipeline capacity, NJRES enters into
storage and pipeline capacity contracts, which require the payment of certain
demand charges by NJRES, in order to maintain the ability to access such natural
gas storage or pipeline capacity, during a fixed time period, which generally
range from one to five years. Demand charges are based on established rates as
regulated by the 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.
Commitments
as of December 31, 2009, for natural gas purchases and future demand fees, for
the next five fiscal year periods, are as follows:
(Thousands)
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
NJRES:
|
|
|
|
|
|
|
Natural
gas purchases
|
$389,751
|
$134,340
|
$118,213
|
$ 10,013
|
$ —
|
$ —
|
Pipeline
demand fees
|
28,868
|
20,940
|
13,443
|
8,619
|
4,435
|
9,709
|
Storage
demand fees
|
31,470
|
22,785
|
12,306
|
11,653
|
7,636
|
24,009
|
Sub-total
NJRES
|
$450,089
|
$178,065
|
$143,962
|
$ 30,285
|
$12,071
|
$ 33,718
|
NJNG:
|
|
|
|
|
|
|
Natural
gas purchases
|
$101,295
|
$1,727
|
$ —
|
$ —
|
$ —
|
$ —
|
Pipeline
demand fees
|
16,454
|
18,435
|
13,349
|
10,456
|
5,561
|
1,173
|
Storage
demand fees (1)
|
56,342
|
80,477
|
74,450
|
74,654
|
70,034
|
256,506
|
Sub-total
NJNG
|
$174,091
|
$100,639
|
$ 87,799
|
$ 85,110
|
$75,595
|
$257,679
|
Total
|
$624,180
|
$278,704
|
$231,761
|
$115,395
|
$87,666
|
$291,397
|
(1)
|
In
January 2010, NJNG entered into a 10-year agreement for storage capacity
with Steckman Ridge. The demand fees noted above do not include fees of
approximately $9.3 million that will be payable annually to Steckman
Ridge.
|
Costs for
storage and pipeline demand fees, included as a component of gas purchases on
the Unaudited Condensed Consolidated Statements of Income, are as
follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
|
2008
|
|
NJRES
|
$29.3
|
|
$28.9
|
|
NJNG
|
23.2
|
|
20.5
|
|
Total
|
$52.5
|
|
$49.4
|
|
NJNG’s
capital expenditures are estimated at $106.6 million for fiscal 2010, of which
approximately $15.5 million has been committed, and $79.0 million for fiscal
2011, and consist primarily of its construction program to support customer
growth, maintenance of its distribution systems and replacement needed under
pipeline safety regulations. Fiscal 2010 and 2011 include an estimated $44.2 and
$20.6 million, respectively, related to AIP construction costs.
The
Company’s future minimum lease payments under various operating leases are less
than $2.8 million annually for the next five years and $1.5 million in the
aggregate for all years thereafter.
Guarantees
As of
December 31, 2009, there were NJR guarantees covering approximately $322 million
of natural gas purchases and demand fee commitments of NJRES and NJNG not yet
reflected in accounts payable on the Unaudited Condensed Consolidated Balance
Sheet.
The
Company enters into agreements to lease vehicles, generally over five-year
terms, which qualify as operating leases. These agreements contain provisions
that could require the Company to make additional cash payments at the end of
the term for a portion of the residual value of the vehicles. As of December 31,
2009, the present value of the liability recognized on the Unaudited Condensed
Consolidated Balance Sheets is $409,000. In the event performance under the
guarantee is required, the Company’s maximum future payment would be
$683,000.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Legal
Proceedings
Manufactured
Gas Plant Remediation
NJNG is
responsible for the remedial cleanup of five Manufactured Gas Plant (MGP) sites,
dating back to gas operations in the late 1800s and early 1900s, which contain
contaminated residues from former gas manufacturing operations. NJNG is
currently involved in administrative proceedings with the New Jersey Department
of Environmental Protection (NJDEP), as well as participating in various studies
and investigations by outside consultants to determine the nature and extent of
any such contaminated residues and to develop appropriate programs of remedial
action, where warranted, under Administrative Consent Orders or Memoranda of
Agreement with the NJDEP.
NJNG may,
subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to the RA approved by
the BPU. On January 27, 2009, NJNG filed an application regarding its SBC
including MGP remediation expenditures incurred through September 30, 2008
resulting in an expected annual recovery of $20.7 million. As of December 31,
2009, $81.5 million of previously incurred remediation costs, net of recoveries
from customers and insurance proceeds, are included in regulatory assets on the
Unaudited Condensed Consolidated Balance Sheet.
In
September 2009, NJNG updated an environmental review of the MGP sites, including
a review of potential liability for investigation and remedial action. NJNG
estimated at the time of the review that total future expenditures to remediate
and monitor the five MGP sites for which it is responsible will range from
approximately $146.7 million to $244.3 million. NJNG’s estimate of these
liabilities is based upon known facts, existing technology and enacted laws and
regulations in place when the review was completed. However, NJNG expects actual
costs to differ from these estimates. Where it is probable that costs will be
incurred, but the information is sufficient only to establish a range of
possible liability, and no point within the range is more likely than any other,
it is NJNG’s policy to accrue the lower end of the range. Accordingly, NJNG has
recorded an MGP remediation liability and a corresponding regulatory asset of
$146.7 million on the Unaudited Condensed Consolidated Balance Sheet. The actual
costs to be incurred by NJNG are dependent upon several factors, including final
determination of remedial action, changing technologies and governmental
regulations, the ultimate ability of other responsible parties to pay and any
insurance recoveries.
NJNG is
presently investigating the potential settlement of alleged Natural Resource
Damage claims that might be brought by the NJDEP concerning the five MGP sites.
NJDEP has not made any specific demands for compensation for alleged injury to
groundwater or other natural resources. NJNG’s evaluation of these potential
claims is in the early stages, and it is not yet possible to quantify the amount
of compensation, if any that NJDEP might seek to recover. NJNG anticipates any
costs associated with this matter would be recoverable through the
RA.
NJNG will
continue to seek recovery of MGP-related costs through the RA. If any future
regulatory position indicates that the recovery of such costs is not probable,
the related cost would be charged to income in the period of such determination.
However, because recovery of such costs is subject to BPU approval, there can be
no assurance as to the ultimate recovery through the RA or the impact on the
Company’s results of operations, financial position or cash flows, which could
be material.
General
The
Company is party to various other claims, legal actions and complaints arising
in the ordinary course of business. In the Company’s opinion, the ultimate
disposition of these matters will not have a material adverse effect on its
financial condition, results of operations or cash flows.
14.
|
BUSINESS
SEGMENT AND OTHER OPERATIONS DATA
|
As stated
on Note 1. General, NJR
established Midstream Assets as a new reportable segment to reflect the way it
currently views and manages its investments in Iroquois, a natural gas pipeline
operating with regulated rates, and Steckman Ridge, a storage facility that
operates under market-based rates. Consequently, the results of operations,
assets and other financial information for Iroquois and Steckman Ridge,
previously included in Retail and Other operations, are now reported as
components of the Midstream Assets segment. As required, prior year information
for both Midstream Assets and Retail and Other operations has been restated
below to be consistent with current year presentation.
NJR
organizes its businesses based on its products and services as well as
regulatory environment. As a result, the Company chooses to manage the
businesses through the following reportable segments and other
operations: 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; as
noted above, the Midstream Asset segment consists of NJR’s investments in
natural gas transportation and storage facilities; the Retail and Other
operations consist of appliance and installation services, commercial real
estate development, investments and other corporate activities.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Information
related to the Company’s various business segments and other operations,
excluding capital expenditures at NJNG of $11.4 million and at Retail and Other
of $17,000, and investments in equity method investees of $157.9 million at
Midstream Assets, is detailed below.
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Operating
revenues
|
|
|
|
|
Natural
Gas Distribution
|
$258,475
|
|
$ 340,908
|
|
Energy
Services
|
347,477
|
|
463,094
|
|
Midstream
Assets
|
—
|
|
—
|
|
Segment
subtotal
|
605,952
|
|
804,002
|
|
Retail
and Other
|
6,044
|
|
(2,654
|
)
|
Eliminations
|
(2,450
|
)
|
(44
|
)
|
Total
|
$609,546
|
|
$801,304
|
|
Depreciation
and amortization
|
|
|
|
|
Natural
Gas Distribution
|
$7,660
|
|
$7,161
|
|
Energy
Services
|
50
|
|
51
|
|
Midstream
Assets
|
1
|
|
—
|
|
Segment
subtotal
|
7,711
|
|
7,212
|
|
Retail
and Other
|
158
|
|
149
|
|
Total
|
$7,869
|
|
$7,361
|
|
Interest
income (1)
|
|
|
|
|
Natural
Gas Distribution
|
$474
|
|
$658
|
|
Energy
Services
|
2
|
|
127
|
|
Midstream
Assets
|
220
|
|
—
|
|
Segment
subtotal
|
696
|
|
785
|
|
Retail
and Other
|
—
|
|
6
|
|
Eliminations
|
(217
|
)
|
(110
|
)
|
Total
|
$479
|
|
$681
|
|
Interest
expense, net of capitalized interest
|
|
|
|
|
Natural
Gas Distribution
|
$4,251
|
|
$6,460
|
|
Energy
Services
|
262
|
|
86
|
|
Midstream
Assets
|
830
|
|
31
|
|
Segment
subtotal
|
5,343
|
|
6,577
|
|
Retail
and Other
|
74
|
|
80
|
|
Eliminations
|
—
|
|
(110
|
)
|
Total
|
$5,417
|
|
$6,547
|
|
Income
tax provision
|
|
|
|
|
Natural
Gas Distribution
|
$14,444
|
|
$ 13,336
|
|
Energy
Services
|
17,285
|
|
6,832
|
|
Midstream
Assets
|
(348
|
)
|
(37
|
)
|
Segment
subtotal
|
31,381
|
|
20,131
|
|
Retail
and Other
|
(772
|
)
|
(4,282
|
)
|
Eliminations
|
320
|
|
(45
|
)
|
Total
|
$30,929
|
|
$15,804
|
|
Equity
in earnings of affiliates, net of taxes
|
|
|
|
|
Natural
Gas Distribution
|
$ —
|
|
$ —
|
|
Energy
Services
|
—
|
|
—
|
|
Midstream
Assets (net of taxes of $1.6 million and $354,000,
respectively)
|
2,335
|
|
538
|
|
Segment
subtotal
|
2,335
|
|
538
|
|
Retail
and Other
|
—
|
|
—
|
|
Eliminations
|
(591
|
)
|
(24
|
)
|
Total
|
$1,744
|
|
$514
|
|
(1) Included
in Other income in the Unaudited Condensed Consolidated Statement of
Income.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Net
financial earnings
|
|
|
|
|
Natural
Gas Distribution
|
$23,502
|
|
$ 23,074
|
|
Energy
Services
|
2,494
|
|
9,383
|
|
Midstream
Assets
|
1,876
|
|
454
|
|
Segment
subtotal
|
27,872
|
|
32,911
|
|
Retail
and Other
|
(459
|
)
|
(433
|
)
|
Total
|
$27,413
|
|
$32,478
|
|
The chief
operating decision maker of the Company is the Chief Executive Officer (CEO).
The CEO uses net financial earnings as a measure of profit or loss in measuring
the results of the Company’s segments and operations. A reconciliation of
consolidated net financial earnings to consolidated net income, for the three
months ended December 31, 2009 and 2008, respectively, is as
follows:
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2009
|
2008
|
Consolidated
net financial earnings
|
$27,413
|
|
$32,478
|
|
Less:
|
|
|
|
|
Unrealized
(gain) loss from derivative instruments and related transactions, net of
taxes(1)
|
(4,105
|
)
|
6,812
|
|
Effects
of economic hedging related to natural gas inventory and certain demand
fees, net of taxes
|
(20,384
|
)
|
(2,606
|
)
|
Consolidated
net income
|
$51,902
|
|
$28,272
|
|
(1)
Excludes unrealized (gain) of $158,000 related to an intercompany transaction
between NJNG and NJRES that has been eliminated in consolidation.
The
company uses derivative instruments as economic hedges of purchases and sales of
physical gas inventory. For GAAP purposes, these derivatives are recorded at
fair value and related changes in fair value are included in reported earnings.
Revenues and cost of gas related to physical gas flow is recognized as the gas
is delivered to customers. Consequently, there is a mismatch in the timing of
earnings recognition between the economic hedges and physical gas flows. Timing
differences occur in two ways:
Ÿ
|
Unrealized
gains and losses on derivatives are recognized in reported earnings in
periods prior to physical gas inventory flows; and
|
|
|
Ÿ
|
Unrealized
gains and losses of prior periods are reclassified as realized gains and
losses when derivatives are settled in the same period as physical gas
inventory movements occur.
|
Net
financial earnings is a measure of the earnings based on eliminating these
timing differences, to effectively match the earnings effects of the economic
hedges with the physical sale of gas. Consequently, to reconcile between GAAP
and net financial earnings, current period unrealized gains and losses on the
derivatives are excluded from net financial earnings as a reconciling item.
Additionally, realized derivative gains and losses are also included in current
period net income, however net financial earnings include only realized gains
and losses related to natural gas sold out of inventory, effectively matching
the full earnings effects of the derivatives with realized margins on physical
gas flows.
The
Company’s assets for the various business segments and business operations are
detailed below:
|
December
31,
|
September
30,
|
(Thousands)
|
2009
|
2009
|
Assets
at end of period:
|
|
|
|
|
Natural
Gas Distribution
|
$1,762,195
|
|
$1,797,165
|
|
Energy
Services
|
463,668
|
|
327,532
|
|
Midstream
Assets
|
158,775
|
|
153,609
|
|
Segment
Subtotal
|
2,384,638
|
|
2,278,306
|
|
Retail
and Other
|
69,741
|
|
69,411
|
|
Intercompany
assets
(1)
|
(22,750
|
)
|
(26,687
|
)
|
Total
|
$2,431,629
|
|
$2,321,030
|
|
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified
in consolidation
|
NJRES’
assets increased 41.6 percent from September 30, 2009 to December 31, 2009, due
primarily to higher receivables resulting from increases in commodity prices and
higher inventory values resulting from increases in weighted average cost of gas
in storage coupled with an increase in volumes.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
15.
|
RELATED
PARTY TRANSACTIONS
|
During
fiscal 2009, NJRES entered into park and loan agreements and firm storage
contracts with Steckman Ridge, an affiliated FERC regulated natural gas storage
facility, for up to 2 Bcf of natural gas storage with various terms ranging from
April 2009 to March 2010. NJRES will incur demand fees, at market rates, payable
to Steckman Ridge aggregating approximately $5.8 million annually.
In
December 2009, NJNG and NJRES entered into an asset management agreement that
begins in January 2010 and ends in March 2013. Under the terms of this
agreement, NJNG will release certain transportation and storage contracts to
NJRES for the entire term of the agreement. NJNG also will sell approximately 1
Bcf of natural gas in storage at cost to NJRES. In return, NJNG will receive
capacity release payments and will also have the option to purchase index priced
gas at certain delivery locations to maintain operational
reliability.
In
January 2010, NJNG entered into a 10-year agreement beginning April 1, 2010
through March 31, 2020, for 3 Bcf of firm storage capacity with Steckman Ridge.
Under the terms of the agreement, NJNG will incur demand fees, at market rates,
of approximately $9.3 million annually. These fees are recoverable through
NJNG’s BGSS mechanism.
As of
December 31, 2009, NJRES had total fees payable to Steckman Ridge in the amount
of $910,000. Demand fees expensed as a component of gas purchases in the
Unaudited Condensed Consolidated Statements of Income during the three months
ended December 31, 2009 were $1.7 million. There were no intercompany
transactions with Steckman Ridge during the three months ended December 31,
2008.
At
December 31, 2009, there were 41,632,804 shares of common stock outstanding and
the book value per share was $17.36.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
Management’s
Overview
New
Jersey Resources Corporation (NJR or the Company) is an energy services holding
company providing retail natural gas service in New Jersey and wholesale natural
gas and related energy services to customers in states from the Gulf Coast and
Mid-Continent regions to the New England region, the West Coast and Canada
through its two principal subsidiaries, New Jersey Natural Gas (NJNG) and NJR
Energy Services (NJRES).
Comprising
the Natural Gas Distribution segment, NJNG is a natural gas utility that
provides regulated retail natural gas service in central and northern New Jersey
and also participates in the off-system sales and capacity release markets. NJNG
is regulated by the New Jersey Board of Public Utilities (BPU).
NJRES
comprises the Energy Services segment. NJRES maintains and transacts around a
portfolio of physical assets consisting of natural gas storage and
transportation contracts. In addition, NJRES provides wholesale energy services
to non-affiliated utility and energy companies.
Effective
October 1, 2009, NJR established Midstream Assets as a reportable segment to
reflect the way it currently views and manages growth opportunities associated
with natural gas transportation and storage facilities. Specifically, the
Midstream Asset segment includes NJR Energy Holdings Corporation (NJREH), which
primarily invests in energy-related ventures through its subsidiaries, NJNR
Pipeline Company (Pipeline), which holds the Company’s 5.53 percent ownership
interest in Iroquois Gas and Transmission System, L.P. (Iroquois) and 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 was jointly developed and
is being marketed with a partner in Pennsylvania. The results of operations,
assets and other financial information for Iroquois and Steckman Ridge,
previously included in Retail and Other operations, are now reported as
components of the Midstream Assets segment. As a result, prior year information
for both Midstream Assets and Retail and Other operations has been restated to
be consistent with current year presentation,
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
The
retail and other business operations (Retail and Other) includes; NJR Energy
Corporation (NJR Energy), a company that invests in energy-related ventures, NJR
Clean Energy Ventures, a company that will invest in clean energy projects, NJR
Home Services (NJRHS), which provides service, sales and installation of
appliances; NJR Plumbing Services (NJRPS), which provides plumbing repair and
installation services, Commercial Realty and Resources (CR&R), which holds
and develops commercial real estate; and NJR Service Corporation (NJR Service),
which provides support services to the various NJR businesses.
Assets by
business segment and operations are as follows:
(Thousands)
|
December
31,
2009
|
September
30,
2009
|
Assets:
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$1,762,195
|
|
72
|
%
|
$1,797,165
|
|
77
|
%
|
Energy
Services
|
463,668
|
|
19
|
|
327,532
|
|
14
|
|
Midstream
Assets
|
158,775
|
|
7
|
|
153,609
|
|
7
|
|
Retail
and Other
|
69,741
|
|
3
|
|
69,411
|
|
3
|
|
Intercompany
assets
(1)
|
(22,750
|
)
|
(1
|
)
|
(26,687
|
)
|
(1
|
)
|
Total
|
$2,431,629
|
|
100
|
%
|
$2,321,030
|
|
100
|
%
|
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified
in consolidation
|
Net
income (loss) by business segment and operations are as follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$23,502
|
|
45
|
%
|
$23,074
|
|
82
|
%
|
Energy
Services
|
27,644
|
|
53
|
|
10,882
|
|
38
|
|
Midstream
Assets
|
1,876
|
|
4
|
|
454
|
|
2
|
|
Retail
and Other
|
(962
|
)
|
(2
|
)
|
(6,138
|
)
|
(22
|
)
|
Intercompany
net income
(1)
|
(158
|
)
|
—
|
|
—
|
|
—
|
|
Total
|
$51,902
|
|
100
|
%
|
$28,272
|
|
100
|
%
|
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified
in consolidation
|
Included
in net income are unrealized gains (losses) in the Energy Services segment of
$4.8 million and $(1.1) million, after taxes, for the three months ended
December 31, 2009 and 2008, respectively. Also included in net income are
realized gains of $20.4 million and $2.6 million, after taxes, for the three
months ended December 31, 2009 and 2008, respectively, which are related to
financial derivative instruments that have settled and are designed to
economically hedge natural gas that is still in inventory.
NJR
Energy records unrealized losses and gains with respect to the change in fair
value of the financial natural gas swaps that are used to economically hedge a
long-term natural gas sale contact. Included in net income in Retail and Other
are unrealized (losses) of $(503,000) and $(5.7) million, after taxes, for the
three months ended December 31, 2009 and 2008, respectively.
NJRES and
NJR Energy account for their financial derivative instruments used to
economically hedge the forecasted purchase, sale and transportation of natural
gas at fair value. In addition, all physical commodity contracts at NJRES are
accounted for at fair value on the Unaudited Condensed Consolidated Balance
Sheets, with changes in fair value included as a component of operating revenue
and gas purchases, as appropriate, on the Unaudited Condensed Consolidated
Statements of Income. All physical commodity contracts at NJNG and NJR Energy
are accounted for under accrual accounting. Accordingly, gains (losses) are
recognized in earnings when the contract settles and the natural gas is
delivered.
Unrealized
losses and gains at NJRES and NJR Energy are the result of changes in the fair
value of derivative instruments. The change in fair value of these derivative
instruments at NJRES and NJR Energy over periods of time can result in
substantial volatility in reported net income. When a financial instrument
settles, the result is the realization of these gains or losses. NJRES utilizes
certain financial instruments to economically hedge natural gas inventory placed
into storage that will be sold at a later date, all of which were contemplated
as part of an entire forecasted transaction. Volatility in earnings also occurs
as a result of timing differences between the settlement of the financial
derivative and the sale of the corresponding natural gas that was hedged with
the financial instrument. When the financial instrument settles and the natural
gas is placed in inventory, the realized gains (losses) associated with the
financial instrument are recognized in earnings. However, the gains (losses)
associated with the economically hedged natural gas are not recognized in
earnings until the natural gas inventory is sold.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Natural
Gas Distribution Segment
Natural
Gas Distribution operations have been managed with the goal of growing
profitably and providing safe and reliable service through several key
initiatives including:
Ÿ
|
Earning
a reasonable rate of return on the investments in its natural gas
distribution system, as well as recovery of all prudently incurred costs
in order to provide safe and reliable service throughout NJNG’s service
territory;
|
|
|
Ÿ
|
Working
with the BPU and the Department of the Public Advocate, Division of Rate
Counsel (Rate Counsel) on the implementation and continuing review and
recently approved extension of the Conservation Incentive Program (CIP).
The CIP allows NJNG to promote conservation programs to its customers
while maintaining protection of its utility gross margin against potential
losses associated with reduced customer usage. CIP usage differences are
calculated annually and are recovered one year following the end of the
CIP usage year;
|
|
|
Ÿ
|
Managing
the new customer growth rate which is expected to be approximately 1.2
percent annually over the next two years. In fiscal 2010 and 2011, NJNG
currently expects to add, in total, approximately 12,000 to 14,000 new
customers. The Company believes that this stable growth would increase
utility gross margin under its base rates as provided by approximately
$3.4 million annually, as calculated under NJNG’s CIP
tariff;
|
|
|
Ÿ
|
Opportunity
to generate earnings from various BPU-authorized gross margin-sharing
incentive programs; and
|
|
|
Ÿ
|
Managing
the volatility of wholesale natural gas prices through a hedging program
designed to keep customers’ Basic Gas Supply Service (BGSS) rates as
stable as possible.
|
In
October 2008, the BPU unanimously approved and made effective certain changes in
the design of NJNG’s base rates. As a result, NJNG received a revenue increase
in its base rates of $32.5 million, which is inclusive of an approximate $13
million impact of a change to the CIP baseline usage rate. Other changes
included an allowed rate of return of 7.76 percent that includes a return on
equity component of 10.3 percent and a reduction to NJNG’s depreciation expense
component.
The CIP
allows NJNG to recover utility gross margin variations related to both weather
and customer usage. Recovery of such margin variations is subject to additional
conditions including an earnings test, which includes a return on equity
component of 10.3 percent, and an evaluation of BGSS-related savings achieved.
An annual review of the CIP must be filed in June of each year, coincident with
NJNG’s annual BGSS filing.
In
October 2008, the BPU provisionally approved recovery of an additional $6.8
million of accrued margin for the CIP, resulting in a total recovery of $22.4
million, which included amounts accrued and estimated through September 30,
2008. In June 2009, the BPU issued their final order approving NJNG’s recovery
of $6.8 million of CIP rates for fiscal 2008. In addition, NJNG filed its annual
BGSS and CIP filing for recoverable CIP amounts for fiscal 2009, requesting
approval to modify its CIP recovery rates effective October 1, 2009, resulting
in total annual recovery requested for fiscal 2009 of $6.9 million, representing
amounts accrued and estimated through September 30, 2009. In September 2009, the
BPU provisionally approved the rates. As of December 31, 2009, NJNG has $8
million related to CIP accrued to be recovered in regulatory assets in the
Unaudited Condensed Consolidated Balance Sheets.
In April,
2009, NJNG filed a letter with the BPU requesting a 1-year extension to its CIP
through October 1, 2010. As a result of no action by the BPU as of October 1,
2009, the CIP remained in effect for an additional year. Subsequently, in
December 2009, NJNG submitted a petition requesting approval from the BPU for an
extension of its CIP mechanism, as currently structured, through September 30,
2013. On January 20, 2010, the BPU approved the extension of the CIP through
September 30, 2013.
NJNG
occasionally adjusts its periodic BGSS rates for its residential and small
commercial customers to reflect increases or decreases in the cost of natural
gas sold to customers. In addition, to manage the cost of natural gas to
customers during periods when the commodity cost declines in comparison to the
established BGSS rate, NJNG will issue credits or refunds to its customers.
During the second quarter of fiscal 2009, NJNG provided approximately $45
million of rate credits to BGSS residential and small commercial customers and
during the first quarter of fiscal 2010 NJNG provided refunds of approximately
$37.4 million. On January 19, 2010, NJNG notified the BPU that bill credits in
the amount of $37.5 million will be provided to residential and small commercial
sales customers, based on individual customer usage, in February 2010 and March
2010.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
In
conducting NJNG’s business, management focuses on factors it believes may have
significant influence on its future financial results. NJNG’s policy is to work
with all stakeholders, including customers, regulators and policymakers, to
achieve favorable results. These factors include the rate of NJNG’s customer
growth in its service territory, which can be influenced by general economic
conditions as well as political and regulatory policies that may impact the new
housing market. A portion of NJNG’s customer growth comes from the conversion
market, which is influenced by the delivered cost of natural gas compared with
competing fuels, interest rates and other economic conditions.
As a
regulated company, NJNG is required to recognize the impact of regulatory
decisions on its financial statements. As a result, significant costs are
deferred and treated as regulatory assets, pending BPU decisions regarding their
ultimate recovery from customers. The most significant costs incurred that are
subject to this accounting treatment include manufactured gas plant (MGP)
remediation costs and wholesale natural gas costs (recovered through BGSS).
Actual remediation costs may vary from management’s estimates due to the
developing nature of remediation requirements, regulatory decisions by the New
Jersey Department of Environmental Protection (NJDEP) and related litigation. If
there are changes in the regulatory position on the recovery of these costs,
such costs would be charged to income in the period of such
determination.
In April
2009, the BPU approved NJNG’s Accelerated Infrastructure Program (AIP)
permitting NJNG to commence construction on 14 infrastructure projects. NJNG
will make a filing for the recovery of infrastructure program investment costs
in June 2010 to be effective October 1, 2010. The filing will allow the recovery
of costs of the AIP construction activities for the period ending August 31,
2010, including the recovery of NJNG’s overall weighted cost of capital on these
investments.
In July
2009, the BPU approved NJNG’s Energy Efficiency (EE) Program allowing
approximately $21.1 million, if fully subscribed, to support three EE Programs.
A Tariff Rider Mechanism was approved by the BPU related to the recovery of the
EE Program costs, effective August 1, 2009, and includes the recovery of NJNG’s
overall weighted cost of capital on these investments.
Due to
the capital-intensive nature of NJNG’s operations and the seasonal nature of its
working capital requirements, significant changes in interest rates can also
impact NJNG’s results.
Energy
Services Segment
NJRES
provides unregulated wholesale energy services and engages in the business of
optimizing natural gas storage and transportation assets. The rights to these
assets are contractually acquired in anticipation of delivering natural gas or
performing asset management activities for customers or in conjunction with
identifying arbitrage opportunities that exist in the marketplace. These
arbitrage opportunities occur as a result of price differences between market
locations and/or time horizons. These activities are conducted in the areas in
which we have expertise and include states from the Gulf Coast and Mid-continent
regions to the Appalachian and Northeast regions, the West Coast and
Canada.
More
specifically, NJRES activities consist of the following elements which provide
for growth, while focusing on maintaining a low-risk operating and counterparty
credit profile:
Ÿ
|
Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences of natural gas
prices to generate gross margin;
|
|
|
Ÿ
|
Providing
natural gas portfolio management services to nonaffiliated utilities and
electric generation facilities;
|
|
|
Ÿ
|
Leveraging
transactions for the delivery of natural gas to customers by aggregating
the natural gas commodity costs and transportation costs in order to
minimize the total cost required to provide and deliver natural gas to
NJRES’ customers by identifying the lowest cost alternative with the
natural gas supply, transportation availability and markets to which NJRES
is able to access through its business footprint and contractual asset
portfolio; and
|
|
|
Ÿ
|
Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
|
NJRES
views “financial margin” as a financial measurement metric. NJRES’ financial
margin, which is a non-GAAP financial measure, represents revenues earned from
the sale of natural gas less costs of natural gas sold, transportation and
storage, and excludes any accounting impact from the change in fair value of
derivative instruments designed to hedge the economic impact of its transactions
that have not been settled, which represent unrealized gains and losses, and the
effects of economic hedging on the value of our natural gas in storage. NJRES
uses financial margin to gauge operating results against established benchmarks
and earnings targets as it eliminates the impact of volatility in GAAP earnings
that can occur prior to settlement of the physical commodity portion of the
transactions or as a result of conditions in the markets and therefore is more
representative of the overall expected economic result.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
NJRES
focuses on creating value from underutilized natural gas assets, which are
typically amassed through contractual rights to natural gas transportation and
storage capacity. NJRES has developed a portfolio of natural gas storage and
transportation capacity in states in the Northeast, Gulf Coast, Mid-continent,
Appalachian, and West Coast regions of the United States and Canada. These
assets become more valuable when prices change between these areas and across
time periods. NJRES is able to capture financial margin by locking in the
differential between purchasing natural gas at a low future price and, in a
related transaction, selling that natural gas at a higher future price, all
within the constraints of its risk management policies. In addition, NJRES seeks
to optimize these assets on a daily basis as market conditions change by
evaluating all the natural gas supplies, transportation and opportunities to
which it has access. This enables NJRES to capture geographic pricing
differences across these various regions as delivered natural gas prices change
as a result of market conditions. NJRES focuses on earning a financial margin on
a single original transaction and then utilizing that transaction and the
changes in prices across the regions or across time periods, as the basis to
further improve the initial result.
NJRES
transacts with a variety of counterparties including local distribution
companies, industrial companies, electric generators, retail aggregators and
other wholesale marketing companies. The physical sales commitments to these
counterparties allow NJRES to leverage its transportation and storage capacity.
These physical sale commitments are managed in an aggregate fashion, and, as a
result, give NJRES the ability to extract more value from its portfolio of
natural gas storage and pipeline transportation capacity. NJRES’ portfolio
management customers include nonaffiliated utilities and electric generation
plants. Services provided by NJRES include optimization of underutilized natural
gas assets and basic gas supply functions.
In
conducting its business, NJRES mitigates risk by following formal risk
management guidelines, including transaction limits, approval processes,
segregation of duties, and formal contract and credit review and approval
procedures. NJRES continuously monitors and seeks to reduce the risk associated
with its credit exposures with its various counterparties. The Risk Management
Committee (RMC) of NJR oversees compliance with these established
guidelines.
Midstream
Assets Segment
NJR
utilizes a subsidiary, NJR Energy Holdings Corporation, to develop its
investments in natural gas “midstream” assets, such as natural gas
transportation and storage facilities. NJR believes that acquiring, owning and
developing these midstream assets, which operate under a tariff structure that
has either a regulated or market-based rate, can provide a growth opportunity
for the Company. To that end, NJR has ownership interests in Iroquois, a natural
gas pipeline operating with regulated rates and Steckman Ridge, a storage
facility that operates under market-based rates, and is actively pursuing other
potential opportunities that meet its investment and development
criteria.
Steckman
Ridge became commercially operational during fiscal 2009 and customers began to
inject natural gas inventory in preparation for the initial winter withdrawal
season. An additional drilling program will be reviewed in the third quarter of
fiscal 2010.
As of
December 31, 2009, NJR had invested $135.7 million in Steckman Ridge and $22.1
million in Iroquois, including capitalized costs.
Retail
and Other Operations
The
financial results of Retail and Other consist primarily of the operating results
of NJRHS, which provides service, sales and installation of appliances to
approximately 144,000 customers and is focused on growing its installation
business and expanding its service contract customer base, CR&R, which seeks
additional opportunities to enhance the value of its undeveloped land and
investments made by NJR Energy, an investor in other energy-related ventures
through its operating subsidiaries. Also included within Retail and Other
operations are organizational expenses incurred at NJR.
Critical
Accounting Policies
A summary
of NJR’s critical accounting policies is included in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations of its Annual
Report on Form 10-K for the period ended September 30, 2009. NJR’s critical
accounting policies have not changed from those reported in the 2009 Annual
Report on Form 10-K.
Recently
Issued Accounting Standards
Refer to
Note 1. General, for
discussion of recently issued accounting standards.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Results
of Operations
Consolidated
Net
income for the three-month period ended December 31, 2009, increased by 83.6
percent to $51.9 million, compared with $28.3 million for the same period last
fiscal year. Basic earnings per share (EPS) increased 86.6 percent to $1.25
compared with $0.67 for the same period last fiscal year, and diluted EPS
increased 85.1 percent to $1.24 compared with $0.67 for the same period last
fiscal year. The increase in net income during the three months ended December
31, 2009, was primarily due to the favorable impact of the value of derivative
contracts at NJRES, as a result of a continuing decline in average natural gas
prices.
The
Company’s operating revenues and gas purchases are as follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
%
Change
|
Operating
revenues
|
$609,546
|
|
$801,304
|
|
(23.9
|
)%
|
Gas
purchases
|
$449,393
|
|
$671,090
|
|
(33.0
|
)%
|
Operating
revenues decreased $191.8 million and gas purchases decreased $221.7 million in
the three months ended December 31, 2009, compared with the same period of the
prior fiscal year due primarily to:
Ÿ
|
a
decrease in operating revenues of $115.6 million and gas purchases of
$143.2 million at NJRES stemming from lower average sales and gas purchase
prices, which correlate to the decrease in NYMEX prices of 40 percent from
an average of $6.94 for the three months ending December 31, 2008 to $4.17
for the three months ending December 31, 2009;
|
|
|
Ÿ
|
a
decrease in operating revenues of $82.4 million and gas purchases of $75.2
million at NJNG as a result of a decrease in Firm sales and a customer
refund in the first quarter of fiscal 2010 that did not occur in the same
period in the prior year; partially offset by
|
|
|
Ÿ
|
an
increase in operating revenues of $8.7 million at Retail and Other due
primarily to lower unrealized losses at NJR Energy, as a result of the
settlement of certain natural gas swap contracts, which allowed for a
decline in exposure to shifts in market pricing during the three months
ended December 31, 2009. NJR Energy had open swap contracts representing
1.9 Bcf’s and 4.5 Bcf’s as of December 31, 2009 and 2008,
respectively.
|
Natural
Gas Distribution Segment
NJNG is a
local natural gas distribution company that provides regulated retail energy
services to approximately 489,000 residential and commercial customers in
central and northern New Jersey and participates in the off-system sales and
capacity release markets.
NJNG’s
business is seasonal by nature, as weather conditions directly influence the
volume of natural gas delivered. Specifically, customer demand substantially
increases during the winter months when natural gas is used for heating
purposes. As a result, NJNG receives most of its gas distribution revenues
during the first and second fiscal quarters and is subject to variations in
earnings and working capital during the year.
The
Electric Discount and Energy Competition Act (EDECA) provides the framework for
New Jersey’s retail energy markets, which are open to competition from other
electric and natural gas suppliers. Currently, NJNG’s residential markets are
open to competition. Under an existing order from the BPU, BGSS can be provided
by suppliers other than the state’s natural gas utilities. 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.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
NJNG’s
financial results for the three months ended December 31 are as
follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Utility
gross margin
|
|
|
|
|
Operating
revenues
|
$258,475
|
|
$340,908
|
|
Less:
|
|
|
|
|
Gas
purchases
|
155,274
|
|
230,452
|
|
Energy
and other taxes
|
14,532
|
|
21,587
|
|
Regulatory
rider expense
|
13,712
|
|
13,561
|
|
Total
utility gross margin
|
74,957
|
|
75,308
|
|
Operation
and maintenance expense
|
24,878
|
|
24,950
|
|
Depreciation
and amortization
|
7,660
|
|
7,161
|
|
Other
taxes not reflected in utility gross margin
|
1,148
|
|
1,011
|
|
Operating
income
|
41,271
|
|
42,186
|
|
Other
income
|
926
|
|
684
|
|
Interest
charges, net
|
4,251
|
|
6,460
|
|
Income
tax provision
|
14,444
|
|
13,336
|
|
Net
income
|
$ 23,502
|
|
$ 23,074
|
|
The
following table summarizes utility gross margin and throughput in billion cubic
feet (Bcf) of natural gas by type:
|
Three
Months Ended
|
|
December
31,
|
|
2009
|
2008
|
($
in thousands)
|
Gross
Margin
|
Bcf
|
Gross
Margin
|
Bcf
|
Residential
|
$49,950
|
12.4
|
$49,687
|
13.3
|
Commercial,
industrial & other
|
12,991
|
2.6
|
13,381
|
3.2
|
Transportation
|
9,494
|
3.3
|
8,432
|
3.0
|
Total
utility firm gross margin
|
72,435
|
18.3
|
71,500
|
19.5
|
Incentive
programs
|
2,438
|
22.1
|
3,724
|
12.2
|
Interruptible
|
84
|
0.8
|
84
|
0.9
|
Total
utility gross margin/throughput
|
$74,957
|
41.2
|
$75,308
|
32.6
|
Utility
Gross Margin
NJNG’s
utility gross margin is a non-GAAP financial measure defined as natural gas
revenues less natural gas purchases, sales tax, a Transitional Energy Facilities
Assessment (TEFA) and regulatory rider expenses, and may not be comparable to
the definition of gross margin used by others in the natural gas distribution
business and other industries. Utility gross margin is comprised of the
following three major categories:
Ÿ
|
Utility
firm gross margin, which is derived from residential and commercial
customers who receive natural gas service from NJNG through either sales
or transportation tariffs;
|
|
|
Ÿ
|
Incentive
programs, where margins generated or savings achieved from BPU-approved
Off-system Sales, Capacity Release, Financial Risk Management (defined in
Incentive Programs) or Storage Incentive programs are shared between
customers and NJNG; and
|
|
|
Ÿ
|
Utility
gross margin from interruptible customers who have the ability to switch
to alternative fuels.
|
Management
believes that utility gross margin provides a more meaningful basis than revenue
for evaluating utility operations since natural gas costs, sales tax, TEFA and
regulatory rider expenses are included in operating revenue and passed through
to customers and, therefore, have no effect on utility gross
margin.
Natural
gas costs are charged to operating expenses on the basis of therm sales at the
prices in NJNG’s BGSS tariff approved by the BPU. The BGSS tariff rate includes
projected natural gas costs, net of supplier refunds, the impact of hedging
activities and credits from non-firm sales and transportation activities. Any
underrecoveries or overrecoveries from the projected amounts are deferred and
reflected in the BGSS tariff rate in subsequent years.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
TEFA,
which is included in energy and other taxes in the Unaudited Condensed
Consolidated Statements of Income, is calculated on a per-therm basis and
excludes sales to cogeneration facilities, other utilities and off-system sales.
TEFA represents a regulatory allowed assessment imposed on all energy providers
in the state of New Jersey, as TEFA has replaced the previously used utility
gross receipts tax formula.
Regulatory
rider expenses consist of recovery of state-mandated programs, the remediation
adjustment (RA) and energy efficiency costs. These expenses are offset by
corresponding revenues and are calculated on a per-therm basis.
NJNG’s
operating revenues decreased by $82.4 million, or 24.2 percent, and gas
purchases decreased by $75.2 million, or 32.6 percent, for the three months
ended December 31, 2009, respectively, compared with same period in the prior
fiscal year as a result of:
Ÿ
|
a
decrease in operating revenues and gas purchases related to firm sales in
the amount of $43.8 million and $40.8 million, respectively, as a result
of a decrease in the average periodic BGSS rate for residential and small
commercial customers of $0.275 per therm, a decrease of $0.261 per therm
in the average monthly BGSS rate for large commercial customers, offset by
an increase in riders of $.004 per therm; and
|
|
|
Ÿ
|
a
decrease in operating revenues and gas purchases related to a BGSS
customer refund in the first quarter of fiscal 2010 that did not occur in
the first quarter of fiscal 2009 in the amount of $37.4 million and $34.5
million, respectively. The customer refund was inclusive of a sales tax
refund of $2.9 million and was the result of reductions in cost to acquire
wholesale natural gas, as compared to the established rate included in
NJNG’s BGSS tariff;
|
|
|
Ÿ
|
a
decrease in operating revenues and gas purchases related to firm sales in
the amount of $21.1 million and $15.9 million, respectively, due to lower
therm usage primarily due to customer conservation and weather being 7.3
percent warmer than the same period of the prior fiscal year, partially
offset by an increase in operating revenue of $3.9 million, as a result of
higher accruals relating to the CIP during the three months ended December
31, 2009; partially offset by
|
|
|
Ÿ
|
an
increase in operating revenues and gas purchases related to off-system
sales in the amount of $14.9 million and $13.9 million, respectively, as a
result of 92.5 percent higher volumes due primarily to opportunities in
the wholesale energy market.
|
Sales tax
and TEFA, which are presented as both components of operating revenues and
operating expenses in the Unaudited Condensed Consolidated Statements of Income,
totaled $14.5 million and $21.6 million for the three months ended December 31,
2009 and 2008, respectively. The decrease of $7.1 million is due primarily to a
decrease of $105.8 million in operating revenue from firm sales for the three
months ended December 31, 2009.
Regulatory
rider expenses are calculated on a per-therm basis and totaled $13.7 million and
$13.6 million for the three months ended December 31, 2009 and 2008,
respectively. The increase is due primarily to an additional EE rider of 0.0119
per therm that went into effect August 2009 offset by a decrease in the USF
rider of 0.008 per therm that went into effect as of October 1,
2009.
Utility
Firm Gross Margin
Utility
firm gross margin is earned from residential and commercial customers who
receive natural gas service from NJNG through either sales or transportation
tariffs.
As a
result of NJNG’s implementation of the CIP, utility gross margin is no longer
linked to customer usage. The CIP eliminates the disincentive to promote
conservation and energy efficiency and facilitates normalizing NJNG’s utility
gross margin recoveries for variances not only in weather but also in other
factors affecting usage, including customer conservation. Recovery of utility
gross margin for the non-weather variance through the CIP is limited to the
amount of certain gas supply cost savings achieved and is subject to an earnings
test, which contains a return on equity component of 10.3 percent.
NJNG’s
total utility gross margin is not negatively affected by customers who use its
transportation service and purchase natural gas from another supplier because
its tariff is designed so that no profit is earned on the commodity portion of
sales to firm customers. All customers who purchase natural gas from another
supplier continue to use NJNG for transportation service.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Utility
firm gross margin from residential service sales increased to $50 million for
the three months ended December 31, 2009, as compared with $49.7 million for the
three months ended December 31, 2008. NJNG delivered 12.4 Bcf for its firm
customers in the three months ended December 31, 2009, compared with 13.3 Bcf
for the same period ended December 31, 2008. The effect of the decrease in Bcf
on utility firm gross margin was mitigated by the CIP mechanism.
Utility
firm gross margin from transportation service increased to $9.5 million for the
three months ended December 31, 2009, as compared to $8.4 million for the three
months ended December 31, 2008. NJNG transported 3.3 Bcf for its firm customers
in the three months ended December 31, 2009, compared with 3.0 Bcf for the same
period ended December 31, 2008. The increase was due primarily to the increase
in customers.
The
weather for the three months ended December 31, 2009 was 5.3 percent
warmer-than-normal, based on a 20-year average, which resulted in an accrual of
utility gross margin under the weather component of the CIP of $2.3 million,
compared with 1.8 percent colder-than-normal weather for the same period last
fiscal year, which resulted in a negative adjustment of utility gross margin of
$(216,000). Under the provisions of the CIP, accruals related to the weather
portion are dependent on the occurrence of degree days and the magnitude of the
variance in relation to a normal degree day.
Customer
usage was lower than the established benchmark during the first quarter of
fiscal 2010, which resulted in an accrual of utility gross margin under the CIP
of $2.1 million compared with $1.0 million in the first quarter of fiscal 2009.
The change in the weather and non-weather components of the CIP include the
effect of adjustments, normal degree days, consumption factors and benchmarks
related to the baseline use per customer.
NJNG had
15,687 and 12,053 residential customers and 6,893 and 5,214 commercial customers
using its transportation service at December 31, 2009 and 2008, respectively.
The increase in transportation customers for the three month period ended
December 31, 2009, was due primarily to an increase in marketing activity by
third party natural gas providers in NJNG’s distribution territory.
NJNG
added 1,438 and 1,763 new customers during the three months ended December 31,
2009 and 2008, respectively. In addition, NJNG converted 58 and 162 existing
customers to natural gas heat and other services during the same periods for
fiscal 2009 and 2008, respectively. The decline in customer growth is driven by
a slower new construction market and weak economic conditions. This customer
growth represents an estimated annual increase of approximately 0.16 Bcf in
sales to firm customers, assuming normal weather and usage, which would
contribute approximately $684,000 to utility gross margin.
Incentive
Programs
To reduce
the overall cost of its natural gas supply commitments, NJNG has entered into
contracts to sell natural gas to wholesale customers outside its franchise
territory when natural gas is not needed for firm system requirements. These
off-system sales enable NJNG to reduce its overall costs applicable to BGSS
customers. NJNG also participates in the capacity release market on the
interstate pipeline network when the capacity is not needed for its firm system
requirements. NJNG retains 15 percent of the utility gross margin from these
sales, with 85 percent credited to firm customers through the BGSS.
The
Financial Risk Management (FRM) program is designed to provide price stability
to NJNG’s natural gas supply portfolio. The FRM program includes an incentive
mechanism designed to encourage the use of financial instruments to economically
hedge NJNG’s natural gas costs. Gross margin is generated by entering into
financial option positions that have a strike price below a published quarterly
benchmark, minus premiums and associated fees. NJNG retains 15 percent of the
utility gross margin, with 85 percent credited to firm customers through the
BGSS.
The
Storage Incentive program shares gains and losses on an 80 percent and 20
percent basis between customers and NJNG, respectively. This program measures
the difference between the actual cost of natural gas injected into storage and
a benchmark established with the purchase of a portfolio of futures contracts
applicable to the April-through-October natural gas injection
season.
On
October 3, 2008, the BPU approved the Rate Order, which extends the incentive
programs through October 31, 2011, and provides changes to certain volume and
cost limitations surrounding these incentive programs (see Note 2.
Regulation).
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Sales
under NJNG’s incentive programs totaled 22.1 Bcf and generated $2.4 million of
utility gross margin for the three months ended December 31, 2009, compared with
12.2 Bcf and $3.7 million of utility gross margin during the same period last
fiscal year. Utility gross margin from incentive programs comprised 3.3 percent
of total utility gross margin for the three months ended December 31, 2009 and
4.9 percent of total utility gross margin for the same period in fiscal 2009,
respectively. The decrease in utility gross margin was due primarily to a
decrease of $1.4 million in the FRM program due primarily to lack of market
opportunities, a decrease of $918,000 related to the storage incentive program
due to timing of physical injections and associated hedging gains, partially
offset by an increase of $908,000 in off-system sales due primarily to
opportunities in the wholesale energy market, which increased volumes 92.5
percent.
Interruptible
Revenues
As of
December 31, 2009, NJNG serves 45 customers through interruptible transportation
and sales services. Interruptible customers are those customers whose service
can be temporarily halted as they have the ability to utilize an alternate fuel
source. Although therms transported and sold to interruptible customers
represented 0.8 Bcf, or 1.9 percent, of total throughput for the three months
ended December 31, 2009, and 0.9 Bcf, or 2.8 percent, of the total throughput
during the same period in the prior fiscal year, they accounted for less than 1
percent of the total utility gross margin in each year.
Operation
and Maintenance Expense
Operation
and maintenance expense remained relatively flat, during the three months ended
December 31, 2009, as compared with the same period in the last fiscal year,
with offsetting variances in the following:
Ÿ
|
increased
pension and OPEB costs in the amount of $915,000 primarily as a result of
the impact of a decline in the returns on plan assets and the decline in
the discount rate used to measure plan liabilities;
|
|
|
Ÿ
|
higher
pipeline integrity costs of $154,000; offset by
|
|
|
Ÿ
|
a
decrease in bad debt expense of $617,000 due primarily to lower reserve
requirements during fiscal 2010 as a result of BGSS customer credits;
and
|
|
|
Ÿ
|
decreased
labor of $388,000 due primarily to lower short-term incentive
costs.
|
Operating
Income
Operating
income decreased $915,000, or 2.2 percent, for the three months ended December
31, 2009, as compared with the same period in the last fiscal year, due
primarily to:
Ÿ
|
a
decrease in total utility gross margin of $351,000, as discussed
above;
|
|
|
Ÿ
|
an
increase in depreciation expense of $499,000, as a result of greater
utility plant being placed into service; and
|
|
|
Ÿ
|
an
increase in other taxes.
|
Interest
Expense
Interest
expense decreased $2.2 million for the three months ended December 31, 2009
compared with the same period in the last fiscal year, due primarily
to:
Ÿ
|
a
decrease of $1.5 million associated with long-term debt due to lower
interest rates on variable rate debt bonds and the redemption of a $30
million bond in November 2008; and
|
|
|
Ÿ
|
a
decrease of $729,000 associated with short-term debt due primarily to
lower average interest rates and balances related to NJNG’s commercial
paper program.
|
Net
Income
Net
income remained relatively flat during the three months ended December 31, 2009,
due primarily to lower interest expense of $2.2 million, as discussed above,
partially offset by a decrease in operating income of approximately $915,000, as
discussed above, and higher income tax expense of $1.1 million, due primarily to
a combination of higher accrued expense associated with higher pre-tax income in
the current fiscal year and the reversal of accrued interest during the three
months ended December 31, 2008, as a result of the settlement of a tax
audit.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Energy
Services Segment
NJRES is
a non-regulated natural gas marketer principally engaged in the optimization of
natural gas storage and transportation assets. 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 or basis spreads,” and pricing differences across time horizons,
commonly referred to as “time spreads.” To capture these price differences,
NJRES enters into contracts for the future delivery and sales of physical
natural gas and simultaneously enters into financial derivative contracts to
establish an initial financial margin for each of its forecasted physical
commodity transactions. The financial derivative contracts serve to protect the
cash flows of the transaction from volatility in commodity prices and can
include futures, options, and swap contracts, which are all predominantly
actively quoted on the NYMEX.
Typically,
periods of greater price volatility provide NJRES with additional opportunities
to generate financial margin by managing its financial hedge transactions with
the intent of further improving the respective time or locational spreads on a
forward basis.
The
strategies used in capturing the value associated with these price differences
include, but are not limited to the following:
Ÿ
|
Storage: NJRES
attempts to take advantages of differences in market prices occurring over
different time periods (time spreads) as follows:
|
|
|
|
*
|
NJRES
can purchase gas to inject into storage and concurrently lock in gross
margin with a contract to sell the natural gas at a higher price at a
future date;
|
|
|
|
*
|
NJRES
can purchase a future contract with an early delivery date at a lower
price and simultaneously sell another future contract with a later
delivery date having a higher price; and
|
|
|
|
*
|
NJRES
can “borrow” gas from a pipeline or storage operator and repay that gas at
a later date, and earn a margin by selling the gas at a later date at a
higher price or by receiving a fee.
|
|
|
Ÿ
|
Transportation
(Basis): Similarly, NJRES benefits from pricing
differences between various receipt and delivery points along a natural
gas pipeline as follows:
|
|
|
|
*
|
NJRES
can utilize its pipeline capacity by purchasing natural gas at a lower
price location and transporting to a higher value location. NJRES can
enter into a basis swap contract, a financial commodity derivative based
on the price of natural gas at two different locations, when it will lead
to positive cash flows and financial margin for
NJRES.
|
Because
NJRES has physical storage and transportation capacity contracts it is able to
take advantage of the continuous daily changes in supply and demand in the
market areas in which it operates. By utilizing those contracts to assist
natural gas marketers, local distribution companies, industrial companies,
electric generators and retail aggregators in managing their gas supply needs,
NJRES has opportunities to deliver the gas from storage, purchase flowing gas,
or move the gas along a more economically advantageous transportation route than
originally planned thereby improving the initial financial margin. The
combination of strategically positioned natural gas storage and transportation
assets and physical purchase and sales contracts provides NJRES with a
significant amount of arbitrage opportunities that are typically more prevalent
during periods of high daily price volatility.
Predominantly
all of NJRES’ physical purchases and sales of natural gas result in the physical
delivery of natural gas. These physical commodity contracts are recorded at fair
value in the Unaudited Condensed Consolidated Balance Sheets with any changes in
fair value related to its forward physical sale and purchase contracts
recognized as a component of operating revenues and gas purchases, respectively,
in the Unaudited Condensed Consolidated Statements of Income.
The
changes in fair value of NJRES’ financial derivative instruments, which are
financial futures, swaps and option contracts, are also recognized in the
Unaudited Condensed Consolidated Statements of Income, as a component of gas
purchases.
NJRES’
financial and physical contracts will result, over time, in earning a gross
margin on the entire transaction. For financial reporting purposes under GAAP,
the change in fair value associated with derivative instruments used to
economically hedge these transactions are recorded as a component of gas
purchases in the Unaudited Condensed Consolidated Statements of Income during
the duration of the financial instrument or commodity contract. These changes in
fair value are referred to as unrealized gains and losses. In other instances,
certain financial contracts designed to economically fix or hedge the price of
natural gas that is purchased and placed into storage, to be sold at a later
date, settle and result in realized gains, which are also recorded as a
component of gas purchases in the Unaudited Condensed Consolidated Statements of
Income.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
These
unrealized gains or losses from the change in fair value of unsettled financial
instruments and physical commodity contracts, or realized gains or losses
related to financial instruments that economically hedge natural gas inventory
that has not been sold as part of a planned transaction, cause large variations
in the reported gross margin and earnings of NJRES. NJRES will continue to earn
the gross margin established at inception of the transaction over the duration
of the forecasted transaction and may be able to capitalize on events in the
marketplace that enable it to increase the initial margin; however, gross margin
or earnings during periods prior to the delivery of the natural gas will not
reflect the underlying economic result.
NJRES
recognizes its demand charges, which represent the right to use natural gas
pipeline and storage capacity assets of a third-party, over the term of the
related natural gas pipeline or storage contract. The term of these contracts
vary from less than one year to ten years.
Operating
Results
NJRES’
financial results are summarized as follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Operating
revenues
|
$347,477
|
|
$463,094
|
|
Gas
purchases
|
297,457
|
|
440,677
|
|
Gross
margin
|
50,020
|
|
22,417
|
|
Operation
and maintenance expense
|
4,233
|
|
4,360
|
|
Depreciation
and amortization
|
50
|
|
51
|
|
Other
taxes
|
547
|
|
329
|
|
Operating
income
|
45,190
|
|
17,677
|
|
Other
income
|
1
|
|
123
|
|
Interest
expense, net
|
262
|
|
86
|
|
Income
tax provision
|
17,285
|
|
6,832
|
|
Net
income
|
$ 27,644
|
|
$ 10,882
|
|
NJRES
records its financial derivative instruments using fair market values. The
mark-to-market changes on these financial instruments are reflected as a
component of gas purchases in the Unaudited Condensed Consolidated Statements of
Income.
As of
December 31, 2009, NJRES’ portfolio of financial derivative instruments was
comprised of:
Ÿ
|
34.1
Bcf of net short futures contracts and fixed swap positions;
and
|
|
|
Ÿ
|
14.4
Bcf of net long basis swap
positions.
|
As of
December 31, 2008, NJRES’ portfolio of financial derivative instruments was
comprised of:
Ÿ
|
22.4
Bcf of net short futures contracts and fixed swap positions;
and
|
|
|
Ÿ
|
50.8
Bcf of net short basis swap
positions.
|
Gross
Margin
Gross
margin for the three months ended December 31, 2009, increased by $27.6 million,
as compared with the same period in the last fiscal year, due primarily to
higher realized margin associated with physical sales of natural gas and higher
unrealized gains during the first fiscal quarter of 2010.
During
the three months ended December 31, 2009, gross margin was higher by
approximately $12.7 million as compared to the three months ended December 31,
2008, due primarily to higher margins on physical sales of natural gas, largely
as a result of rising market prices for natural gas prices in the three months
ended December 31, 2009 as compared to the cost of our inventory sold, the cost
of which lags the market. During the first quarter of fiscal 2010, the average
margin per dekatherm (dth) of gas sold, excluding the results of economic
hedging, was approximately 14 cents. This compares to an average margin of 7
cents per dth for the prior period. This increase in margin was partially offset
by lower sales volumes during the three months ended December 31,
2009.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
In
addition to the amounts discussed above, NJRES had unrealized gains (losses) of
$7.7 million and $(1.8) million during the three months ended December 31, 2009
and 2008, respectively, relating to physical and financial contracts that have
not yet settled and serve to lock in a sale price on physical gas that will be
sold in the future. These unrealized amounts represent the change in price of
natural gas from the original hedge price as compared to the market price of
natural gas at each reporting date. When NJRES sells the purchased gas, the
associated financial hedges will be settled and any previously recognized
unrealized amounts related to these transactions will be realized.
Offsetting
the higher margin that resulted from the higher net gains discussed above, was a
decrease in storage spreads during the three months ended December 31, 2009, as
described further in the discussion of financial margin in the Non-GAAP measures
section.
Non-GAAP
measures
Additionally,
management of the Company uses non-GAAP measures, noted as “financial margin”
and “net financial earnings”, when evaluating the operating results of NJRES.
Since NJRES economically hedges its natural gas purchases and sales with
derivative instruments, management uses these measures to compare NJRES’ results
against established benchmarks and earnings targets as it eliminates the impact
of volatility to GAAP earnings associated with the derivative instruments.
Volatility can occur as a result of timing differences surrounding the
recognition of certain gains and losses. These timing differences can impact
GAAP earnings in two ways:
Ÿ
|
Unrealized
gains and losses on derivatives are recognized in reported earnings in
periods prior to physical gas inventory flows; and
|
|
|
Ÿ
|
Unrealized
gains and losses of prior periods are reclassified as realized gains and
losses when derivatives are settled in the same period as physical gas
inventory movements occur.
|
Net
financial earnings is a measure of the earnings based on eliminating these
timing differences, to effectively match the earnings effects of the economic
hedges with the physical sale of gas. Consequently, to reconcile from GAAP to
both financial margin and net financial earnings, current period unrealized
gains and losses on the derivatives are excluded as a reconciling item.
Additionally, the effects of economic hedging on the value of our natural gas in
storage also included in current period net loss, however financial margin and
net financial earnings include only realized gains and losses related to natural
gas sold out of inventory, effectively matching the full earnings effects of the
derivatives with realized margins on physical gas flows.
Management
views financial margin and net financial earnings as more representative of the
overall expected economic result. To the extent that there are unanticipated
changes in the markets or to the effectiveness of the economic hedges, NJRES’
non-GAAP results can be different than was originally planned at the beginning
of the transaction.
The
following table is a computation of financial margin of NJRES for the three
months ended December 31:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Operating
revenues
|
$347,477
|
|
$463,094
|
|
Less:
Gas purchases
|
297,457
|
|
440,677
|
|
Add:
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments and related
transactions
|
(7,742
|
)
|
1,816
|
|
Effects
of economic hedging related to natural gas inventory
|
(33,113
|
)
|
(4,274
|
)
|
Financial
margin
|
$ 9,165
|
|
$ 19,959
|
|
New
Jersey Resources Corporation
Part
I
ITEM
2. 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:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Operating
income
|
$45,190
|
|
$17,677
|
|
Add:
|
|
|
|
|
Operation
and maintenance expense
|
4,233
|
|
4,360
|
|
Depreciation
and amortization
|
50
|
|
51
|
|
Other
taxes
|
547
|
|
329
|
|
Subtotal
– Gross margin
|
50,020
|
|
22,417
|
|
Add:
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments and related
transactions
|
(7,742
|
)
|
1,816
|
|
Effects
of economic hedging related to natural gas inventory
|
(33,113
|
)
|
(4,274
|
)
|
Financial
margin
|
$ 9,165
|
|
$19,959
|
|
A
reconciliation of NJRES’ Net income to Net financial earnings is as
follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Net
income
|
$27,644
|
|
$10,882
|
|
Add:
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments and related transactions, net of
taxes
|
(4,766
|
)
|
1,107
|
|
Effects
of economic hedging related to natural gas inventory, net of
taxes
|
(20,384
|
)
|
(2,606
|
)
|
Net
financial earnings
|
$ 2,494
|
|
$ 9,383
|
|
Financial
margin for the three months ended December 31, 2009 and 2008 was $9.2 million
and $20 million, respectively. The decrease of $10.8 million is due to a
combination of factors including:
|
A
decrease in opportunities to optimize transportation assets because of the
lack of volatility in the marketplace caused by a decrease in the demand
for natural gas in the first quarter of 2010 as compared with the prior
year. The decrease in demand is attributed to lower industrial consumption
as a result of the economy and the mild weather in November and early
December.
|
|
A
decrease overall in basis spreads, which lowered the overall value of the
transportation portfolio.
|
|
A
change in the pricing of certain natural gas sales contracts from a single
fixed price for the November through March period to a distinct flat price
for each month. The result of which is a sales price that more closely
resembles the price of natural gas for that month at time of trade
execution. These pricing changes have no overall impact on the margin on
the transactions, but do impact the timing of margin recognition and cash
flows.
|
Operation
and Maintenance Expense
Operation
and maintenance expense decreased $127,000, or 2.9 percent, during the three
months ended December 31, 2009, as compared with the same period in fiscal 2009,
due primarily to a decrease in general and administrative costs during the three
months ended December 31, 2009.
Future
results are subject to NJRES’ ability to maintain and expand its wholesale
marketing activities and are contingent upon many other factors, including an
adequate number of appropriate counterparties, volatility in the natural gas
market, availability of storage arbitrage opportunities, sufficient liquidity in
the energy trading market and continued access to the capital
markets.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Midstream
Assets Segment
The
consolidated financial results of Midstream Assets are summarized as
follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Operation
and maintenance expense
|
$ 195
|
|
$105
|
|
Interest
expense
|
$ 830
|
|
$ 31
|
|
Equity
in earnings of affiliates (1)
|
$3,960
|
|
$892
|
|
Net
income
|
$1,876
|
|
$454
|
|
(1)
|
Excludes
taxes of $413,000 and $354,000 for Iroquois for the three months ended
December 31, 2009 and 2008, respectively and $1.2 million for Steckman
Ridge for the three months ended December 31,
2009.
|
Operation
and maintenance expenses for the three months ended December 31, 2009, increased
$90,000, as compared to the same period in fiscal 2009 due primarily to the
allocation of shared service costs of $105,000 to Steckman Ridge this fiscal
year.
Interest
expenses for the three months ended December 31, 2009, increased $800,000, as
compared to the same period in fiscal 2009, due primarily to interest no longer
being capitalized on Steckman Ridge since it became operational during the third
quarter of fiscal 2009.
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. Equity in earnings from Steckman Ridge is driven by storage revenues,
which are based on market rates. The $3.1 million increase in equity in earnings
during the three months ended December 31, 2009 is due primarily to a
contribution of $2.9 million from Steckman Ridge, which began generating storage
revenues when it became commercially operational during the third quarter of
fiscal 2009. Equity in earnings in Iroquois increased $147,000 from $892,000
during the three months ended December 31, 2008 to $1 million during the three
months ended December 31, 2009
Net
income for the three months ended December 31, 2009, increased $1.4 million
compared with the same period in fiscal 2009, due primarily to an increase in
equity in earnings related to operating results at Steckman Ridge, as noted
above.
Retail
and Other Operations
The
unaudited consolidated financial results of Retail and Other are summarized as
follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Operating
revenues
|
$6,044
|
|
$(2,654
|
)
|
Operation
and maintenance expense
|
$7,036
|
|
$
7,045
|
|
Net
(loss)
|
$ (962
|
)
|
$(6,138
|
)
|
Retail
and Other includes NJR Energy, which has economically hedged a long-term
fixed-price contract to sell gas to a counterparty. Unrealized gains or losses
at NJR Energy, recorded in operating revenues, are the result of the changes in
values associated with financial derivative instruments designed to economically
hedge the long-term fixed-price contracts.
Operating
revenues increased $8.7 million, or 327.7 percent for the three months ended
December 31, 2009, to $6 million as compared with $(2.7) million for the three
months ended December 31, 2008 due primarily to lower unrealized losses at NJR
Energy of $(854,000), during the three months ended December 31, 2009, as
compared with $(9.7) million for the three months ended December 31, 2008. The
positive change in values at NJR Energy was offset by a decrease in installation
revenues at NJRHS.
Operation
and maintenance expenses for the three months ended December 31, 2009, remained
relatively flat as compared with the three months ended December 31, 2008 in all
of the related companies.
Net loss
for the three months ended December 31, 2009 decreased $5.2 million compared
with the same period in the prior fiscal year, due primarily to the decreased
operating loss at NJR Energy partially offset by higher income tax expense as a
result of the decreased operating loss.
Additionally,
management of the Company uses the non-GAAP measure “net financial earnings”,
when viewing the results of NJR Energy to monitor the operational results
without the impact of unsettled derivative instruments.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
A
reconciliation of net (loss) to net financial (loss), a non-GAAP measure, is as
follows:
|
Three
Months Ended
December
31,
|
(Thousands)
|
2009
|
2008
|
Net
(loss)
|
$(962
|
)
|
$(6,138
|
)
|
Add:
|
|
|
|
|
Unrealized
loss on derivative instruments, net of taxes
|
503
|
|
5,705
|
|
Net
financial (loss)
|
$(459
|
)
|
$ (433
|
)
|
Net
financial loss for the three months ended December 31, 2009, remained consistent
with the same period in the prior fiscal year.
Liquidity
and Capital Resources
NJR’s
objective is to maintain a consolidated capital structure that reflects the
different characteristics of each business segment and provides adequate
financial flexibility for accessing capital markets as required.
NJR’s
consolidated capital structure was as follows:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
Common
stock equity
|
52
|
%
|
53
|
%
|
Long-term
debt
|
32
|
|
35
|
|
Short-term
debt
|
16
|
|
12
|
|
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, treasury shares
or newly issued shares.
The
Company has a share repurchase program that provides for the repurchase of up to
6.75 million shares. As of December 31, 2009, the Company repurchased
approximately 6.5 million of those shares and had the ability to repurchase
approximately 249,000 additional shares under the approved program. On January
27, 2010, the Board of Directors authorized an increase in the number of shares
of NJR common stock authorized for repurchase under NJR’s Share Repurchase Plan
by 2 million shares to a total of 8.75 million shares.
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
December 31, 2009, NJR and NJNG had committed credit facilities of $525 million
with approximately $314.5 million available under these facilities (see Note 7. Debt).
NJR
believes that as of December 31, 2009, NJR and NJNG were, and currently are, in
compliance with all debt covenants.
NJR
believes that existing borrowing availability and cash flow from operations will
be sufficient to satisfy it and its subsidiaries’ working capital, capital
expenditure and dividend requirements for the foreseeable future. NJR, NJNG and
NJRES currently anticipate that its financing requirements for the next twelve
months will be met through the issuance of short-term debt, meter sale
lease-backs and proceeds from the Company’s DRP. While U.S. credit markets
continue to improve compared to last year, the impact of the credit crisis is
still being felt across the economy. A return to the constrictive credit
availability seen last year could possibly affect management’s ability to
borrow.
NJR
In March
2009, NJR repaid its $25 million, 3.75 percent, Unsecured Senior notes at
maturity.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
NJR has a
$325 million, five-year, revolving, unsecured credit facility expiring December
2012, which permits the borrowing of revolving loans and swing loans, as well as
the issuance of letters of credit. Swing loans are loans made available on a
same-day basis for an aggregate principal amount of up to $50 million and
repayable in full within a maximum of seven days of borrowing. It also permits
an increase to the facility, from time to time, with the existing or new
lenders, in a minimum of $5 million increments up to a maximum $100 million at
the lending banks’ discretion. Borrowings under the facility are conditional
upon compliance with a maximum leverage ratio, as defined in the new credit
facility, of not more than 0.65 to 1.00 at any time. In addition, certain of
NJR’s non-regulated subsidiaries have guaranteed to the lenders all of NJR’s
obligations under the new credit facility. Depending on borrowing levels and
credit ratings, NJR’s interest rate can either be, at its discretion, the London
inter-bank offered rate (“LIBOR”) or the Federal Funds Open Rate plus an
applicable spread and facility fee. As of December 31, 2009, NJR’s effective
rate was 0.53 percent on outstanding borrowings of $200.8 million under this
credit facility.
As of
December 31, 2009, NJR had a $4 million letter of credit outstanding on behalf
of NJRES, which is used for margin requirements for natural gas transactions and
will expire on June 30, 2010. NJR also has a $675,000 letter of credit
outstanding on behalf of CR&R, which will expire on December 3, 2010, which
is in place to support development activities. NJR does not anticipate that
these letters of credit will be drawn upon by the counterparties, and they will
be renewed as necessary.
NJR uses
its short term borrowings primarily to finance its share repurchases, to satisfy
NJRES’ short term liquidity needs and to finance, on an initial basis,
unregulated investments. NJRES’ use of high-injection, high-withdrawal storage
facilities and anticipated pipeline park-and-loan arrangements, combined with
related economic hedging activities in the volatile wholesale natural gas
market, create significant short-term cash requirements.
NJNG
NJNG
satisfies its debt needs by issuing short- and long-term debt based upon its own
financial profile. The seasonal nature of NJNG’s operations creates large
short-term cash requirements, primarily to finance natural gas purchases and
customer accounts receivable. NJNG obtains working capital for these
requirements, and for the temporary financing of construction and MGP
remediation expenditures and energy tax payments, through the issuance of
commercial paper and short-term bank loans.
In
November 2008, upon maturity, NJNG redeemed its $30 million, 6.27 percent,
Series X First Mortgage bonds.
In
October 2007, NJNG entered into an agreement for standby letters of credit that
could have been drawn upon through December 15, 2009, for up to $50 million.
Upon expiration, the agreement was not renewed.
To
support the issuance of commercial paper, NJNG had a $250 million committed
credit facility with several banks, with a 5-year term, that expired on December
16, 2009. On December 11, 2009, NJNG entered into a new 3-year, $200 million
unsecured committed credit facility expiring December 2012, which replaced the
one that expired and permits the borrowing of revolving loans and swing loans,
as well as the issuance of letters of credit. It also permits an increase to the
facility, from time to time, with the existing or new lenders, in a minimum of
$10 million increments up to a maximum of $50 million at the lending banks’
discretion. Depending on borrowing levels and credit ratings, NJNG’s interest
rate can either be, at its discretion, based upon Prime Rate, the Federal Funds
Open Rate or the Euro-Rate, in each case, plus an applicable spread and facility
fee. In addition, borrowings under NJNG’s credit facility are conditioned upon
compliance with a maximum leverage ratio, as defined in the credit facility, of
not more than 0.65 to 1.00 at any time and a minimum interest coverage ratio, as
defined in the credit facility, of less than 2.50 to 1.00. NJNG had no
borrowings supported by the credit facility as of December 31,
2009.
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97 million of variable-rate debt backed by
securities issued by the New Jersey Economic Development Authority (EDA). The
EDA bonds are commonly referred to as auction rate securities (ARS) and have an
interest rate reset every 7 or 35 days, depending upon the applicable series. On
those dates, an auction is held for the purposes of determining the interest
rate of the securities. The interest rate associated with the NJNG variable-rate
debt is based on the rates on the EDA ARS. For the three months ended December
31, 2009, all of the auctions surrounding the EDA ARS have failed, resulting in
those bonds bearing interest at their maximum rates, defined as the lesser of
(i) 175 percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as
applicable to such series of ARS.
While the
failure of the ARS auctions does not signify or constitute a default by NJNG,
the EDA ARS does impact NJNG’s borrowing costs of the variable-rate debt. As of
December 31, 2009, the 30-day LIBOR rate was 0.23 percent. As such, NJNG
currently has a weighted average interest rate of 0.41 percent as of December
31, 2009, compared with a weighted average interest rate of 0.44 percent as of
September 30, 2009.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
There can
be no assurance that the EDA ARS will have enough market liquidity to avoid
failed auctions in the future, which could potentially have an adverse impact on
NJNG’s borrowing costs if LIBOR rates increase. NJR reviews alternative methods
for refinancing the ARS at NJNG on a continuing basis, however, it cannot assure
that alternative sources of financing can be implemented in a timely
manner.
Neither
NJNG nor its assets are obligated or pledged to support the NJR or NJRES
facilities.
NJRES
NJRES had
a 3-year, $30 million committed credit facility with a multinational financial
institution that expired in October 2009. Borrowings under this facility were
guaranteed by NJR. Upon expiration, the credit facility was not
renewed.
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 December
31, 2009:
(Thousands)
|
Total
|
Up
to
1
Year
|
2-3
Years
|
4-5
Years
|
After
5
Years
|
Long-term
debt (1)
|
$ 557,774
|
$ 36,629
|
$ 31,195
|
$ 88,810
|
$401,140
|
Capital
lease obligations (1)
|
86,702
|
10,781
|
23,446
|
16,677
|
35,798
|
Operating
leases (1)
|
9,746
|
2,819
|
3,753
|
1,719
|
1,455
|
Short-term
debt
|
200,800
|
200,800
|
—
|
—
|
—
|
New
Jersey Clean Energy Program (1)
|
38,673
|
10,955
|
24,668
|
3,050
|
—
|
Construction
obligations
|
3,556
|
3,556
|
—
|
—
|
—
|
Accelerated
Infrastructure Program (AIP)
|
64,770
|
44,214
|
20,556
|
—
|
—
|
Remediation
expenditures (2)
|
146,700
|
17,360
|
27,000
|
10,330
|
92,010
|
Natural
gas supply purchase obligations–NJNG
|
103,022
|
103,022
|
—
|
—
|
—
|
Demand
fee commitments–NJNG (3)
|
677,891
|
98,619
|
182,435
|
150,041
|
246,796
|
Natural
gas supply purchase obligations–NJRES
|
652,317
|
439,300
|
213,017
|
—
|
—
|
Demand
fee commitments–NJRES
|
195,873
|
76,220
|
59,414
|
28,633
|
31,606
|
Total
contractual cash obligations
|
$2,737,824
|
$1,044,275
|
$585,484
|
$299,260
|
$808,805
|
(1)
|
These
obligations include an interest component, as defined under the related
governing agreements or in accordance with the applicable tax
statute.
|
(2)
|
Expenditures
are estimated.
|
(3)
|
In
January, 2010, NJNG entered into a 10-year agreement for storage capacity
with Steckman Ridge. The demand fees noted above do not include fees of
approximately $9.3 million that will be payable annually to Steckman
Ridge.
|
The
Company has no minimum pension funding requirements, however, funding
requirements are uncertain and can depend significantly on changes in actuarial
assumptions, returns on plan assets and changes in demographic factors. In
fiscal 2009, NJR made discretionary contributions of $25.6 million to the
Pension plan. These contributions brought the plan to the Transition Target
Funding level under the Pension Protection Act. An additional contribution of
$4.4 million was made on October 1, 2009. This amount is expected to cover the
additional cost of benefits accruing during fiscal 2010. There are no Federal
requirements to pre-fund OPEB benefits. However, the Company is required to fund
certain amounts due to regulatory agreements with the BPU. In 2004, the Company
elected to pre-fund most of the annual required contributions expected for the
subsequent five fiscal years. The Company contributed approximately $1.9 million
in fiscal 2009 to its OPEB plan and expects future funding to range from $6.1
million to $6.4 million annually over the next three years in accordance with
BPU requirements. Actual contributions may be higher or lower based on market
conditions and various assumptions.
As of
December 31, 2009, there were NJR guarantees covering approximately $322 million
of natural gas purchases and demand fee commitments of NJRES and NJNG, included
in natural gas supply purchase obligations above, not yet reflected in accounts
payable on the Unaudited Condensed Consolidated Balance Sheet.
The
Company is obligated to fund up to $132.5 million associated with the
construction and development of Steckman Ridge. As of December 31, 2009, NJR has
invested approximately $123.8 million in Steckman Ridge. Steckman Ridge may seek
non-recourse project financing for a portion of the facility once construction
activities are completed, therefore potentially reducing the aggregate recourse
amount funded by NJR. There can be no assurances that Steckman Ridge will
eventually secure such non-recourse project financing.
Total
capital expenditures for fiscal 2010 are estimated at $106.6 million, including
an estimate of $44.2 million related to the AIP construction costs.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Off-Balance-Sheet
Arrangements
The
Company does not have any off-balance-sheet financing arrangements.
Cash
Flow
Operating
Activities
As
presented in the Unaudited Condensed Consolidated Statements of Cash Flows, cash
flow used in operating activities totaled $52.2 million for the three months
ended December 31, 2009, compared with cash flow used in operations of $36.9
million for the same period in fiscal 2009. NJR employs the indirect method when
preparing its Unaudited Condensed Consolidated Statement of Cash Flows. Net
income is adjusted for any non-cash items, such as depreciation, accruals and
certain amortization amounts that impact earnings during the period. In
addition, operating cash flows are primarily affected by variations in working
capital, which can be impacted by the following:
Ÿ
|
seasonality
of NJR’s business;
|
|
|
Ÿ
|
fluctuations
in wholesale natural gas prices;
|
|
|
Ÿ
|
timing
of storage injections and withdrawals;
|
|
|
Ÿ
|
management
of the deferral and recovery of gas costs;
|
|
|
Ÿ
|
changes
in contractual assets utilized to optimize margins related to natural gas
transactions; and
|
|
|
Ÿ
|
timing
of the collections of receivables and payments of current
liabilities.
|
Net
income increased $23.6 million during the three months ended December 31, 2009,
as compared with the same period in the prior fiscal year, due primarily to
higher realized gains associated with natural gas in inventory at NJRES, as well
as higher unrealized gains associated with decreases in the values of financial
derivative instruments at NJRES. Changes in working capital that offset the
increase in net income and were the primary contributors to the increase in cash
used in operating activities are as follows:
Ÿ
|
higher
natural gas inventory cost at NJRES during the three months ended December
31, 2009, relative to the prior fiscal year. NJRES average cost of gas
during the three months ended December 31, 2009 increased approximately 33
percent from $3.08 to $5.52 as compared with a 28 percent reduction in
average cost of gas during the comparable period in fiscal 2009 from $8.31
to $6.96. The increase in the change in gas inventory pricing over the
periods was coupled with an increase in natural gas injections during the
current period;
|
|
|
Ÿ
|
a
decrease in NJNG’s gas costs recovered during the three months ended
December 31, 2009 due primarily to a refund of $37.4 million during the
current fiscal quarter to NJNG’s customers; offset by
|
|
|
Ÿ
|
reduced
margin requirements of $67 million due primarily to change in NYMEX prices
compared with the fixed price on hedges related to NJNG’s storage
incentive program.
|
NJNG’s
MGP expenditures are currently expected to total $18.6 million in fiscal 2010
(see Note 13. Commitments and
Contingent Liabilities).
Investing
Activities
Cash flow
used in investing activities totaled $15.7 million for the three months ended
December 31, 2009, compared with $36.6 million in the same period in fiscal
2009. The decrease in cash used was due primarily to lower amounts of cash
invested in Steckman Ridge, as it became commercially operational during the
third quarter of fiscal 2009 and construction on the facility has subsided, in
addition to lower utility plant expenditures at NJNG due primarily to slower
customer growth as well as expenditures during fiscal 2009 associated with a
meter reading project that did not recur in the first quarter of fiscal 2010.
These were offset by lower amounts of cash generated as a result of a final
drawdown of $4.2 million from NJNG’s restricted cash construction fund during
fiscal 2009 that did not recur in the three months ended December 31,
2009.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
In April
2009, Steckman Ridge received authorization to place certain injection related
facilities into commercial operation and customers began to inject natural gas
inventory in preparation for the initial withdrawal season. An additional
drilling program will be reviewed in the third quarter of fiscal 2010. As of
December 31, 2009, NJR has invested $123.8 million in Steckman Ridge. This
amount excludes capitalized interest and other direct costs. Total project costs
related to the development of the storage facility are currently estimated at
approximately $265 million, of which NJR is obligated to fund 50 percent or
approximately $132.5 million. Steckman Ridge may seek non-recourse financing
upon full completion of the construction and development of its facilities,
thereby potentially reducing the final expected recourse obligation of NJR.
There can be no assurances that such non-recourse project financing will be
secured or available for Steckman Ridge.
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 2010 when compared with the capital spending in
fiscal 2009, due primarily to accelerated spending related to the AIP projects,
which are estimated at $44.2 million. As of December 31, 2009, capital
expenditures for AIP totaled $7.0 million.
Retail
and Other capital expenditures each year have been made primarily in connection
with investments made to preserve the value of real estate holdings. At December
31, 2009, CR&R owned 83 acres of undeveloped land and a 56,400-square-foot
building on 5 acres of land.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2010.
Financing
Activities
Cash flow
from financing activities totaled $42.1 million for the three months ended
December 31, 2009, compared with $56.9 million for the same period in the prior
fiscal year due primarily to additional share repurchases and dividend payments
during the current fiscal quarter offset by lower proceeds from stock issuances
and NJNG’s meter sale-leaseback program. NJNG received $4.9 million and $6.3
million in December 2009 and 2008, respectively, related to the meter program,
which is expected to be continued on an annual basis.
NJNG
provides funding for certain of its infrastructure projects through tax exempt,
variable-rate debt, which has been issued to back six series of auction rate
securities (ARS) through the Economic Development Authority of New Jersey (EDA),
and are based on the borrowing costs of the ARS. During periods of reduced
liquidity for ARS, NJNG’s rate on its variable rate debt could default to a
maximum rate of the lesser of (i) 175 percent of the 30-day LIBOR or (ii) 10 to
12 percent, as applicable to a particular series of ARS. Although its average
weighted interest rate has decreased to a rate of 0.41 percent as of December
31, 2009, NJNG continues to review alternatives that would eliminate or mitigate
the inherent interest rate risk associated with its variable rate
debt.
Credit
Ratings
The table
below summarizes NJNG’s current credit ratings issued by two rating entities,
Standard and Poor’s (S&P) and Moody’s Investors Service, Inc.
(Moody’s):
|
Standard
and Poor’s
|
Moody’s
|
Corporate
Rating
|
A
|
N/A
|
Commercial
Paper
|
A-1
|
P-1
|
Senior
Secured
|
A+
|
Aa3
|
Ratings
Outlook
|
Stable
|
Stable
|
NJNG’s
S&P and Moody’s ratings are investment-grade ratings. S&P and Moody’s
give NJNG’s commercial paper the highest rating within the Commercial Paper
investment-grade category. NJR is not a rated entity. On April 30, 2009, S&P
affirmed its ratings and changed its outlook from negative to stable. On
December 22, 2009, Moody’s affirmed NJNG’s Aa3 secured long-term debt rating and
short-term P-1 rating and changed its outlook from negative to
stable.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
NJNG is
not party to any lending agreements that would accelerate the maturity date of
any obligation caused by a failure to maintain any specific credit rating. If
such ratings are downgraded below investment grade, borrowing costs could
increase, as will the costs of maintaining certain contractual relationships and
for future financing. Even if ratings are downgraded without falling below
investment grade, NJR and NJNG may still face increased borrowing costs under
their respective credit facilities. A rating set forth above is not a
recommendation to buy, sell or hold the Company’s or NJNG’s securities and may
be subject to revision or withdrawal at any time. Each rating set forth above
should be evaluated independently of any other rating.
The
timing and mix of any external financings will target a common equity ratio that
is consistent with maintaining the Company’s current short- and long-term credit
ratings.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Financial
Risk Management
Commodity
Market Risks
Natural
gas is a nationally traded commodity, and its prices are determined effectively
by the New York Mercantile Exchange (NYMEX) and over-the-counter markets. The
prices on the NYMEX and over-the-counter markets generally reflect the notional
balance of natural gas supply and demand, but are also influenced significantly
from time to time by other events.
The
regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations in the price of
natural gas. To 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, swaps and physical
contracts to economically hedge purchases and sales of natural gas. Finally, NJR
Energy has entered into two swap transactions related to an 18-year fixed-price
contract, expiring in October 2010, to sell remaining volumes of approximately
2.0 Bcf of natural gas (Gas Sales Contract) to an energy marketing
company.
The
following table reflects the changes in the fair market value of financial
derivatives related to natural gas purchases and sales from September 30, 2009
to December 31, 2009:
(Thousands)
|
Balance
September
30,
2009
|
Increase
(Decrease)
in
Fair
Market
Value
|
Less
Amounts
Settled
|
Balance
December
31,
2009
|
NJNG
|
$(8,073
|
)
|
$(7,274
|
)
|
$(9,584
|
)
|
$(5,763
|
)
|
NJRES
|
27,926
|
|
22,390
|
|
7,700
|
|
42,616
|
|
NJR
Energy
|
3,355
|
|
(1,745
|
)
|
(891
|
)
|
2,501
|
|
Total
|
$23,208
|
|
$13,371
|
|
$(2,775
|
)
|
$39,354
|
|
There
were no changes in methods of valuations during the three months ended December
31, 2009.
The
following is a summary of fair market value of financial derivatives related to
natural gas purchases and sales at December 31, 2009, by method of valuation and
by maturity for each fiscal year period:
(Thousands)
|
2011
|
2012
|
2013-2015
|
After
2015
|
Total
Fair
Value
|
Price
based on NYMEX
|
$15,963
|
|
$(1,280
|
)
|
$ (7
|
)
|
—
|
|
$14,676
|
|
Price
based on other external data
|
26,904
|
|
(2,704
|
)
|
478
|
|
—
|
|
24,678
|
|
Total
|
$42,867
|
|
$(3,984
|
)
|
$471
|
|
—
|
|
$39,354
|
|
New
Jersey Resources Corporation
Part
I
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The
following is a summary of financial derivatives by type as of December 31,
2009:
|
|
Volume
(Bcf)
|
Price
per
Mmbtu
|
Amounts
included in Derivatives
(Thousands)
|
NJNG
|
Futures
|
20.3
|
|
$5.28
- $6.35
|
$(1,861
|
)
|
|
Swaps
|
(10.0
|
)
|
$4.62
- $6.98
|
(4,370
|
)
|
|
Options
|
2.9
|
|
$0.68
- $0.68
|
468
|
|
NJRES
|
Futures
|
(23.5
|
)
|
$4.22
- $10.35
|
15,961
|
|
|
Swaps
|
3.8
|
|
$4.00
- $12.45
|
26,548
|
|
|
Options
|
4.6
|
|
$0.01
- $0.04
|
107
|
|
NJR
Energy
|
Swaps
|
1.9
|
|
$3.55
- $4.41
|
2,501
|
|
Total
|
|
|
|
|
$39,354
|
|
The
following table reflects the changes in the fair market value of physical
commodity contracts from September 30, 2009 to December 31, 2009:
(Thousands)
|
Balance
September
30,
2009
|
Increase
(Decrease)
in Fair
Market
Value
|
Less
Amounts
Settled
|
Balance
December
31,
2009
|
NJRES
|
$16,295
|
|
$(4,187
|
)
|
$7
|
|
$12,101
|
|
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.
The VaR
at December 31, 2009, using the variance-covariance method with a 95 percent
confidence level and a 1-day holding period, was $559,000. The VaR with a 99
percent confidence level and a 10-day holding period was $2.5 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 December 31, 2009. 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.
New
Jersey Resources Corporation
Part
I
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
Unregulated
counterparty credit exposure as of December 31, 2009, is as
follows:
(Thousands)
|
Gross
Credit
Exposure
|
|
Net
Credit
Exposure
|
Investment
grade
|
$152,960
|
|
|
$100,623
|
|
Noninvestment
grade
|
9,345
|
|
|
—
|
|
Internally
rated investment grade
|
28,671
|
|
|
8,528
|
|
Internally
rated noninvestment grade
|
6,521
|
|
|
—
|
|
Total
|
$197,497
|
|
|
$109,151
|
|
NJNG’s
counterparty credit exposure as of December 31, 2009, is as
follows:
(Thousands)
|
Gross
Credit
Exposure
|
|
Net
Credit
Exposure
|
Investment
grade
|
$41,819
|
|
|
$31,897
|
|
Noninvestment
grade
|
380
|
|
|
—
|
|
Internally
rated investment grade
|
994
|
|
|
106
|
|
Internally
rated noninvestment grade
|
1,409
|
|
|
244
|
|
Total
|
$44,602
|
|
|
$32,247
|
|
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
As of
December 31, 2009, NJNG is obligated with respect to loan agreements securing
six series of auction-rate bonds totaling approximately $97 million of
variable-rate debt backed by securities issued by the Economic Development
Authority (EDA). The EDA bonds are ARS and have an interest rate reset every 7
or 35 days, depending upon the applicable series, when an auction is held for
the purposes of determining the interest rate pricing of the securities. The
interest rate associated with the NJNG variable-rate debt is based on the rates
the EDA receives from its ARS. As of December 31, 2009, all of the auctions
surrounding the EDA ARS have failed, resulting in the securities bearing
interest at their maximum rates, as defined in the ARS, as the lesser of (i) 175
percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as applicable to
such series of ARS. While the failure of the ARS auctions has no default impact
on NJNG’s variable-rate debt, it does impact its borrowing costs of the
variable-rate debt. As such, NJNG currently has a weighted average interest rate
of 0.41 percent as of December 31, 2009. There can be no assurance that the EDA
ARS will have enough market liquidity to avoid failed auctions in the future,
which could potentially have an adverse impact on NJNG’s borrowing costs if
LIBOR rates increase. NJR is reviewing alternative methods for refinancing the
ARS at NJNG on a continuing basis, however, it cannot assure that alternative
sources of financing can be implemented in a timely manner.
At
December 31, 2009, the Company (excluding NJNG) had no variable-rate long-term
debt.
Effects
of Inflation
Although
inflation rates have been relatively low to moderate in recent years, any change
in price levels has an effect on operating results due to the capital-intensive
and regulated nature of the Company’s utility subsidiary. The Company attempts
to minimize the effects of inflation through cost control, productivity
improvements and regulatory actions where appropriate.
New
Jersey Resources Corporation
Part
I
ITEM
4. 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 are effective, to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to the Company’s management, including its
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
NJR
continually reviews its disclosure controls and procedures and makes changes, as
necessary, to ensure the quality of its financial reporting. There have been no
changes in internal control over financial reporting that occurred during the
first quarter of 2010 that have materially affected, or are reasonably likely to
materially affect, internal control over financial reporting.
New
Jersey Resources Corporation
Part
II
ITEM
1. LEGAL PROCEEDINGS
|
Information
regarding reportable legal proceedings is contained in Part I, "Item 3. Legal
Proceedings" in NJR’s Annual Report on Form 10-K for the year ended September
30, 2009, and is set forth in Part I, Item 1, Note 13.
Commitment and Contingent
Liabilities—Legal Proceedings in the Unaudited Condensed Consolidated
Financial Statements. No legal proceedings became reportable during the quarter
December 31, 2009, and there have been no material developments during such
quarter regarding any previously reported legal proceedings, which have not been
previously disclosed.
While NJR
attempts to identify, manage and mitigate risks and uncertainties associated
with its business to the extent practical, under the circumstances, some level
of risk and uncertainty will always be present. Part I, Item 1A, "Risk Factors,"
of NJR’s 2009 Annual Report on Form 10-K includes a detailed discussion of NJR’s
risk factors. These risks and uncertainties have the potential to materially
affect NJR’s financial condition and results of operations. There have not been
any material changes from the risk factors as previously disclosed by NJR in the
2009 Annual Report on Form 10-K.
ITEM
2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
The
following table sets forth NJR’s repurchase activity for the quarter ended
December 31, 2009:
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total
Number of Shares
Purchased
as Part of
Publicly
Announced Plans
or
Programs
|
|
Maximum
Number
of
Shares That May
Yet
be Purchased Under
the
Plans or Programs
(1)
|
10/01/09
– 10/31/09
|
|
50,800
|
|
$35.54
|
|
50,800
|
|
273,971
|
11/01/09
– 11/30/09
|
|
25,300
|
|
$34.95
|
|
25,300
|
|
248,671
|
12/01/09
– 12/31/09
|
|
—
|
|
—
|
|
—
|
|
248,671
|
Total
|
|
76,100
|
|
$35.34
|
|
76,100
|
|
248,671
|
(1) On
January 27, 2010, the Board of Directors authorized an increase the number of
shares of NJR common stock authorized for repurchase under NJR’s Share
Repurchase Plan by 2 million shares to a total of 8.8 million
shares.
New
Jersey Resources Corporation
Part
II
(a)
|
An
annual meeting of shareholders was held on January 27,
2010.
|
|
|
|
(b)
|
The
shareholders voted upon the following matters at the January 27, 2010
annual shareholders meeting:
|
|
|
|
(i)
|
The
election of four directors to the Board of Directors for terms expiring in
2013. The results of the voting were as
follows:
|
|
DIRECTORS UNTIL 2013
|
FOR
|
WITHHELD
|
|
|
|
|
|
Lawrence
R. Codey
|
26,196,859
|
2,564,680
|
|
Laurence
M. Downes
|
28,043,986
|
717,554
|
|
Robert
B. Evans
|
28,373,017
|
388,522
|
|
Alfred
C. Koeppe
|
26,277,109
|
2,484,430
|
In
addition to the directors elected at the annual meeting, the terms of the
following members of NJR’s Board of Directors continued after the
meeting:
|
Nina
Aversano
|
|
Donald
L. Correll
|
|
M.
William Howard, Jr.
|
|
Jane
M. Kenny
|
|
J.
Terry Strange
|
|
David
A. Trice
|
|
George
R. Zoffinger
|
|
(ii)
|
Approval
of the action of the Audit Committee in retaining Deloitte & Touche
LLP as NJR’s independent registered public accounting firm. The results of
the voting were as follows:
|
|
FOR
|
AGAINST
|
ABSTAIN
|
|
|
|
|
34,793,104
|
393,406
|
123,027
|
There
were 6,547,998 broker non-votes in the election of directors.
New
Jersey Resources Corporation
Part
II
10.3
|
New
Jersey Natural Gas Company Plan for Retirement Allowances for
Non-Represented Employees (Amended and Restated Effective January 1,
2010)*
|
|
|
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**
|
* Filed
herewith.
**This
certificate accompanies this report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of
Section 18 or any other provision of the Securities Exchange Act of 1934, as
amended.
New
Jersey Resources Corporation
Part
II
SIGNATURES
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:
February 3, 2010
|
|
|
By:/s/
Glenn C. Lockwood
|
|
Glenn
C. Lockwood
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|