Attached files
file | filename |
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EX-23.1 - EXHIBIT 23.1 - NEW JERSEY RESOURCES CORP | ex23_1.htm |
EX-31.2 - EXHIBIT 31.2 - NEW JERSEY RESOURCES CORP | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - NEW JERSEY RESOURCES CORP | ex32_1.htm |
EX-21.1 - EXHIBIT 21.1 - NEW JERSEY RESOURCES CORP | ex21_1.htm |
EX-32.2 - EXHIBIT 32.2 - NEW JERSEY RESOURCES CORP | ex32_2.htm |
EX-31.1 - EXHIBIT 31.1 - NEW JERSEY RESOURCES CORP | ex31_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2009
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
TRANSITION PERIOD
FROM TO
Commission
file number 1-8359
NEW
JERSEY RESOURCES CORPORATION
(Exact
name of registrant as specified in its charter)
New
Jersey
|
22-2376465
|
|
(State
or other jurisdiction of incorporation
or organization)
|
(I.R.S.
Employer Identification
Number)
|
|
1415
Wyckoff Road, Wall, New Jersey 07719
|
732-938-1480
|
|
(Address
of principal executive
offices)
|
(Registrant’s
telephone number, including
area code)
|
|
Securities
registered pursuant to Section 12 (b) of the Act:
|
||
Common
Stock - $2.50 Par Value
|
New
York Stock Exchange
|
|
(Title
of each class)
|
(Name
of each exchange on which registered)
|
|
Securities
registered pursuant to Section 12 (g) of the Act:
None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes:
x No:
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes: o No: x
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes:
x No:
o
Indicate
by check mark 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 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer: x
|
Accelerated
filer: o
|
Non-accelerated
filer: o
|
Smaller
reporting company: o
|
(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
aggregate market value of the Registrant’s Common Stock held by nonaffiliates
was $1,417,456,420 based on the closing price of $33.98 per share on March 31,
2009 as reported on the New York Stock Exchange.
The
number of shares outstanding of $2.50 par value Common Stock as of November 24,
2009 was 41,585,243.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s definitive Proxy Statement for the Annual Meeting of
Shareowners (Proxy Statement) to be held January 27, 2010, to be filed on or
about December 15, 2009, are incorporated by reference into Part I and Part III
of this report.
New
Jersey Resources Corporation
TABLE
OF CONTENTS
Page
|
|||||
Information
Concerning Forward-Looking Statements
|
1
|
||||
PART
I
|
|||||
ITEM
1.
|
Business
|
2
|
|||
Organizational
Structure
|
2
|
||||
Business
Segments
|
2
|
||||
Natural
Gas Distribution
|
3
|
||||
General
|
3
|
||||
Throughput
|
3
|
||||
Seasonality
of Gas Revenues
|
3
|
||||
Gas
Supply
|
4
|
||||
Regulation
and Rates
|
6
|
||||
Competition
|
6
|
||||
Energy
Services
|
6
|
||||
Other
Business Operations
|
8
|
||||
Retail
and Other
|
8
|
||||
Environment
|
8
|
||||
Employee
Relations
|
9
|
||||
ITEM
1A.
|
Risk
Factors
|
10
|
|||
ITEM
1B.
|
Unresolved
Staff Comments
|
16
|
|||
ITEM
2.
|
Properties
|
16
|
|||
ITEM
3.
|
Legal
Proceedings
|
17
|
|||
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
|||
ITEM
4A.
|
Executive
Officers of the Company
|
18
|
|||
PART
II
|
|||||
ITEM
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
20
|
|||
ITEM
6.
|
Selected
Financial Data
|
21
|
|||
ITEM
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
|||
ITEM
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
50
|
|||
ITEM
8.
|
Financial
Statements and Supplementary Data
|
53
|
|||
Management’s
Report on Internal Control over Financial Reporting
|
53
|
||||
Report
of Independent Registered Public Accounting Firm
|
54
|
||||
ITEM
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
100
|
|||
ITEM
9A.
|
Controls
and Procedures
|
100
|
|||
ITEM
9B.
|
Other
Information
|
101
|
|||
PART
III*
|
|||||
ITEM
10.
|
Directors,
Executive Officers and Corporate Governance
|
102
|
|||
ITEM
11.
|
Executive
Compensation
|
102
|
|||
ITEM
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
102
|
|||
ITEM
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
102
|
|||
ITEM
14.
|
Principal
Accountant Fees and Services
|
102
|
|||
PART
IV
|
|||||
ITEM
15.
|
Exhibits
and Financial Statement Schedules
|
103
|
|||
Index
to Financial Statement Schedules
|
104
|
||||
Signatures
|
107
|
||||
Exhibit
Index
|
108
|
* Portions
of Item 10 and Items 11-14 are Incorporated by Reference from the Proxy
Statement.
i
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 Item 1.—Business, under
the captions “Natural Gas Distribution—General;—Throughput;—Seasonality of Gas
Revenues;—Gas Supply;—Regulation and Rates;—Competition”; “Energy Services”;
“Retail and Other”; “Environment,” and Item 3.—“Legal Proceedings,” and in Part
II including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 7, and “Quantitative and Qualitative Disclosures
About Market Risk” in Item 7A are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements can also be identified by the use of forward-looking terminology such
as “may,” “intend,” “expect,” “believe” or “continue” or comparable terminology
and are made based upon management’s expectations and beliefs concerning future
developments and their potential effect upon New Jersey Resources Corporation
(NJR or the Company). There can be no assurance that future developments will be
in accordance with management’s expectations or that the effect of future
developments on the Company will be those anticipated by
management.
The
Company cautions readers that the assumptions that form the basis for
forward-looking statements regarding customer growth, customer usage, financial
condition, results of operations, cash flows, capital requirements, market risk
and other matters for fiscal 2009 and thereafter include many factors that are
beyond the Company’s ability to control or estimate precisely, such as estimates
of future market conditions, the behavior of other market participants and
changes in the debt and equity capital markets. The factors that could cause
actual results to differ materially from NJR’s expectations include, but are not
limited to, those discussed in Risk Factors in Item 1A, as well as the
following:
|
·
|
weather
and economic conditions;
|
|
·
|
NJR’s
dependence on operating
subsidiaries;
|
|
·
|
demographic
changes in the New Jersey Natural Gas (NJNG) service
territory;
|
|
·
|
the
rate of NJNG customer growth;
|
|
·
|
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;
|
|
·
|
changes
in rating agency requirements and/or credit ratings and their effect on
availability and cost of capital to the
Company;
|
|
·
|
continued
volatility or seizure of the credit markets that would result in the
increased cost and decreased availability and access to credit at NJR to
fund and support physical gas inventory purchases and other working
capital needs at NJRES, and all other non-regulated subsidiaries, as well
as negatively affect access to the commercial paper market and other
short-term financing markets at NJNG to allow it to fund its commodity
purchases and meet its short-term obligations as they come
due;
|
|
·
|
the
ability to comply with debt
covenants;
|
|
·
|
continued
failures in the market for auction rate
securities;
|
|
·
|
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 a continuing downturn in the financial
markets;
|
|
·
|
the
ability to maintain effective internal
controls;
|
|
·
|
accounting
effects and other risks associated with hedging activities and use of
derivatives contracts;
|
|
·
|
commercial
and wholesale credit risks, including creditworthiness of customers and
counterparties;
|
|
·
|
the
ability to obtain governmental approvals and/or financing for the
construction, development and operation of certain non-regulated energy
investments;
|
|
·
|
risks
associated with the management of the Company’s joint ventures and
partnerships;
|
|
·
|
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;
|
|
·
|
dependence
on third-party storage and transportation
facilities;
|
|
·
|
operating
risks incidental to handling, storing, transporting and providing
customers with natural gas;
|
|
·
|
access
to adequate supplies of natural
gas;
|
|
·
|
the
regulatory and pricing policies of federal and state regulatory
agencies;
|
|
·
|
the
ultimate outcome of pending regulatory proceedings, including the possible
expiration of the Conservation Incentive Program
(CIP);
|
|
·
|
the
availability of an adequate number of appropriate creditworthy
counterparties and liquidity in the wholesale energy trading
market;
|
|
·
|
the
disallowance of recovery of environmental-related expenditures and other
regulatory changes;
|
|
·
|
environmental-related
and other litigation and other uncertainties;
and
|
|
·
|
the
impact of NJR’s charter and bylaws on a potential
transaction.
|
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.
Page
1
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
ORGANIZATIONAL
STRUCTURE
New
Jersey Resources Corporation (NJR or the Company) is a New Jersey corporation
formed in 1981 pursuant to a corporate reorganization. The Company is an energy
services holding company providing retail and wholesale energy services to
customers in states from the Gulf Coast to the New England regions, including
the Mid-Continent region, the West Coast and Canada. The Company is an exempt
holding company under section 1263 of the Energy Policy Act of 2005. NJR’s
subsidiaries and businesses include:
New
Jersey Natural Gas (NJNG), a local natural gas distribution company that
provides regulated retail natural gas service to approximately 487,000
residential and commercial customers in central and northern New Jersey and
participates in the off-system sales and capacity release markets. NJNG is
regulated by the New Jersey Board of Public Utilities (BPU) and comprises the
Company’s Natural Gas Distribution segment.
NJR
Energy Services (NJRES) is the Company’s principal non-utility subsidiary. It
maintains and transacts around a portfolio of physical assets consisting of
natural gas storage and transportation contracts. Also, NJRES provides wholesale
energy management services to other energy companies. NJRES comprises the
Company’s Energy Services segment.
NJR also
has retail and other operations (Retail and Other) , which includes the
following companies:
|
Ÿ
|
NJR
Energy Investments (NJREI), an unregulated affiliate that consolidates the
Company’s unregulated energy-related investments. NJREI includes the
following wholly owned
subsidiaries:
|
|
*
|
NJR
Energy Holdings, a company that invests primarily in energy-related
ventures through its subsidiary, NJNR Pipeline (Pipeline), which holds the
Company’s 5.53 percent interest in Iroquois Gas and Transmission System,
LP (Iroquois) and another subsidiary, NJR Storage Holdings Company, which
owns NJR Steckman Ridge Storage Company, which holds the Company’s 50
percent combined interest in Steckman Ridge GP, LLC and Steckman Ridge, LP
(collectively, Steckman Ridge), a natural gas storage facility that has
been developed with a partner in western
Pennsylvania.
|
|
*
|
NJR
Investment, a company that makes and holds certain energy-related
investments, primarily through equity instruments of public
companies.
|
|
*
|
NJR
Energy Corporation (NJR Energy), a company that invests in energy-related
ventures.
|
|
*
|
NJR
Clean Energy Ventures, a subsidiary formed in 2009, which the Company
plans to use to invest in clean energy
projects.
|
|
Ÿ
|
NJR
Retail Holdings (Retail Holdings), an unregulated affiliate that
consolidates the Company’s unregulated retail operations. Retail Holdings
consists of the following wholly owned
subsidiaries:
|
|
*
|
NJR
Home Services (NJRHS), a company that provides heating, ventilation and
cooling (HVAC) service repair and contract
services.
|
|
*
|
Commercial
Realty & Resources (CR&R), a company that holds and develops
commercial real estate.
|
|
*
|
NJR
Plumbing Services (NJRPS), a company that provides plumbing repair and
installation services.
|
|
Ÿ
|
NJR
Service (NJR Service), an unregulated company that provides shared
administrative services, including corporate communications, financial and
planning, internal audit, legal, human resources and information
technology for NJR and all
subsidiaries.
|
BUSINESS
SEGMENTS
The
Company operates within two reportable business segments: Natural Gas
Distribution and Energy Services.
The
Natural Gas Distribution segment consists of regulated energy and off-system,
capacity and storage management operations, and the Energy Services segment
consists of unregulated wholesale energy operations.
Page
2
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS (Continued)
NATURAL
GAS DISTRIBUTION
General
NJNG
provides natural gas service to approximately 487,000 customers. Its service
territory encompasses 1,516 square miles, covering 105 municipalities with an
estimated population of 1.4 million people.
NJNG’s
service territory is in New Jersey’s Monmouth and Ocean counties and parts of
Burlington, Morris and Middlesex counties. It is primarily suburban, with a wide
range of cultural and recreational activities and highlighted by approximately
100 miles of New Jersey coastline. It is in close proximity to New York City,
Philadelphia and the metropolitan areas of northern New Jersey and is accessible
through a network of major roadways and mass transportation. NJNG added 5,841
and 7,175 new customers and added natural gas heat and other services to another
709 and 728 existing customers in fiscal 2009 and 2008, respectively. NJNG’s new
customer annual growth rate of approximately 1.2 percent is expected to continue
with projected additions in the range of approximately 12,000 to 14,000 new
customers over the next two years. This anticipated customer growth represents
approximately $3.4 million in expected new annual utility gross margin as
calculated under NJNG’s Conservation Incentive Program (CIP)
tariff.
In
assessing the potential for future growth in its service area, NJNG uses
information derived from county and municipal planning boards that describes
housing developments in various stages of approval. Furthermore, builders in
NJNG’s service area are surveyed to determine their development plans for future
time periods. NJNG has also periodically engaged outside consultants to assist
in its customer growth projections. In addition to customer growth through new
construction, NJNG’s business strategy includes aggressively pursuing
conversions from other fuels, such as electricity, propane and oil. The Company
estimates that, during fiscal 2010, approximately 50 percent of NJNG’s projected
customer growth will consist of conversions.
Throughput
For the
fiscal year ended September 30, 2009, operating revenues and throughput by
customer class were as follows:
Operating
Revenues
|
Throughput
|
|||||||||||||||
(Thousands)
|
(Bcf)
|
|||||||||||||||
Residential
|
$ | 686,798 | 63 | % | 43.6 | 33 | % | |||||||||
Commercial
and other
|
144,565 | 13 | 9.8 | 7 | ||||||||||||
Firm
transportation
|
40,356 | 4 | 9.4 | 7 | ||||||||||||
Total
residential and commercial
|
871,719 | 80 | 62.8 | 47 | ||||||||||||
Interruptible
|
5,711 | 1 | 4.1 | 3 | ||||||||||||
Total
system
|
877,430 | 81 | 66.9 | 50 | ||||||||||||
Incentive
programs
|
204,571 | 19 | 66.1 | 50 | ||||||||||||
Total
|
$ | 1,082,001 | 100 | % | 133.0 | 100 | % |
In fiscal
2009, no single customer represented more than 10 percent of total NJNG
operating revenue.
Seasonality
of Gas Revenues
As a
result of the heat-sensitive nature of NJNG’s residential customer base, therm
sales are significantly affected by weather conditions. Specifically, customer
demand substantially increases during the winter months when natural gas is used
for heating purposes. Weather conditions directly influence the volume of
natural gas delivered to customers. The relative measurement of the impact of
weather is in degree-days. Degree-day data is used to estimate amounts of energy
required to maintain comfortable indoor temperature levels based on each day’s
average temperature. A degree-day is the measure of the variation in the weather
based on the extent to which the average daily temperature falls below 65
degrees Fahrenheit. Each degree of temperature below 65 degrees Fahrenheit is
counted as one heating degree-day. Normal heating degree-days are based on a
20-year average, calculated based upon three reference areas representative of
NJNG’s service territory.
Effective
October 1, 2006, the New Jersey Board of Public Utilities (BPU) authorized a
three-year CIP pilot program, which decoupled the link between customer usage
and NJNG’s utility gross margin, allowing NJNG to promote energy conservation
measures. During the term of the pilot, the Weather Normalization Clause (WNC)
was suspended and replaced with the CIP tracking mechanism, which addresses
utility gross margin variations related to both weather and customer usage.
Recovery of such utility gross margin is subject to additional conditions
including an earnings test and an evaluation of Basic Gas Supply Service-related
savings achieved. In May 2008, NJNG filed its Petition for the annual review of
its CIP. On October 3, 2008, the BPU approved the CIP petition on a provisional
basis, effective the date of the order, and on June 8, 2009, the BPU issued
their final order approving the rates on a permanent basis. On April 1, 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 of October 1, 2009, the CIP
will remain in effect for an additional year or until a final order is issued by
the BPU.
Page
3
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS (Continued)
As a
result of increases in NJNG’s operation, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base rates for delivery
service. This request is consistent with NJNG’s objectives of providing safe and
reliable service to its customers and earning a market-based return on its
regulated investments. On October 3, 2008, the BPU unanimously approved a
revenue increase in NJNG’s base rates of $32.5 million as well as certain
changes in the design of its tariff rates.
For
additional information regarding the CIP, see Management’s Discussion and
Analysis—Natural Gas Distribution Operations and Note 2. Regulation in the
accompanying Consolidated Financial Statements.
Gas
Supply
Firm Natural Gas
Supplies
NJNG’s
gas supply portfolio consists of long-term (over seven months), winter-term (for
the five winter months of November through March) and short-term contracts. In
fiscal 2009, NJNG purchased gas from 95 suppliers under contracts ranging from
one day to one year. In fiscal 2009, NJNG purchased over 10 percent of its
natural gas from two suppliers, Southwestern Energy Services Company and Devon
Gas Services, LP. NJNG believes the loss of any one or all of these suppliers
would not have a material adverse impact on its results of operations, financial
position or cash flows as an adequate number of alternative suppliers exist.
NJNG believes that its supply strategy should adequately meet its expected firm
load over the next several years.
Firm Transportation and
Storage Capacity
In order
to take delivery of firm natural gas supplies, which ensures the ability to
reliably service its customers, NJNG maintains agreements for firm
transportation and storage capacity with several interstate pipeline companies.
NJNG receives natural gas at eight city gate stations located in Middlesex,
Morris and Passaic counties in New Jersey.
The
pipeline companies that provide firm transportation service to NJNG’s city gate
stations, the maximum daily deliverability of that capacity in dekatherms (dths)
and the contract expiration dates are as follows:
Pipeline
|
Maximum
daily
|
Expiration
|
|
deliverability
(dths)
|
|||
Algonquin
Gas Transmission
|
12,000
|
2011
|
|
Columbia
Gas Transmission Corp.
|
20,000
|
2024
|
|
Tennessee
Gas Pipeline Co.
|
35,894
|
Various
dates between 2011 and 2013
|
|
Texas
Eastern Transmission, L.P.
|
488,738
|
Various
dates between 2014 and 2023
|
|
Transcontinental
Gas Pipe Line Corp.
|
22,531
|
2014
|
|
579,163
|
The
pipeline companies that provide firm contract transportation service for NJNG
and supply the above pipelines are ANR Pipeline Company, Iroquois Gas
Transmission System, Tennessee Gas Pipeline, Dominion Transmission Corporation
and Columbia Gulf Transmission Company.
In
addition, NJNG has storage and related transportation contracts that provide
additional maximum daily deliverability to NJNG’s city gate stations of 102,941
dths from storage fields in its Northeast market area. The storage suppliers,
the maximum daily deliverability of that storage capacity and the contract
expiration dates are as follows:
Pipeline
|
Maximum
daily
|
Expiration
|
|
deliverability
(dths)
|
|||
Texas
Eastern Transmission, L.P.
|
94,557
|
2014
|
|
Transcontinental
Gas Pipe Line Corp.
|
8,384
|
2014
|
|
102,941
|
Page
4
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS (Continued)
NJNG also
has upstream storage contracts, maximum daily deliverability and contract
expiration dates as follows:
Company
|
Maximum
daily
|
Expiration
|
|
deliverability
(dths)
|
|||
ANR
Pipeline Company
|
39,831
|
2013
|
|
Central
NY Oil & Gas (Stagecoach)
|
47,065
|
2011
|
|
Dominion
Transmission Corporation
|
103,714
|
Various
dates between 2012 and 2016
|
|
190,610
|
NJNG
utilizes its transportation contracts to transport gas from the ANR, Dominion
and Stagecoach storage fields to NJNG’s city gates.
Peaking
Supply
To manage
its winter peak day demand NJNG maintains two liquefied natural gas (LNG)
facilities with a combined deliverability of approximately 170,000 dths per day,
which represents approximately 21 percent of its estimated peak day sendout. See
Item 2. Properties–NJNG
for additional information regarding the LNG storage facilities.
Basic Gas Supply
Service
Wholesale
natural gas prices are, by their very nature, volatile. NJNG has mitigated the
impact of volatile price changes on customers through the use of financial
derivative instruments, which are part of its financial risk management program,
its storage incentive program and its Basic Gas Supply Service (BGSS) clause.
BGSS is a BPU-approved clause designed to allow for the recovery of natural gas
commodity costs. The clause also requires all New Jersey natural gas utilities
to make an annual filing by each June 1 for review of BGSS rates and to request
a potential rate change to be effective the following October 1. The BGSS also
is designed to allow each natural gas utility to provisionally increase
residential and small commercial customer BGSS rates up to 5 percent on December
1 and February 1 on a self-implementing basis, after proper notice and BPU
action on the June filing. Such increases are subject to subsequent BPU review
and final approval. Decreases in the BGSS rate and BGSS refunds can be
implemented upon five days’ notice to the BPU.
In March
2008, NJNG, the BPU Staff and the New Jersey Department of the Public Advocate,
Division of Rate Counsel (Rate Counsel) entered into a stipulation to resolve
certain matters related to NJNG’s fiscal 2007 BGSS filing. This stipulation was
approved by the BPU in May 2008, and resulted in NJNG recording a non-recurring
settlement charge to its BGSS costs of $300,000.
In May
2008, NJNG filed for an increase to the periodic BGSS factor to be effective
October 1, 2008, that would increase an average residential heating customer’s
bill by approximately 18.0 percent due to an increase in the price of wholesale
natural gas. Subsequent to the filing, wholesale natural gas prices moderated
and, on September 22, 2008, NJNG, the Staff of the BPU, and Rate Counsel signed
an agreement for an increase to the periodic BGSS factor that would increase an
average residential heating customer’s bill by approximately 8.9 percent. On
October 3, 2008, and June 8, 2009, the BPU and Rate Counsel approved the BGSS
increase on a provisional and final basis, respectively, effective the date of
the BPU order.
In June
2009, NJNG filed its annual BGSS and CIP filing proposing a decrease of 17.6
percent for the average residential heating customer of which 15.7 percent stems
from 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 and a minor reduction to the rate related to collecting
the remaining balance under the WNC.
In
September 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 stems from the reduction to the BGSS price and the balance of rate
change is related to the CIP and WNC rates as discussed above.
These
rate changes, as well as other regulatory actions, are discussed further in
Note 2. Regulation in
the accompanying Consolidated Financial Statements in Part II, Item
8.
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Part
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ITEM
1. BUSINESS (Continued)
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Future Natural Gas
Supplies
NJNG
expects to meet the natural gas requirements for existing and projected firm
customers into the foreseeable future. If NJNG’s long-term natural gas
requirements change, NJNG would renegotiate and restructure its contract
portfolio components to better match the changing needs of its
customers.
Regulation
and Rates
State
NJNG is
subject to the jurisdiction of the BPU with respect to a wide range of matters
such as rates, the issuance of securities, the adequacy of service, the manner
of keeping its accounts and records, the sufficiency of natural gas supply,
pipeline safety, compliance with affiliate standards and the sale or encumbrance
of its properties.
See Note 2. Regulation in the
accompanying Consolidated Financial Statements for additional information
regarding NJNG’s rate proceedings.
Federal
The
Federal Energy Regulatory Commission (FERC) regulates rates charged by
interstate pipeline companies for the transportation and storage of natural gas.
This affects NJNG’s agreements for the purchase of such services with several
interstate pipeline companies. Any costs associated with these services are
recoverable through the BGSS.
Competition
Although
its franchises are nonexclusive, NJNG is not currently subject to competition
from other natural gas distribution utilities with regard to the transportation
of natural gas in its service territory. Due to significant distances between
NJNG’s current large industrial customers and the nearest interstate natural gas
pipelines, as well as the availability of its transportation tariff, NJNG
currently does not believe it has significant exposure to the risk that its
distribution system will be bypassed. Competition does exist from suppliers of
oil, coal, electricity and propane. At the present time, however, natural gas is
used in favor of alternate fuels in over 95 percent of new construction due to
its efficiency and reliability. Natural gas prices are a function of market
supply and demand, although NJNG believes natural gas will remain competitive
with alternate fuels, no assurance can be given in this regard.
The BPU,
within the framework of the Electric Discount and Energy Competition Act
(EDECA), fully opened NJNG’s residential markets to competition, including
third-party suppliers, and restructured rates to segregate its BGSS and delivery
(i.e., transportation) prices. In the absence of any third-party supplier, BGSS
must be provided by the state’s natural gas utilities. On September 30, 2009,
NJNG had 14,608 residential and
6,357 commercial
and industrial customers utilizing the transportation service. Based on its
current and projected level of transportation customers, NJNG expects to use its
existing firm transportation and storage capacity to fully meet its firm sales
contract obligations.
ENERGY
SERVICES
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 our 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 market
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, while focusing
on maintaining a low-risk operating and counterparty credit
profile:
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Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences of natural gas
prices to generate financial margin (as defined
below);
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Providing
natural gas portfolio management services to nonaffiliated utilities and
electric generation facilities;
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Leveraging
transactions for the delivery of natural gas to customers by aggregating
the natural gas commodity costs and transportation costs in order to
minimize the total cost required to provide and deliver natural gas to
NJRES’ customers 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
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1. BUSINESS (Continued)
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Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
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NJRES
views “financial margin” as its key financial measurement metric. NJRES’
financial margin, which is a non-GAAP financial measure, represents revenues
earned from the sale of natural gas less costs of natural gas sold,
transportation and storage, and excludes any accounting impact from the change
in fair value of derivative instruments designed to hedge the economic impact of
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 and therefore NJRES believes it is more
representative of its overall expected economic result.
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 the Northeast, Gulf Coast, Mid-continent and
Appalachian regions, the West Coast and Canada. These assets become more
valuable when prices change between these areas and across time periods. On a
forward basis, NJRES will lock in these price differentials through the use of
financial instruments. 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
also participates in park-and-loan transactions with pipeline counterparties,
where NJRES will park (store on the pipeline) natural gas to be redelivered to
NJRES at a later date or borrow (receive a loan of natural gas from the
pipeline) to be returned to the pipeline at a later date. In these cases, NJRES
evaluates the economics of the transaction to determine if it can capture
pricing differentials in the marketplace in order to be able to generate
financial margin. In evaluating these transactions NJRES will compare the fixed
fee it will pay to or receive from the pipeline, along with other costs such as
time value of money, and the resulting spread it can generate when considering
the market price at the beginning and end of the time period of the park or
loan. When the transaction allows NJRES to generate a financial margin, NJRES
will fix the financial margin by economically hedging the transaction with
natural gas futures.
NJRES has
built a portfolio of customers including local distribution companies,
industrial companies, electric generators, retail aggregators and other
wholesale marketing companies. Sales to these customers have allowed NJRES to
leverage its transportation and storage capacity and manage sales to these
customers in an aggregate fashion. This strategy allows NJRES to extract more
value from its portfolio of natural gas storage and pipeline transportation
capacity through the arbitrage of pricing differences as a result of locational
differences or over different periods of time.
In
conducting its business, NJRES mitigates risk by following formal risk
management guidelines, including transaction limits, approval processes,
segregation of duties, and formal contract and credit review and approval
procedures. NJRES continuously monitors and seeks to reduce the risk associated
with its credit exposures with its various counterparties. The Risk Management
Committee (RMC) of NJR oversees compliance with these established
guidelines.
In fiscal
2009, NJRES had one customer, who represented 14 percent of its total revenue.
Management believes that the loss of this customer would not have a material
effect on its financial position, results of operations or cash flows as an
adequate number of alternative counterparties exist.
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1. BUSINESS (Continued)
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OTHER
BUSINESS OPERATIONS
RETAIL
AND OTHER
Retail
and Other operations consist primarily of the following unregulated
affiliates:
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NJRHS,
which provides service, sales and installation of
appliances;
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NJR
Energy Holdings, a company that invests in energy-related ventures through
its subsidiary, Pipeline, which consists primarily of its 5.53 percent
equity investment in Iroquois, which is a 412-mile natural gas pipeline
from the New York-Canadian border to Long Island, New
York;
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NJR
Steckman Ridge Storage Company, which holds the Company’s 50 percent
equity investment in Steckman Ridge. Steckman Ridge is a partnership,
jointly owned and controlled by subsidiaries of the Company and
subsidiaries of Spectra Energy Corporation, that built, owns and operates
a 17.7 Bcf natural gas storage facility in western
Pennsylvania.
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On
June 5, 2008, the Federal Energy Regulatory Commission (FERC) issued
Steckman Ridge a certificate of public convenience and necessity
authorizing the ownership, construction and operation of its natural gas
storage facility and associated facilities. On April 1, 2009, Steckman
Ridge received authorization to place certain injection related facilities
into commercial operation. Customers have begun to inject natural gas
inventory in preparation for the initial withdrawal season. An additional
drilling program will be reviewed in the third quarter of fiscal 2010. As
of September 30, 2009, NJR has invested approximately $122.5 million in
Steckman Ridge, excluding capitalized interest and other direct costs.
Total project costs related to the development of the storage facility are
currently estimated at approximately $265 million, of which NJR is
obligated to fund 50 percent, or approximately $132.5 million. Steckman
Ridge may seek non-recourse financing upon completion of the construction
and development of its facilities, thereby potentially reducing the final
expected recourse obligation of NJR. There can be no assurances that such
non-recourse project financing will be secured or available for Steckman
Ridge;
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CR&R,
which holds and develops commercial real
estate.
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As
of September 30, 2009, CR&R’s real estate portfolio consisted of 31
acres of undeveloped land in Monmouth County with a net book value of $6.5
million, 52 acres of undeveloped land in Atlantic County with a net book
value of $2.1 million and a 56,400-square-foot office building on 5 acres
of land in Monmouth County with a net book value of $8.9 million. The
Atlantic County location has 11 acres under contract for sale and will be
sold as undeveloped land, subject to all approvals being obtained. An
additional 5 acres of undeveloped land in Monmouth County, with a net book
value of $1.7 million, is also under contract for sale and such sale is
estimated to close in fiscal 2010, subject to all approvals being
obtained. The remaining 26 acres of undeveloped land in Monmouth County
with a net book value of $4.8 million will be developed or sold based on
market conditions. The specific time frame for development or sale is
currently unknown;
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NJR
Investment, a company that makes and holds certain energy-related
investments, primarily through equity instruments of public
companies:
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NJR Energy, a company that
invests in energy-related ventures;
and
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NJR
Service, which provides shared administrative and financial services to
the Company and all its
subsidiaries.
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ENVIRONMENT
The
Company and its subsidiaries are subject to legislation and regulation by
federal, state and local authorities with respect to environmental matters. The
Company believes that it is in compliance in all material respects with all
applicable environmental laws and regulations.
NJNG is
responsible for the environmental remediation of five manufactured gas plant
(MGP) sites, which contain contaminated residues from former gas manufacturing
operations that ceased at these sites by the mid-1950s and, in some cases, had
been discontinued many years earlier. In September 2009, NJNG updated an
environmental review of the MGP sites, including a review of potential liability
related to the investigation and remedial action on these sites. Based on this
review, NJNG estimated that the total future expenditures to remediate and
monitor the five MGP sites for which it is responsible will range from $146.7
million to $244.3 million.
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1. BUSINESS (Continued)
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NJNG’s
estimate of these liabilities is based upon known facts, existing technology and
enacted laws and regulations in place when the review was completed. Where
available information is sufficient to estimate the amount of the liability, it
is NJNG’s policy to accrue the full amount of such estimate. Where the
information is sufficient only to establish a range of possible liability, and
no point within the range is more likely than the other, it is NJNG’s policy to
accrue the lower end of the range. As a result, NJNG has recorded an MGP
remediation liability and a corresponding Regulatory asset of $146.7 million on
the Consolidated Balance Sheet; however, actual costs may differ from these
estimates. NJNG will continue to seek recovery of these costs through its
remediation rider. See Item 3.
Legal Proceedings and Note 13. Commitments and Contingent
Liabilities in the accompanying Consolidated Financial Statements for
information with respect to environmental matters and material expenditures for
the remediation of the MGP sites.
CR&R
is the owner of certain undeveloped land in Monmouth and Atlantic counties, New
Jersey, with a net book value at September 30, 2009, of $8.6 million that is
regulated by the provisions of the Freshwater Wetlands Protection Act (Wetlands
Act), which restricts building in areas defined as “freshwater wetlands” and
their transition areas. Based upon a third-party environmental engineer’s
delineation of the wetlands and transition areas in accordance with the
provisions of the Wetlands Act, CR&R will file for a Letter of
Interpretation from the New Jersey Department of Environmental Protection
(NJDEP) as parcels of land are selected for development. If the NJDEP reduces
the amount of developable yield from CR&R’s current estimates, a write-down
of the carrying value of the undeveloped land may be required.
Taking
into consideration the environmental engineer’s revised estimated developable
yield for undeveloped acreage and recently negotiated sales, the Company does
not believe that a write-down of the carrying value of the Monmouth and Atlantic
counties land is necessary as of September 30, 2009.
Although
the Company cannot estimate with certainty future costs of environmental
compliance, which, among other factors, are subject to changes in technology and
governmental regulations, the Company does not presently anticipate any
additional significant future expenditure for compliance with existing
environmental laws and regulations, other than for the remediation of the MGP
sites discussed in Note 13.
Commitments and Contingent Liabilities in the accompanying Consolidated
Financial Statements, which would have a material effect upon the capital
expenditures, results of operations or competitive position of the Company or
its subsidiaries.
EMPLOYEE
RELATIONS
As of
September 30, 2009, the Company and its subsidiaries employed 900 employees
compared with 854 employees as of September 30, 2008. Of the total number of
employees, NJNG had 402 and 399 and NJRHS had 97 and 94 union employees as of
September 30, 2009 and 2008, respectively. NJNG and NJRHS have collective
bargaining agreements with local 1820 of the International Brotherhood of
Electrical Workers (IBEW), AFL-CIO expiring in December 2011 and April 2010,
respectively. The labor agreements cover wage increases and other benefits
during the term of the agreements. The Company considers its relationship with
employees, including those covered by collective bargaining agreements, to be
good.
AVAILABLE
INFORMATION AND CORPORATE GOVERNANCE DOCUMENTS
The
following items are available free of charge on our website at http://njr360.client.shareholder.com/sec.cfm
as soon as reasonably possible after filing or furnishing them with the
Securities and Exchange Commission (SEC):
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Annual
reports on Form 10-K;
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Quarterly
reports on Form 10-Q; and
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Current
reports on Form 8-K.
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In
addition, on our website at http://njr360.client.shareholder.com/governance.cfm, the following documents are
also available free of charge:
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Corporate
governance guidelines;
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Principal
Executive Officer and Senior Financial Officers Code of
Ethics;
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Wholesale Trading Code of
Conduct;
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NJR
Code of Conduct; and
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the
charters of the following Board Committees: Audit, Leadership Development
and Compensation and Nominating/Corporate
Governance.
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New
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ITEM
1. BUSINESS (Continued)
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A printed
copy of each is available free of charge to any shareholder who requests it by
contacting the Corporate Secretary at New Jersey Resources Corporation, 1415
Wyckoff Road, Wall, NJ 07719.
ITEM
1A. RISK FACTORS
|
When
considering any investment in NJR’s securities, investors should consider the
following information, as well as the information contained under the caption
“Forward Looking Statements,” in analyzing the Company’s present and future
business performance. While this list is not exhaustive, NJR’s management also
places no priority or likelihood based on their descriptions or orders of
presentation.
Financial
Risks
Inability
of NJR and/or NJNG to access the financial markets and conditions in the credit
markets could affect management’s ability to execute their respective business
plans.
NJR
relies on access to both short-term and long-term credit as significant sources
of liquidity for capital requirements not satisfied by its cash flow from
operations. Any deterioration in NJR’s financial condition could hamper its
ability to access the credit markets or otherwise obtain debt financing. Because
certain state regulatory approvals may be necessary in order for NJNG to incur
debt, NJNG may not be able to access credit markets on a timely
basis.
External
events could also increase the cost of borrowing or adversely affect the ability
to access the financial markets. Such external events could include the
following:
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economic
weakness in the United States or in the regions where NJR
operates;
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financial
difficulties of unrelated energy
companies;
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capital
market conditions generally;
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market
prices for natural gas;
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the
overall health of the natural gas utility industry;
and
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fluctuations
in interest rates.
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NJR and
its subsidiaries’ ability to secure short-term financing is subject to
conditions in the credit markets. The volatility in the U.S. credit markets and
stricter bank credit policies have contributed to a slowdown of lending by
banks. A prolonged constriction of credit availability could affect management’s
ability to execute NJR’s, NJRES’ and NJNG’s business plan. An inability to
access capital may limit the ability to pursue improvements or acquisitions that
NJR, or its subsidiaries, may otherwise rely on for both current operations and
future growth.
Although
NJRES and NJNG have strict credit risk management policies and procedures, they
execute derivative transactions with financial institutions as a part of their
economic hedging strategy and could incur losses associated with the inability
of a financial counterparty to meet or perform under its obligations as a result
of adverse conditions in the credit markets or their ability to access capital
or post collateral.
NJR
is a holding company and depends on its operating subsidiaries to meet its
financial obligations.
NJR is a
holding company with no significant assets other than possible cash investments
and the stock of its operating subsidiaries. NJR relies exclusively on dividends
from its subsidiaries, on intercompany loans from its non-regulated
subsidiaries, and on the repayments of principal and interest from intercompany
loans made to its subsidiaries for its cash flows. NJR’s ability to pay
dividends on its common stock and to pay principal and accrued interest on its
outstanding debt depends on the payment of dividends to NJR by certain of its
subsidiaries or the repayment of loans to NJR by its principal subsidiaries. The
extent to which NJR’s subsidiaries do not pay dividends or repay funds to NJR
may adversely affect its ability to pay dividends to holders of its common stock
and principal and interest to holders of its debt.
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1A. RISK FACTORS (Continued)
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Credit
rating downgrades could increase financing costs, limit access to the financial
markets and negatively affect NJR and its subsidiaries.
The debt
of NJNG is currently rated by the rating agencies Moody’s Investor Services,
Inc. and Standard & Poor’s as investment grade. If such ratings are
downgraded below investment grade, borrowing costs could increase, as will the
costs of maintaining certain contractual relationships and obtaining future
financing. Even if ratings are downgraded without falling below investment
grade, NJR and NJNG can still face increased borrowing costs under their
currently existing credit facilities. NJR and its subsidiaries’ ability to
borrow and costs of borrowing have a direct impact on its subsidiaries' ability
to execute their operating strategies.
Additionally,
lower credit ratings could adversely affect relationships with NJNG’s state
regulators, who may be unwilling to allow NJNG to pass along increased costs to
its natural gas customers.
NJR
is dependent on credit facilities and continued access to capital markets to
execute its operating strategies, and failure by NJR and/or NJNG to comply with
debt covenants may impact NJR’s financial condition.
NJR and
NJNG’s long-term debt obligations contain financial covenants related to
debt-to-capital ratios and an interest coverage ratio for NJNG. These debt
obligations also contain provisions that put certain limitations on NJR’s
ability to finance future operations or capital needs or to expand or pursue
certain business activities. For example, certain of these agreements contain
provisions that, among other things, put limitations on our ability to make
loans or investments, make material changes to the nature of our businesses,
merge, consolidate or engage in asset sales, grant liens, or make negative
pledges. Furthermore, the debt obligations contain covenants and other
provisions requiring NJR or NJNG to make timely delivery of accurate financial
statements prepared in accordance with GAAP. The failure to comply with any of
these covenants could result in an event of default, which, if not cured or
waived, could result in the acceleration of outstanding debt obligations and/or
the inability to borrow under existing revolving credit facilities. NJNG has
relied, and continues to rely, upon short-term bank borrowings or commercial
paper supported by its revolving credit facility to finance the execution of a
portion of its operating strategies. NJNG is dependent on these capital sources
to purchase its natural gas supply and maintain its properties. The acceleration
of outstanding debt obligations of NJR or NJNG and their inability to borrow
under their existing revolving credit facilities would cause a material adverse
change in NJR or NJNG’s financial condition.
NJRES’
ability to conduct its business is dependent upon the creditworthiness of
NJR.
If NJR
suffers a reduction in its credit and borrowing capacity or in its ability to
issue parental guarantees, the business prospects of NJRES, which rely on the
creditworthiness of NJR, would be adversely affected. NJRES would possibly be
required to comply with various margin or other credit enhancement obligations
under its trading and marketing contracts, and it may be unable to continue to
trade or be able to do so only on less favorable terms with certain
counterparties.
Continued
failures in the market for auction-rate securities could have a negative impact
on NJNG’s financial condition.
NJNG is
obligated with respect to a total of six series of auction rate bonds totaling
approximately $97 million (collectively, auction-rate securities or “ARS”). All
of the ARS are investment grade rated by Moody’s Investor Services and Standard
& Poor’s. NJNG has been experiencing ARS failed auctions, which occur when
there are not enough orders to purchase all of the securities being sold at the
auction. The result of a failed auction, which does not signify a default by
NJNG, is that the ARS continue to pay interest in accordance with their terms
until there is a successful auction or until such time as other markets for
these securities develop. However, upon an auction failure, the interest rates
do not reset at a market rate established at an auction, but instead reset based
upon a formula contained within the ARS, otherwise known as a “maximum auction
rate,” which may be materially higher than the previous auction rate. The
“maximum auction rate” for the ARS is the lesser of (i) 175 percent of one-month
LIBOR or (ii) either 10 percent or 12 percent per annum, as applicable to such
series of the ARS. Should future auctions fail and interest rates on the ARS
continue to be established at the maximum auction rate, NJNG’s average cost of
borrowing could rise above historic levels, which could materially and adversely
affect both NJNG’s and NJR’s cash flows, results of operations and financial
condition. Although NJR is reviewing alternative methods for refinancing the ARS
at NJNG on a continuing basis, NJR cannot assure that alternative sources of
financing can be implemented in a timely manner.
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1A. RISK FACTORS (Continued)
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The cost of providing pension and
postemployment health care benefits to eligible former employees is subject to
changes in pension fund values and changing demographics and may have a material
adverse effect on NJR’s financial results.
NJR has
two defined benefit pension plans and two postemployment health care plans
(OPEB) for the benefit of substantially all full-time employees and qualified
retirees. The cost of providing these benefits to eligible current and former
employees is subject to changes in the market value of the pension and OPEB fund
assets, changing discount notes and changing demographics, including longer life
expectancy of beneficiaries, an expected increase in the number of eligible
former employees over the next five years and increases in health care
costs.
Any
sustained declines in equity markets and reductions in bond yields may have a
material adverse effect on the funded status of NJR’s pension and OPEB plans. In
these circumstances, NJR may be required to recognize increased pension and OPEB
expenses and/or be required to make additional cash contributions into the
plans.
The
funded status of these plans, and the related cost reflected in NJR’s financial
statements, are affected by various factors that are subject to an inherent
degree of uncertainty, particularly in the current economic environment. Under
the Pension Protection Act of 2006, continued losses of asset values may
necessitate increased funding of the plans in the future to meet minimum federal
government requirements. A continued downward pressure on the asset values of
these plans may require NJR to fund obligations earlier than it had originally
planned, which would have a negative impact on cash flows from operations,
decrease NJR’s borrowing capacity and increase its interest expense as a result
of having to fund these obligations.
If
we do not maintain an effective system of internal control we could have one or
more material weaknesses in internal control over financial reporting, which may
result in unreliable financial statements.
Section
404 of the Sarbanes-Oxley Act of 2002 requires NJR’s management to make an
assessment of the design and effectiveness of internal controls. It also
requires NJR’s independent registered public accounting firm to audit the design
and effectiveness of these controls and to form an opinion on both management’s
assessment and the effectiveness of these controls. Management’s ongoing
assessment of these controls may identify areas of weakness in control design or
effectiveness, which may lead to the conclusion that a material weakness in
internal control exists. NJR’s independent public registered accounting firm may
also identify control deficiencies, which may lead to identification of a
material weakness in internal control. While NJR’s system of internal controls
is reviewed periodically, there exist inherent limitations to control
effectiveness. To the extent NJR identifies future weaknesses or deficiencies,
NJR may not be able to produce reliable financial statements, which could result
in a loss of investor confidence and a decline in its stock value. In addition,
should NJR not be able to produce reliable financial statements, it could limit
NJR’s and NJNG’s ability to access the capital markets.
Economic
hedging activities of NJR designed to protect against commodity and financial
market risks may cause fluctuations in reported financial results, and NJR’s
stock price could be adversely affected as a result.
Although
NJR uses derivatives, including futures, forwards, options and swaps, to manage
commodity and financial market risks, the timing of the recognition of gains or
losses on these economic hedges in accordance with generally accepted accounting
principles used in the United States of America (GAAP) does not always coincide
with the gains or losses on the items being hedged. The difference in accounting
can result in volatility in reported results, even though the expected profit
margin is essentially unchanged from the dates the transactions were
consummated.
Operational
Risks
NJNG’s
operations are subject to certain operating risks incidental to handling,
storing, transporting and providing customers with natural gas.
NJNG’s
operations are subject to all operating hazards and risks incidental to
handling, storing, transporting and providing customers with natural gas. These
risks include explosions, pollution, release of toxic substances, fires, storms
and other adverse weather conditions and hazards, each of which could result in
damage to or destruction of facilities or damage to persons and property. If any
of these events were to occur, NJR could suffer substantial losses. Moreover, as
a result, NJR has been, and likely will be, a defendant in legal proceedings and
litigation arising in the ordinary course of business. Although NJR maintains
insurance coverage, insurance may not be sufficient to cover all material
expenses related to these risks.
Page
12
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS (Continued)
|
Major
changes in the supply and price of natural gas may affect financial
results.
While
NJNG expects to provide for the demand of its customers for the foreseeable
future, factors impacting suppliers and other third parties, including increased
competition, further deregulation, transportation costs, possible climate change
legislation, transportation availability and drilling for new natural gas
resources, may impact the supply and price of natural gas. NJNG actively hedges
against the fluctuation in the price of natural gas by entering into forward and
financial contracts with third parties. Should these third parties fail to
perform, it may result in a loss that could have a material impact on the
financial position, cash flows and statement of operations of NJR.
NJNG
and NJRES rely on third parties to supply natural gas.
NJNG’s
ability to provide natural gas for its present and projected sales will depend
upon its suppliers’ ability to obtain and deliver additional supplies of natural
gas, as well as NJNG’s ability to acquire supplies directly from new sources.
Factors beyond the control of NJNG, its suppliers and the independent suppliers
who have obligations to provide natural gas to certain NJNG customers, may
affect NJNG’s ability to deliver such supplies. These factors include other
parties’ control over the drilling of new wells and the facilities to transport
natural gas to NJNG’s city gate stations, competition for the acquisition of
natural gas, priority allocations, impact of severe weather disruptions to
natural gas supplies, the regulatory and pricing policies of federal and state
regulatory agencies, as well as the availability of Canadian reserves for export
to the United States. Energy deregulation legislation may increase competition
among natural gas utilities and impact the quantities of natural gas
requirements needed for sales service.
NJRES
also relies on a firm supply source to meet its energy management obligations
for its customers. Should NJRES’ suppliers fail to deliver supplies of natural
gas, there could be a material impact on its cash flows and statement of
operations.
The
use of derivative contracts in the normal course of NJRES’ business could result
in financial losses that negatively impact results of operations.
NJRES
uses derivatives, including futures, forwards, options and swaps, to manage
commodity and financial market risks. NJRES could recognize financial losses on
these contracts as a result of volatility in the market values of the underlying
commodities or if a counterparty fails to perform under a contract. In the
absence of actively quoted market prices and pricing information from external
sources, the valuation of these financial instruments can involve management’s
judgment or use of estimates. As a result, changes in the underlying assumptions
or use of alternative valuation methods could adversely affect the value of the
reported fair value of these contracts.
Adverse
economic conditions including inflation, increased natural gas costs,
foreclosures, and business failures could adversely impact NJNG’s customer
collections and increase its level of indebtedness.
Inflation
has caused increases in certain operating and capital costs. NJR has a process
in place to continually review the adequacy of NJNG’s rates in relation to the
increasing cost of providing service and the inherent regulatory lag in
adjusting those rates. The ability to control expenses is an important factor
that will influence future results.
Rapid
increases in the price of purchased gas may cause NJNG to experience a
significant increase in short-term debt because it must pay suppliers for gas
when it is purchased, which can be significantly in advance of when these costs
may be recovered through the collection of monthly customer bills for gas
delivered. Increases in purchased gas costs also slow collection efforts as
customers are more likely to delay the payment of their gas bills, leading to
higher-than-normal accounts receivable. In addition, the extended recession in
the U.S. has led to increasing unemployment, foreclosures in the housing
markets, and the discontinuation of some commercial businesses that fall within
NJNG’s service territory. These situations can result in higher short-term debt
levels and increased bad debt expense.
Changes
in weather conditions may affect earnings and cash flows.
Weather
conditions and other natural phenomena can have an adverse impact on earnings
and cash flows. Severe weather conditions can impact suppliers and the pipelines
that deliver gas to NJNG’s distribution system. Extended mild weather, during
either the winter period or summer period, can have a significant impact on
demand for and the cost of natural gas. While NJR believes the CIP mitigates the
impact of weather variations on its gross margin, severe weather conditions may
still have an impact on the ability of suppliers and pipelines to deliver the
natural gas to NJNG, which can negatively affect NJR’s earnings. The CIP does
not mitigate the impact of unusual weather conditions on its cash
flows.
Page
13
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS (Continued)
|
Termination
of NJNG’s CIP may lead to a decrease in earnings and cash flows.
Customer
conservation efforts have been increasing and as a result NJNG has seen a
decrease in volumes of natural gas delivered to its customers. NJNG’s CIP has a
usage component that is intended to mitigate the impact to earnings as a result
of reductions in customer usage. NJNG has requested an extension of the CIP, but
if it is not renewed or replaced with a similar mechanism to decouple the link
between customer usage and NJNG’s utility gross margin, NJNG’s results from
operations and cash flows, and NJR’s results from operations and cash flows,
could be adversely affected.
Changes
in customer growth may affect earnings and cash flows.
NJNG’s
ability to increase its utility firm gross margin is dependent upon the new
construction housing market, as well as the additional conversion of customers
to natural gas from other fuel sources. Should there be continued weakness in
the housing market or a slowdown in the conversion market, there could be an
adverse impact on NJNG’s utility firm gross margin, earnings and cash
flows.
NJRES’
earnings and cash flows are dependent upon an asset optimization strategy of its
physical assets using financial transactions.
NJRES’
earnings and cash flows are based, in part, on its ability to optimize its
portfolio of contractual-based natural gas storage and pipeline assets. The
optimization strategy involves utilizing its physical assets to take advantage
of differences in natural gas prices between geographic locations and/or time
periods. Any change among various pricing points could affect these
differentials, which in turn could affect NJRES’ earnings and cash flows. NJRES
incurs fixed demand fees to acquire its contractual rights to storage and
transportation assets. Should commodity prices at various locations or time
periods change in such a way that NJRES is not able to recover these costs from
its customers, the cash flows and earnings at NJRES, and ultimately NJR, could
be adversely impacted.
NJRES
is exposed to market risk and may incur losses in wholesale
services.
The
storage and transportation portfolios at NJRES consist of contracts to transport
and store natural gas commodities. If the values of these contracts change in a
direction or manner that NJRES does not anticipate, the value of NJRES’
portfolio could be negatively impacted. In addition, upon expiration of these
storage and transportation contracts, to the extent that they are renewed or
replaced at less favorable terms, NJR’s results of operations and cash flows
could be negatively impacted.
NJNG
and NJRES rely on storage and transportation assets that they do not own or
control to deliver natural gas.
NJNG and
NJRES depend on natural gas pipelines and other storage and transportation
facilities owned and operated by third parties to deliver natural gas to
wholesale markets and to provide retail energy services to customers. If
transportation or storage is disrupted, including for reasons of force majeure,
the ability of NJNG and NJRES to sell and deliver their products and services
may be hindered. As a result, they may be responsible for damages incurred by
their customers, such as the additional cost of acquiring alternative supply at
then-current market rates.
Investing
through partnerships or joint ventures decreases NJR’s ability to manage
risk.
NJR and
its subsidiaries have utilized joint ventures for certain non-regulated energy
investments, including Steckman Ridge and Iroquois, and although they currently
have no specific plans to do so, NJR and its subsidiaries may acquire interests
in other joint ventures in the future. In these joint ventures, NJR and its
subsidiaries may not have the right or power to direct the management and
policies of the joint ventures, and other participants may take action contrary
to their instructions or requests and against their policies and objectives. In
addition, the other participants may become bankrupt or have economic or other
business interests or goals that are inconsistent with those of NJR and its
subsidiaries. If a joint venture participant acts contrary to the interests of
NJR or its subsidiaries, it could harm NJR’s financial condition, results of
operations or cash flows.
Page
14
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS (Continued)
|
Regulatory
and Legal Risks
NJR
is subject to governmental regulation. Compliance with current and future
regulatory requirements and procurement of necessary approvals, permits and
certificates may result in substantial costs to NJR.
NJR and
its subsidiaries are subject to substantial regulation from federal, state and
local regulatory authorities. They are required to comply with numerous laws and
regulations and to obtain numerous authorizations, permits, approvals and
certificates from governmental agencies. These agencies regulate various aspects
of their business, including customer rates, services and natural gas pipeline
operations.
The
Federal Energy Regulatory Commission (FERC) has regulatory authority over some
of NJR’s operations, including sales of natural gas in the wholesale market and
the purchase and sale of interstate pipeline and storage capacity. Any
Congressional legislation or agency regulation that would alter these or other
similar statutory and regulatory structures in a way to significantly raise
costs that could not be recovered in rates from customers, that would reduce the
availability of supply or capacity, or that would reduce NJR’s competitiveness
would negatively impact its earnings.
NJR and
its subsidiaries cannot predict the impact of any future revisions or changes in
interpretations of existing regulations or the adoption of new laws and
regulations applicable to them. Changes in regulations or the imposition of
additional regulations could influence their operating environment and may
result in substantial costs to them.
Risks
related to the regulation of NJNG could affect the rates it is able to charge,
its costs and its profitability.
NJNG is
subject to regulation by federal, state and local authorities. These authorities
regulate many aspects of NJNG’s distribution operations, including construction
and maintenance of facilities, operations, safety, rates that NJNG can charge
customers, rates of return, the authorized cost of capital, recovery of pipeline
replacement and environmental remediation costs and relationships with its
affiliates. NJNG’s ability to obtain rate increases, including base rate
increases, extend its incentive programs and maintain its currently authorized
rates of return may be impacted by events, including regulatory or legislative
actions. There can be no assurance that NJNG will be able to obtain rate
increases, continue its incentive programs or continue the opportunity to earn
its currently authorized rates of return.
Significant
regulatory assets recorded by NJNG could be disallowed for recovery from
customers in the future.
NJNG
records regulatory assets on its financial statements to reflect the ratemaking
and regulatory decision-making authority of the BPU as allowed by current GAAP.
The creation of a regulatory asset allows for the deferral of costs which,
absent a mechanism to recover such costs from customers in rates approved by the
BPU, would be charged to expense on its income statement. Primary regulatory
assets that are subject to BPU approval include the recovery of BGSS and
Universal Service Fund (USF) costs, remediation costs associated with its MGP
sites, the CIP, WNC, the New Jersey Clean Energy program, economic stimulus
plans and pension and other postemployment plans. If there were to be a change
in regulatory position surrounding the collection of these deferred costs there
could be a material impact on NJNG’s financial position, operations and cash
flows.
NJR’s
charter and bylaws may delay or prevent a transaction that stockholders would
view as favorable.
The
certificate of incorporation and bylaws of NJR, as well as New Jersey law,
contain provisions that could have the effect of delaying, deferring or
preventing an unsolicited change in control of NJR, which may negatively affect
the market price of the common stock or the ability of stockholders to
participate in a transaction in which they might otherwise receive a premium for
their shares over the then current market price. These provisions also may have
the effect of preventing changes in management. In addition, the board of
directors is authorized to issue preferred stock without stockholder approval on
such terms as the board of directors may determine. The common stockholders will
be subject to, and may be negatively affected by, the rights of any preferred
stock that may be issued in the future. In addition, NJR is subject to the New
Jersey Shareholders’ Protection Act, which could have the effect of delaying or
preventing a change of control of NJR.
Page
15
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS (Continued)
|
NJR
and its subsidiaries may be unable to obtain governmental approvals, property
rights and/or financing for the construction, development and operation of its
non-regulated energy investments.
Construction,
development and operation of energy investments, such as natural gas storage
facilities and pipeline transportation systems, are subject to federal and state
regulatory oversight and require certain property rights and approvals,
including permits and licenses for such facilities and systems. NJR, its
subsidiaries, or its joint venture partnerships may be unable to obtain, in a
cost-efficient or timely manner, all such needed property rights, permits and
licenses in order to successfully construct and develop its non-regulated energy
facilities and systems. Successful financing of NJR’s energy investments will
require participation by willing financial institutions and lenders, as well as
acquisition of capital at favorable interest rates. If NJR and its subsidiaries
do not obtain the necessary regulatory approvals and financing, their equity
investments could become impaired, and such impairment could have a materially
adverse effect on NJR’s financial condition, results of operations or cash
flows.
NJR
is involved in legal or administrative proceedings before various courts and
governmental bodies that could adversely affect the company's results of
operations, cash flows and financial condition.
NJR is
involved in legal or administrative proceedings before various courts and
governmental bodies with respect to general claims, rates, taxes, environmental
issues, gas cost prudence reviews and other matters. Adverse decisions regarding
these matters, to the extent they require NJR to make payments in excess of
amounts provided for in its financial statements, could adversely affect NJR’s
results of operations, cash flows and financial condition.
Environmental
Risks
NJR
costs of compliance with present and future environmental laws are significant
and could adversely affect its cash flows and profitability.
NJR’s
operations are subject to extensive federal, state and local environmental
statutes, rules and regulations relating to air quality, water quality, waste
management, natural resources and site remediation. Compliance with these laws
and regulations may require NJR to expend significant financial resources to,
among other things, conduct site remediation and perform environmental
monitoring. If NJR fails to comply with applicable environmental laws and
regulations, even if it is unable to do so due to factors beyond its control, it
may be subject to civil liabilities or criminal penalties and may be required to
incur significant expenditures to come into compliance. Additionally, any
alleged violations of environmental laws and regulations may require NJR to
expend significant resources in its defense against alleged
violations.
Furthermore,
the United States Congress has for some time been considering various forms of
climate change legislation. There is a possibility that, when and if enacted,
the final form of such legislation could impact NJR’s costs and put upward
pressure on wholesale natural gas prices. Higher cost levels could impact the
competitive position of natural gas and negatively affect our growth
opportunities, cash flows and earnings.
ITEM
1B. UNRESOLVED STAFF COMMENTS
|
None
ITEM
2. PROPERTIES
|
NJNG (All properties are
located in New Jersey)
NJNG owns
approximately 6,710 miles of distribution main, 6,660 miles of service main, 214
miles of transmission main and approximately 503,000 meters. Mains are primarily
located under public roads. Where mains are located under private property, NJNG
has obtained easements from the owners of record.
Additionally,
NJNG owns and operates two LNG storage plants in Stafford Township, Ocean
County, and Howell Township, Monmouth County. The two LNG plants have an
aggregate estimated maximum capacity of approximately 170,000 dths per day.
These facilities are used for peaking natural gas supply and
emergencies.
Page
16
New
Jersey Resources Corporation
Part
I
ITEM
2. PROPERTIES (Continued)
|
NJNG owns
four service centers located in Rockaway Township, Morris County; Atlantic
Highlands and Wall Township, Monmouth County; and Lakewood, Ocean County. These
service centers house storerooms, garages and gas distribution and
administrative offices. NJNG leases its headquarters and customer service
facilities in Wall Township, customer service offices in Asbury Park, Monmouth
County, and a service center in Manahawkin, Ocean County. These customer service
offices support customer contact, marketing, economic development and other
functions.
Substantially
all of NJNG’s properties, not expressly excepted or duly released, are subject
to the lien of an Indenture of Mortgage and Deed of Trust to BNY Midwest Trust
Company, Chicago, Illinois, dated April 1, 1952, as amended by 32 supplemental
indentures (Indenture), as security for NJNG’s bonded debt, which totaled
approximately $290 million at September 30, 2009. In addition, under the terms
of the Indenture, NJNG could have issued up to approximately $448 million of
additional first mortgage bonds as of September 30, 2009.
All
Other Business Operations
At
September 30, 2009, CR&R owned 83 acres of undeveloped land, of which 16
acres are under contract for sale, and a 56,400-square-foot office building on 5
acres.
A total
of 52 acres of undeveloped land is located in Atlantic County with a net book
value of $2.1 million, 11 acres at this location are under contract for sale and
will be sold as undeveloped land, subject to all approvals being obtained. An
additional 5 acres of undeveloped land under contract for sale is in Monmouth
County, with a net book value of $1.7 million and such sale is estimated to
close in fiscal 2010, subject to all approvals being obtained. The remaining 26
acres of undeveloped land in Monmouth County with a net book value of $4.8
million will be developed or sold based on market conditions. The specific time
frame for development or sale is currently unknown.
As of
September 30, 2009, NJRES currently leases office space in Wall Township, New
Jersey and in Houston, Texas for its business activities
As of
September 30, 2009, the Steckman Ridge partnership owns and/or leases mineral
rights on approximately 8,300 acres of land in Bedford County, Pennsylvania,
where it has developed a 17.7 billion cubic foot (Bcf) natural gas storage
facility with up to 12 Bcf of working gas capacity for an estimated project cost
of approximately $265 million. The Company is obligated to fund up to $132.5
million associated with the construction and development of Steckman Ridge. As
of September 30, 2009, NJR has invested approximately $122.5 million. Equipment
on the property includes a compressor station, gathering pipelines and pipeline
interconnections. On April 1, 2009, Steckman Ridge received authorization to
place certain injection related facilities into commercial operation. Customers
have begun to inject natural gas inventory in preparation for the initial
withdrawal season. An additional drilling program will be reviewed in the third
quarter of fiscal 2010.
NJRHS
leases service centers in Dover, Morris County, and Wall, Monmouth County, New
Jersey.
Capital
Expenditure Program
See Item 7. Management Discussion and
Analysis–Cash Flows for a discussion of anticipated fiscal 2010 and 2011
capital expenditures as applicable to NJR’s business segments and business
operations.
ITEM
3. 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 a Remediation Adjustment
(RA) approved by the BPU. In June 2009, the BPU approved $17.7 million in
eligible costs to be recovered annually for MGP remediation expenditures
incurred through June 30, 2007. As of September 30, 2009, $85.5 million of
previously incurred remediation costs, net of recoveries from customers and
insurance proceeds, are included in Regulatory assets on the Consolidated
Balance Sheet.
Page
17
New
Jersey Resources Corporation
Part
I
ITEM
3. LEGAL PROCEEDINGS (Continued)
|
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 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, other than as
disclosed in this Item 3, the ultimate disposition of these matters will not
have a material adverse effect on its financial condition, results of operations
or cash flows.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
ITEM
4A. EXECUTIVE OFFICERS OF THE COMPANY
|
The
Company’s Executive Officers and their business experience, age, and office are
set forth below.
Office
|
Name
|
Age
|
Officer
Since
|
Chairman
of the Board, President and Chief Executive Officer
|
Laurence
M. Downes
|
52
|
1986
|
Executive
Vice President and Chief Operating Officer, NJNG and Senior Vice
President, Corporate Affairs and Marketing
|
Kathleen
T. Ellis
|
56
|
2004
|
Executive
Vice President and Chief Operating Officer, NJRES and Senior Vice
President, Energy Services, NJNG
|
Joseph
P. Shields
|
52
|
1996
|
Senior
Vice President and Chief Financial Officer
|
Glenn
C. Lockwood
|
48
|
1990
|
Senior
Vice President and General Counsel
|
Mariellen
Dugan
|
43
|
2005
|
Vice
President, Corporate Services, NJR Service
|
Deborah
G. Zilai
|
56
|
1996
|
Laurence
M. Downes, Chairman of the Board, President and Chief Executive
Officer
Mr.
Downes has held the position of Chairman of the Board since September 1996. He
has held the position of President and Chief Executive Officer since July 1995.
From January 1990 to July 1995, he held the position of Senior Vice President
and Chief Financial Officer.
Page
18
New
Jersey Resources Corporation
Part
I
ITEM
4A. EXECUTIVE OFFICERS OF THE COMPANY (Continued)
|
Kathleen
T. Ellis, Executive Vice President, Chief Operating Officer, NJNG and Senior
Vice President, Corporate Affairs and Marketing
Ms. Ellis
has held the position of Senior Vice President, Corporate Affairs since December
2004 and the position of Executive Vice President and Chief Operating Officer of
NJNG since February 2008. She also held the position of Senior Vice President,
Corporate Affairs and Marketing of NJNG from July 2007 to February 2008. From
December 2002 to November 2004, she held the position of Director of
Communications for the Governor of the State of New Jersey, and from August 1998
to December 2002, she held the position of Manager of Communications and
Director, State Governmental Affairs for Public Service Electric and Gas Company
(PSE&G), a combined gas and electric utility company based in Newark,
NJ.
Joseph
P. Shields, Executive Vice President and Chief Operating Officer, NJRES and
Senior Vice President, Energy Services, NJNG
Mr.
Shields joined NJNG in 1983 and has been Senior Vice President, Energy Services,
NJNG since January 1996. He has been Executive Vice President and Chief
Operating Officer of NJRES since February 2008 and held the position of Senior
Vice President at NJRES from January 1996 to February 2008. As head of the
energy services business unit, he is responsible for natural gas supply
acquisitions, negotiating transportation agreements and monitoring natural gas
control activities as well as regulated wholesale marketing activity for
NJNG.
Glenn
C. Lockwood, Senior Vice President and Chief Financial Officer
Mr.
Lockwood has held the position of Chief Financial Officer since September 1995
and the added position of Senior Vice President since January 1996. From January
1994 to September 1995, he held the position of Vice President, Controller and
Chief Accounting Officer. From January 1990 to January 1994, he held the
position of Assistant Vice President, Controller and Chief Accounting
Officer.
Mariellen
Dugan, Senior Vice President and General Counsel
Ms. Dugan
has held the position of Senior Vice President and General Counsel since
February 2008. She previously held the position of Vice President and General
Counsel from December 2005 to February 2008. Prior to joining NJR, from February
2004 to November 2005, she held the position of First Assistant Attorney General
for the State of New Jersey, and from February 2003 to February 2004, she held
the position of Chief of Staff, Executive Assistant Attorney General of the
State of New Jersey. From July 1999 to January 2003, Ms. Dugan was Of Counsel to
the law firm of Kevin H. Marino P.C. in Newark, NJ.
Deborah
G. Zilai, Vice President, Corporate Services, NJR Service
Mrs.
Zilai has held the position of Vice President, Corporate Services, NJR Service
since June 2005. She joined New Jersey Resources in June 1996 after a
twenty-year career at International Business Machines Corporation, where she
held various management positions. Her current responsibilities include
technology, human resources and supply chain management. From June 1996 to May
2005, she served as Vice President, Information Systems and
Services.
Page
19
New
Jersey Resources Corporation
Part
II
ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
NJR’s
Common Stock is traded on the New York Stock Exchange under the ticker symbol
NJR. As of September 30, 2009, NJR had 42,261 holders of record of its common
stock.
NJR’s
common stock high and low sales prices and dividends paid per share were as
follows:
2009
|
2008
|
Dividends
Paid
|
||||||||||||||||||||||
High
|
Low
|
High
|
Low
|
2009
|
2008
|
|||||||||||||||||||
Fiscal
Quarter
|
||||||||||||||||||||||||
First
|
$ | 40.22 | $ | 21.90 | $ | 34.71 | $ | 31.00 | $ | 0.28 | $ | 0.25 | ||||||||||||
Second
|
$ | 42.37 | $ | 29.95 | $ | 33.50 | $ | 29.22 | $ | 0.31 | $ | 0.27 | ||||||||||||
Third
|
$ | 37.57 | $ | 30.79 | $ | 34.63 | $ | 30.95 | $ | 0.31 | $ | 0.28 | ||||||||||||
Fourth
|
$ | 40.61 | $ | 35.64 | $ | 41.13 | $ | 31.68 | $ | 0.31 | $ | 0.28 |
The
following table sets forth NJR’s repurchase activity for the quarter ended
September 30, 2009:
Period
|
Total
Number of Shares (or Units) Purchased
|
Average
Price Paid per Share (or Unit)
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs
|
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be
Purchased Under the Plans or Programs
|
||||||||||||
07/01/09
– 07/31/09
|
— | — | — | 854,171 | ||||||||||||
08/01/09
– 08/31/09
|
— | — | — | 854,171 | ||||||||||||
09/01/09
– 09/30/09
|
529,400 | $ | 36.30 | 529,400 | * | 324,771 | ||||||||||
Total
|
529,400 | $ | 36.30 | 529,400 | 324,771 |
*The stock repurchase plan, which was
authorized by our Board of Directors, became effective in September 1996 and
includes 6,750,000 shares of common stock for repurchase, of which, as of
September 30, 2009, 324,771 shares remained for repurchase. The stock repurchase
plan will expire when we have repurchased all shares authorized for repurchase
there under, unless the repurchase plan is earlier terminated by action of our
Board of Directors or further shares are authorized for
repurchase.
Our
Chairman and Chief Executive Officer certified to the New York Stock Exchange
(NYSE) on February 12, 2009 that, as of that date, he was unaware of any
violation by NJR of the NYSE’s corporate governance listing
standards.
Page
20
New
Jersey Resources Corporation
Part
II
ITEM
6. SELECTED FINANCIAL DATA
|
CONSOLIDATED
FINANCIAL STATISTICS
(Thousands,
except per share data)
|
||||||||||||||||||||
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
SELECTED
FINANCIAL DATA
|
||||||||||||||||||||
Operating
Revenues
|
$ | 2,592,460 | $ | 3,816,210 | $ | 3,021,765 | $ | 3,271,229 | $ | 3,184,582 | ||||||||||
Operating
Expenses
|
||||||||||||||||||||
Gas
purchases
|
2,245,169 | 3,330,756 | 2,625,560 | 2,639,489 | 2,914,387 | |||||||||||||||
Operation
and maintenance
|
149,151 | 148,384 | 136,601 | 121,384 | 108,441 | |||||||||||||||
Regulatory
rider expenses
|
44,992 | 39,666 | 37,605 | 28,587 | 31,594 | |||||||||||||||
Depreciation
and amortization
|
30,328 | 38,464 | 36,235 | 34,753 | 33,675 | |||||||||||||||
Energy
and other taxes
|
74,750 | 65,602 | 62,499 | 58,632 | 56,211 | |||||||||||||||
Total
Operating Expenses
|
2,544,390 | 3,622,872 | 2,898,500 | 2,882,845 | 3,144,308 | |||||||||||||||
Operating
Income
|
48,070 | 193,338 | 123,265 | 388,384 | 40,274 | |||||||||||||||
Other
income
|
4,409 | 4,368 | 4,294 | 4,725 | 4,814 | |||||||||||||||
Interest
expense, net of capitalized interest
|
21,014 | 25,811 | 27,613 | 25,669 | 20,474 | |||||||||||||||
Income
before Income Taxes
|
31,465 | 171,895 | 99,946 | 367,440 | 24,614 | |||||||||||||||
Income
tax provision
|
8,488 | 64,715 | 38,675 | 147,349 | 7,832 | |||||||||||||||
Equity
in earnings, net of tax
|
4,265 | 1,988 | 1,662 | 1,817 | 1,753 | |||||||||||||||
Net
Income
|
$ | 27,242 | $ | 109,168 | $ | 62,933 | $ | 221,908 | $ | 18,535 | ||||||||||
Total
Assets
|
$ | 2,321,030 | $ | 2,635,297 | $ | 2,210,354 | $ | 2,398,928 | $ | 2,330,248 | ||||||||||
CAPITALIZATION
|
||||||||||||||||||||
Common
stock equity
|
$ | 689,726 | $ | 728,068 | $ | 650,648 | $ | 629,861 | $ | 438,052 | ||||||||||
Long-term
debt
|
455,492 | 455,117 | 383,184 | 332,332 | 317,204 | |||||||||||||||
Total
Capitalization
|
$ | 1,145,218 | $ | 1,183,185 | $ | 1,033,832 | $ | 962,193 | $ | 755,256 | ||||||||||
COMMON
STOCK DATA
|
||||||||||||||||||||
Earnings
per share–Basic
|
$ | 0.65 | $ | 2.61 | $ | 1.50 | $ | 5.31 | $ | 0.45 | ||||||||||
Earnings
per share–Diluted
|
$ | 0.64 | $ | 2.59 | $ | 1.49 | $ | 5.27 | $ | 0.44 | ||||||||||
Dividends
declared per share
|
$ | 1.24 | $ | 1.11 | $ | 1.01 | $ | 0.96 | $ | 0.91 |
Page
21
New
Jersey Resources Corporation
Part
II
ITEM
6. SELECTED FINANCIAL DATA (Continued)
NJNG
OPERATING STATISTICS
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Operating
Revenues ($ in
thousands)
|
||||||||||||||||||||
Residential
|
$ | 686,798 | $ | 594,147 | $ | 584,727 | $ | 598,274 | $ | 568,324 | ||||||||||
Commercial,
Industrial and other
|
144,565 | 149,177 | 132,113 | 172,465 | 143,211 | |||||||||||||||
Firm
transportation
|
40,356 | 28,634 | 36,794 | 28,656 | 29,566 | |||||||||||||||
Total
residential and commercial
|
871,719 | 771,958 | 753,634 | 799,395 | 741,101 | |||||||||||||||
Interruptible
|
5,711 | 11,840 | 7,141 | 12,134 | 14,377 | |||||||||||||||
Total
system
|
877,430 | 783,798 | 760,775 | 811,529 | 755,478 | |||||||||||||||
Incentive
programs
|
204,571 | 295,026 | 244,813 | 327,245 | 382,802 | |||||||||||||||
Total
Operating Revenues
|
$ | 1,082,001 | $ | 1,078,824 | $ | 1,005,588 | $ | 1,138,774 | $ | 1,138,280 | ||||||||||
Throughput
(Bcf)
|
||||||||||||||||||||
Residential
|
43.6 | 40.8 | 41.8 | 39.4 | 43.7 | |||||||||||||||
Commercial,
Industrial and other
|
9.8 | 9.0 | 9.4 | 10.4 | 11.3 | |||||||||||||||
Firm
transportation
|
9.4 | 8.9 | 8.6 | 7.4 | 7.6 | |||||||||||||||
Total
residential and commercial
|
62.8 | 58.7 | 59.8 | 57.2 | 62.6 | |||||||||||||||
Interruptible
|
4.1 | 6.4 | 6.5 | 7.2 | 9.7 | |||||||||||||||
Total
system
|
66.9 | 65.1 | 66.3 | 64.4 | 72.3 | |||||||||||||||
Incentive
programs
|
66.1 | 34.5 | 36.5 | 38.4 | 52.4 | |||||||||||||||
Total
Throughput
|
133.0 | 99.6 | 102.8 | 102.8 | 124.7 | |||||||||||||||
Customers
at Year-End
|
||||||||||||||||||||
Residential
|
437,793 | 437,655 | 435,169 | 429,834 | 418,646 | |||||||||||||||
Commercial,
Industrial and other
|
27,771 | 29,002 | 28,916 | 28,914 | 28,878 | |||||||||||||||
Firm
transportation
|
20,965 | 16,830 | 14,104 | 12,874 | 15,246 | |||||||||||||||
Total
residential and commercial
|
486,529 | 483,487 | 478,189 | 471,622 | 462,770 | |||||||||||||||
Interruptible
|
45 | 46 | 45 | 48 | 47 | |||||||||||||||
Incentive
programs
|
36 | 27 | 26 | 35 | 39 | |||||||||||||||
Total
Customers at Year-End
|
486,610 | 483,560 | 478,260 | 471,705 | 462,856 | |||||||||||||||
Interest
Coverage Ratio (1)
|
8.19 | 6.08 | 6.03 | 7.63 | 6.38 | |||||||||||||||
Average
Therm Use per Customer
|
||||||||||||||||||||
Residential
|
995 | 931 | 960 | 920 | 1,045 | |||||||||||||||
Commercial,
Industrial and other
|
4,777 | 5,303 | 5,710 | 5,084 | 5,443 | |||||||||||||||
Degree
Days
|
4,791 | 4,399 | 4,481 | 4,367 | 4,927 | |||||||||||||||
Weather
as a Percent of Normal (2)
|
101 | % | 91 | % | 94 | % | 90 | % | 102 | % | ||||||||||
Number
of Employees
|
613 | 572 | 548 | 516 | 518 |
(1)
NJNG’s
Income from Operations divided by interest expense.
(2)
Normal
heating degree-days are based on a 20-year average, calculated based upon three
reference areas representative of NJNG’s service
territory.
Page
22
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking
and Cautionary Statements
From time
to time, we may make statements that may constitute “forward-looking statements”
within the meaning of the “safe-harbor” provisions of the Private Securities
Litigation Reform Act of 1995. These statements are based on the Company’s
then-current expectations and are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those addressed in the
forward-looking statements. Information concerning forward-looking statements is
set forth on page 1 of this annual report and is incorporated herein, and the
risk factors that may cause such differences are summarized in Item 1A beginning
on page 10 and are incorporated herein.
Management’s
Overview
New
Jersey Resources Corporation (NJR or the Company) is an energy services holding
company providing retail natural gas service in New Jersey and wholesale natural
gas and related energy services to customers in states from the Gulf Coast and
Mid-Continent regions to the New England region, 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.
The
retail and other business operations (Retail and Other) includes NJR Energy
Holdings, an investor in energy-related ventures, most significantly through
NJNR Pipeline, which holds the Company’s 5.53 percent interest in Iroquois Gas
and Transmission System, LP (Iroquois), a 412-mile natural gas pipeline from the
New York-Canadian border to Long Island, New York, and NJR Steckman Ridge
Storage Company, which has a 50 percent equity ownership interest in Steckman
Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a 17.7
billion cubic foot (Bcf) natural gas storage facility, with up to 12 Bcf of
working capacity, which was jointly developed and constructed with a partner in
western Pennsylvania; NJR Investment, which makes energy-related equity
investments; 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:
($
in thousands)
|
2009
|
2008
|
||||||||||||||
Assets
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 1,797,165 | 77 | % | $ | 1,761,964 | 66 | % | ||||||||
Energy
Services
|
327,532 | 14 | 699,897 | 27 | ||||||||||||
Retail
and Other
|
223,020 | 10 | 231,551 | 9 | ||||||||||||
Intercompany
Assets
(1)
|
(26,687 | ) | (1 | ) | (58,115 | ) | (2 | ) | ||||||||
Total
|
$ | 2,321,030 | 100 | % | $ | 2,635,297 | 100 | % | ||||||||
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified
in consolidation.
|
NJRES’
assets decreased 53.2 percent from September 30, 2008 to September 30, 2009, due
primarily to lower inventory values resulting from a decline in commodity
prices.
Net
income (loss) by business segment and operations are as follows:
($
in Thousands)
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
Net
Income (Loss)
|
||||||||||||||||||||||||
Natural
Gas Distribution
|
$ | 65,403 | 240 | % | $ | 42,479 | 39 | % | $ | 44,480 | 71 | % | ||||||||||||
Energy
Services
|
(32,632 | ) | (120 | ) | 67,166 | 61 | 18,950 | 30 | ||||||||||||||||
Retail
and Other
|
(5,529 | ) | (20 | ) | (477 | ) | — | (497 | ) | (1 | ) | |||||||||||||
Total
|
$ | 27,242 | 100 | % | $ | 109,168 | 100 | % | $ | 62,933 | 100 | % |
Page
23
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Included
in Net income are unrealized (losses) gains in the Energy Services segment of
$(29.3) million, $10.8 million, and $(38) million, after taxes, for the fiscal
years ended September 30, 2009, 2008 and 2007, respectively. Also included in
Net income are realized (losses) gains of $(34.5) million, $9.3 million and
$16.8 million, after taxes, for the fiscal years ended September 30, 2009, 2008
and 2007, 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 $(9.9) million, $(4.8) million and $(4.2) million,
after taxes, for the fiscal years ended September 30, 2009, 2008 and 2007,
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. Prior to October 1, 2007, gains (losses) associated
with physical commodity contracts at NJRES were not reflected in earnings until
the individual contracts settled and the natural gas was delivered when certain
delivery conditions were met. During fiscal 2007 and 2008, NJRES changed the
accounting treatment for certain of its physical commodity contracts so that
effective October 1, 2008, all NJRES’ physical commodity contracts are accounted
for at fair value with changes in the fair value of these contracts included in
earnings as a component of Operating revenue and Gas purchases, as appropriate,
in the Consolidated Statements of Income.
All
physical commodity contracts at NJNG and NJR Energy continue to meet the
delivery conditions and, therefore, 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, used to economically hedge future natural gas
purchases, sales and transportation. The change in fair value of these
derivative instruments at NJRES and NJR Energy over periods of time, referred to
as unrealized gains or losses, can result in substantial volatility in reported
net income. 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.
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, continuing review and
proposed 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
its 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 growth would increase utility
gross margin (as defined below) 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
|
Page
24
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
|
Ÿ
|
Managing
the volatility of wholesale natural gas prices through a hedging program
designed to keep customers’ Basic Gas Supply Service (BGSS) rates as
stable as possible.
|
Based
upon increases in NJNG’s operation, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base rates for its natural
gas delivery service. This base rate case filing was consistent with NJNG’s
objectives of providing safe and reliable service to its customers and earning a
market-based return.
On
October 3, 2008, the BPU unanimously approved and made effective the settlement
of NJNG’s base rate case. As a result, NJNG received a revenue increase in its
base rates of $32.5 million, which is inclusive of an approximate $13 million
impact of a change to the CIP baseline usage rate, received an allowed return on
equity component of 10.3 percent, reduced its depreciation expense component
from 3 percent to 2.34 percent and reduced its annual depreciation expense by
$1.6 million as a result of the amortization of previously recovered asset
retirement obligations.
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 2007, the BPU provisionally approved
NJNG’s initial CIP recovery rates, which are designed to recover approximately
$15.6 million of accrued margin and on August 1, 2008, the provisional rates
were approved by the BPU on a permanent basis. 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. On June 10, 2009,
these provisional rates were approved by the BPU on a permanent basis. In the
period January 2009 through March 2009, NJNG provided approximately $45 million
of rate credits to BGSS residential and small commercial customers. On June 1,
2009, 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 of $6.9 million. The total
recovery requested for fiscal 2009 includes amounts accrued and estimated
through September 30, 2009. On September 16, 2009, the BPU provisionally
approved the rates. As of September 30, 2009, NJNG has $5.8 million accrued to
be recovered in Regulatory Assets in the Consolidated Balance Sheets related to
CIP. On April 1, 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 will remain in effect for an additional year
or until a final order is issued by the BPU. In October 2009, NJNG provided its
BGSS residential and small commercial customers with refunds of approximately
$37.4 million.
In
conjunction with the CIP, NJNG is required to administer programs that promote
customer conservation efforts. As of September 30, 2009 and September 30, 2008,
the obligation to fund these conservation programs was reflected at its present
value of $248,000 and $864,000, respectively in the Consolidated Balance
Sheets.
In
conducting NJNG’s business, management focuses on factors it believes may have
significant influence on its future financial results. NJNG’s policy is to work
with all stakeholders, including customers, regulators and policymakers, to
achieve favorable results. These factors include the rate of NJNG’s customer
growth in its service territory, which can be influenced by general economic
conditions as well as political and regulatory policies that may impact the new
housing market. A portion of NJNG’s customer growth comes from the conversion
market, which is influenced by the delivered cost of natural gas compared with
competing fuels, interest rates and other economic conditions.
As a
regulated company, NJNG is required to recognize the impact of regulatory
decisions on its financial statements. As a result, significant costs are
deferred and treated as regulatory assets, pending BPU decisions regarding their
ultimate recovery from customers. The most significant costs incurred that are
subject to this accounting treatment include manufactured gas plant (MGP)
remediation costs and wholesale natural gas costs (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.
On April
16, 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.
On July
1, 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.
Page
25
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
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, 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.
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 allows NJRES to leverage its transportation and storage capacity.
These physical sale commitments are managed in an aggregate fashion, and as a
result, gives 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.
Page
26
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Retail
and Other Operations
As part
of the Retail and Other operations NJR’s subsidiary, NJR Energy Holdings, holds
investments in natural gas “mid-stream” assets, such as natural gas
transportation and storage facilities. NJR believes that acquiring, owning and
developing these mid-stream assets, which operate under a tariff structure that
has either a regulated or market-based rate, can provide a growth opportunity
for the Company. To that end, NJR has ownership interests in Iroquois, a natural
gas pipeline operating with a regulated rate 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. Other
businesses included as part of Retail and Other include NJRHS, which provides
service, sales and installation of appliances to approximately 150,000 customers
and is focused on growing its installation business and expanding its service
contract customer base, and CR&R, which seeks additional opportunities to
enhance the value of its undeveloped land.
The
financial results of Retail and Other consist primarily of the operating results
of NJRHS and earnings attributable to the Company’s equity investments in
Iroquois and Steckman Ridge, as well as to investments made by NJR Energy, an
investor in other energy-related ventures through its operating subsidiaries.
Also included within Retail and Other operations are interest income and
organizational expenses incurred at NJR.
On June
5, 2008, the Federal Energy Regulatory Commission (FERC) issued Steckman Ridge a
certificate of public convenience and necessity authorizing the ownership,
construction and operation of its natural gas storage facility and associated
facilities. On April 1, 2009, Steckman Ridge received authorization to place
certain injection related facilities into commercial operation. Customers have
begun to inject natural gas inventory in preparation for the initial withdrawal
season. An additional drilling program will be reviewed in the third quarter of
fiscal 2010. As of September 30, 2009, NJR has invested approximately $122.5
million in Steckman Ridge, excluding capitalized interest and other direct
costs. Total project costs related to the development of the storage facility
are currently estimated at approximately $265 million, of which NJR is obligated
to fund 50 percent or approximately $132.5 million. Steckman Ridge may seek
non-recourse financing upon completion of the construction and development of
its facilities, thereby potentially reducing the final expected recourse
obligation of NJR. There can be no assurances that such non-recourse project
financing will be secured or available for Steckman Ridge.
Critical
Accounting Policies
The
Company prepares its financial statements in accordance with GAAP. Application
of these accounting principles requires the use of estimates and assumptions
that affect the reported amounts of liabilities, revenues and expenses, and
related disclosures of contingencies during the reporting period. The Company
regularly evaluates its estimates, including those related to the calculation of
the fair value of derivative instruments, unbilled revenues, provisions for
depreciation and amortization, regulatory assets, income taxes, pension and
postemployment benefits other than pensions and contingencies related to
environmental matters and litigation. NJR bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. In the normal course of business, estimated
amounts are subsequently adjusted to actual results that may differ from
estimates.
Regulatory
Accounting
NJNG
maintains its accounts in accordance with the FERC Uniform System of Accounts as
prescribed by the BPU. As a result of the ratemaking process, NJNG is required
to apply the accounting principles in the Regulated Operations Topic
980 of the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC), which differ in certain respects from those applied by
unregulated businesses. Specifically, regulated operations record assets when it
is probable that certain operating costs will be recoverable from customers in
future periods and liabilities associated with probable future obligations to
customers. Accordingly, NJNG recognizes the impact of regulatory decisions on
its financial statements. NJNG’s BGSS requires NJNG to project its natural gas
costs and provides the ability, subject to BPU approval, to recover or refund
the difference, if any, of such actual costs as compared with the projected
costs included in prices through a BGSS charge to customers. Any underrecovery
or overrecovery is recorded as a Regulatory asset or liability on the
Consolidated Balance Sheets and reflected in the BGSS charge to customers in
subsequent years. NJNG also enters into derivatives that are used to hedge
natural gas purchases, and the offset to the resulting fair value of derivative
assets or liabilities is recorded as a Regulatory asset or liability on the
Consolidated Balance Sheets.
Page
27
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Derivative
Instruments
NJR
records its derivative instruments held as assets and liabilities at fair value
in the Consolidated Balance Sheet in accordance with GAAP. In addition, changes
in the fair value of NJRES’ and NJR Energy’s financial derivatives, as well as
NJRES’ contracts for the purchase and sales of natural gas are recognized in
earnings, as they occur, as a component of Operating revenues or Gas purchases
in the Consolidated Statements of Income. Gains (losses) associated with NJR
Energy’s physical commodity contracts are recorded in earnings as a component of
Operating revenues when the underlying commodity is delivered.
NJNG’s
derivatives that are used to manage price risk of its natural gas purchasing
activities are recoverable through its BGSS, subject to BPU approval.
Accordingly, the offset to the change in fair value of these derivatives is
recorded as a Regulatory asset or liability on the Consolidated Balance
Sheets.
In
providing its unregulated wholesale energy services, NJRES enters into physical
contracts to buy and sell natural gas. GAAP permits companies to apply an
exception for certain contracts intended for normal purchases and normal sales
(“normal”) for which physical delivery is probable. Prior to October 1, 2007,
NJRES elected to use normal accounting treatment and, therefore, recognized the
related liabilities incurred and assets acquired when title to the underlying
natural gas commodity passed. However, during fiscal 2007 and 2008, NJRES
elected to discontinue normal accounting treatment for certain of its physical
forward contracts, so that as of October 1, 2008, all NJRES’ physical commodity
contracts are recorded at fair value with related changes in fair value included
in current earnings.
The fair
value of derivative instruments is determined by reference to quoted market
prices of listed contracts, published quotations or quotations from independent
parties. NJRES’ portfolio is valued using the most current market information.
However, if the price underlying a physical commodity transaction does not
represent a visible and liquid market, NJRES utilizes non-binding broker
quotations and/or other pricing services to derive an equivalent market price.
As of September 30, 2009, fair values based on market prices that are not
visible and liquid represent less than one percent of total fair value of its
derivative assets and liabilities reported in the Consolidated Balance
Sheets.
Should
there be a significant change in the underlying market prices or pricing
assumptions, NJRES may experience a significant impact on its financial
position, results of operations and cash flows. The valuation methods remained
consistent for fiscal 2009, 2008 and 2007. NJR applies a discount to its
derivative assets to factor in an adjustment associated with the credit risk of
its counterparties. NJR determines this amount by using historical default
probabilities corresponding to the appropriate Standard and Poor’s issuer
ratings. Since the majority of NJR’s counterparties are investment
grade rated, this resulted in an immaterial credit risk adjustment.
NJR has
not designated any derivatives as fair value hedges as of September 30, 2009 and
2008.
Capitalized
Financing Costs
NJNG
capitalizes an allowance for funds used during construction (AFUDC) as a
component of Utility plant in the Consolidated Balance Sheets. AFUDC is recorded
as an increase to Interest income or a reduction to Interest expense as
applicable in the Consolidated Statements of Income. Under regulatory rate
practices and in accordance with GAAP applicable to regulated operations, NJNG
fully recovers AFUDC through base rates. As a result of the BPU’s base rate
order (Rate Order) issued in October 2008, NJNG implemented certain rate design
changes, including a change to its AFUDC calculation. Effective October 3, 2008,
NJNG is allowed to recover an incremental cost of equity component during
periods when its short-term debt balances were lower than its construction work
in progress balance. This results in a non-cash income statement recognition
that is capitalized as a component of Utility plant. If any of these amounts are
deemed to be unrecoverable, NJNG records a charge for the unrecovered portion in
the Consolidated Statements of Income.
Environmental
Costs
At the
end of each fiscal year, NJNG updates the environmental review of its MGP sites,
including a review of its potential liability for investigation and remedial
action, based on assistance from an independent external consulting firm. From
this review, NJNG estimates expenditures that will be necessary to remediate and
monitor these MGP sites. NJNG’s estimate of these liabilities is developed from
then currently available facts, existing technology and presently enacted laws
and regulations.
Page
28
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Where it
is probable that the cost will be incurred, but the information is sufficient to
establish only a range of possible liability, and no point within the range is
more likely than any other, it is NJNG’s policy to accrue the lower end of the
range. Since management believes that recovery of these expenditures, as well as
related litigation costs, is possible through the regulatory process, it has
recorded a regulatory asset corresponding to the related accrued liability.
Accordingly, NJNG has recorded an MGP remediation liability and a corresponding
Regulatory asset of $146.7 million on the Consolidated Balance
Sheets.
The
actual costs to be incurred by NJNG are dependent upon several factors,
including final determination of remedial action, changing technologies and
governmental regulations, the ultimate ability of other responsible parties to
pay, as well as the potential impact of any litigation and any insurance
recoveries. If there are changes in future regulatory positions that indicate
the recovery of all or a portion of such regulatory asset is not probable, the
related cost and carrying costs would be charged to income in the period of such
determination. As of September 30, 2009 and 2008, $85.5 million and $92.2
million of previously incurred remediation costs, net of recoveries from
customers and insurance proceeds received, are included in Regulatory assets on
the Consolidated Balance Sheet, respectively.
If there
are changes in the regulatory position surrounding these costs, or should actual
expenditures vary significantly from estimates in that these costs are
disallowed for recovery by the BPU, such costs would be charged to income in the
period of such determination.
Postemployment
Employee Benefits
NJR’s
costs of providing postemployment employee benefits are dependent upon numerous
factors including actual plan experience and assumptions of future experience.
Postemployment employee benefit costs, for example, are impacted by actual
employee demographics including age, compensation levels and employment periods,
the level of contributions made to the plans, changes in long-term interest
rates and the return on plan assets. Changes made to the provisions of the plans
may also impact current and future postemployment employee benefit costs.
Postemployment employee benefit costs may also be significantly affected by
changes in key actuarial assumptions, including anticipated rates of return on
plan assets, health care cost trends and discount rates used in determining the
projected benefit obligations (PBO). In determining the PBO and cost amounts,
assumptions can change from period to period and could result in material
changes to net postemployment employee benefit periodic costs and the related
liability recognized by NJR.
NJR’s
postemployment employee benefit plan assets consist primarily of U.S. equity
securities, international equity securities and fixed-income investments, with a
targeted allocation, effective October 1, 2009, of 39 percent, 20 percent and 41
percent, respectively. Fluctuations in actual market returns, as well as changes
in interest rates, may result in increased or decreased postemployment employee
benefit costs in future periods. Postemployment employee benefit expenses are
included in Operations and maintenance expense on the Consolidated Statements of
Income.
The
following is a summary of a sensitivity analysis for each actuarial
assumption:
Pension
Plans
Estimated
|
Estimated
|
|||||||||||
Increase/(Decrease)
|
Increase/(Decrease)
|
|||||||||||
Increase/
|
on
PBO
|
to
Expense
|
||||||||||
Actuarial
Assumptions
|
(Decrease)
|
(Thousands)
|
(Thousands)
|
|||||||||
Discount
rate
|
1.00 | % | $ | (16,660 | ) | $ | (982 | ) | ||||
Discount
rate
|
(1.00 | )% | $ | 20,778 | $ | 1,238 | ||||||
Rate
of return on plan assets
|
1.00 | % | n/a | $ | (976 | ) | ||||||
Rate
of return on plan assets
|
(1.00 | )% | n/a | $ | 976 |
Other
Postemployment Benefits
Actuarial
Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/(Decrease)
on
PBO
(Thousands)
|
Estimated
Increase/(Decrease)
to
Expense
(Thousands)
|
|||||||||
Discount
rate
|
1.00 | % | $ | (11,077 | ) | $ | (774 | ) | ||||
Discount
rate
|
(1.00 | )% | $ | 14,028 | $ | 932 | ||||||
Rate
of return on plan assets
|
1.00 | % | n/a | $ | (222 | ) | ||||||
Rate
of return on plan assets
|
(1.00 | )% | n/a | $ | 222 |
Page
29
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Actuarial
Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/(Decrease)
on
PBO
(Thousands)
|
Estimated
Increase/(Decrease)
to
Expense
(Thousands)
|
|||||||||
Heath
care cost trend rate
|
1.00 | % | $ | 13,181 | $ | 1,534 | ||||||
Health
care cost trend rate
|
(1.00 | )% | $ | (10,617 | ) | $ | (1,228 | ) |
Recently
Issued Accounting Standards and Updates
Effective
July 1, 2009, the FASB ASC became the single source of authoritative GAAP,
restructuring previously issued standards into a topical based model. As of the
effective date, new guidance will be issued in the form of Accounting Standards
Updates (ASU’s), which will replace accounting changes that were historically
issued as FASB Standards. For a more detailed description of the ASC, recently
issued accounting standards that have been reorganized within the ASC and ASU’s
issued since July 1, 2009, see Note 1. Summary of Significant
Accounting Policies in the accompanying Consolidated Financial
Statements.
Results
of Operations
Consolidated
Net
income decreased 75 percent to $27.2 million in fiscal 2009 from $109.2 million
in fiscal 2008 and increased 73.5 percent in fiscal 2008 from $62.9 million in
fiscal 2007. The fiscal 2009 results were $0.65 per basic share and and $0.64
per diluted share, compared with the fiscal 2008 results of $2.61 per basic
share and $2.59 per diluted share and fiscal 2007 results of $1.50 per basic
share and $1.49 per diluted share on a split adjusted basis. Changes in Net
income were primarily driven by unrealized (losses) and gains of $(39.3)
million, $6 million and $(42.2) million, after taxes, for the years ended
September 30, 2009, 2008 and 2007, respectively, as well as certain realized
(losses) and gains associated with natural gas in inventory of $(34.5) million,
$9.3 million and $16.8 million, after taxes, for the years ended September 30,
2009, 2008 and 2007, respectively, which were primarily due to the change in the
fair market value of financial derivative instruments as a result of market
conditions.
The
Company’s Operating revenues and Gas purchases for the fiscal years ended
September 30, are as follows:
($
in Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Operating
revenues
|
$ | 2,592,460 | $ | 3,816,210 | $ | 3,021,765 | ||||||
Gas
purchases
|
$ | 2,245,169 | $ | 3,330,756 | $ | 2,625,560 |
Operating
revenues decreased $1.2 billion and Gas purchases decreased $1.1 billion for
fiscal, 2009 compared with fiscal 2008 due primarily to:
|
Ÿ
|
a
decrease in Operating revenues of $1.2 billion and Gas purchases of $1
billion at NJRES and a decrease in Operating revenues of $8.8 million at
Retail and Other all as a result of lower average prices on the
NYMEX;
|
|
Ÿ
|
an
increase in Operating revenues of $3.2 million and a decrease in Gas
purchases of $43.3 million at NJNG. The increase in Operating revenue was
due primarily to an increase in base rates, while increased credits from
incentive programs contributed to the decrease in Gas
purchases.
|
Operating
revenues increased $794.4 million during fiscal 2008, compared with fiscal 2007
due primarily to an increase in sales transaction volume and prices at NJRES.
NJRES transaction volumes increased 12 percent and coupled with an average 21
percent increase in sales prices over the corresponding period resulted in an
increase in revenues of approximately $720.1 million. Moderate increases in
customer growth and greater off-system sales at NJNG, partially offset by
reduced customer usage at NJNG also contributed to the increase in Operating
revenues.
The
factors that resulted in the increase in revenues described above similarly
affected an increase of $705.2 million in Gas purchases for fiscal 2008, as
compared with fiscal 2007. NJRES gas purchase transaction volumes increased 11
percent, and coupled with an average 20 percent increase in gas purchases prices
over the corresponding period, resulted in an increase in gas purchases of
approximately $639.3 million.
Page
30
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Natural
Gas Distribution Operations
NJNG is a
local natural gas distribution company that provides regulated retail energy
services to approximately 487,000 residential and commercial customers in
central and northern New Jersey and participates in the off-system sales and
capacity release markets.
NJNG’s
business is seasonal by nature, as weather conditions directly influence the
volume of natural gas delivered. Specifically, customer demand substantially
increases during the winter months when natural gas is used for heating
purposes. As a result, NJNG receives most of its gas distribution revenues
during the first and second fiscal quarters and is subject to variations in
earnings and working capital during the year.
The
Electric Discount and Energy Competition Act (EDECA) provides the framework for
New Jersey’s energy markets, which are open to competition from other energy
suppliers. Currently, NJNG’s residential markets are open to competition, and
its rates are segregated between BGSS (natural gas commodity) and delivery
(i.e., transportation) components. NJNG earns no utility gross margin on the
commodity portion of its natural gas sales. NJNG earns utility gross margin
through the delivery of natural gas to its customers. Under an existing order
from the BPU, BGSS can be provided by suppliers other than the state’s natural
gas utilities.
NJNG’s
financial results for the fiscal years ended September 30 are as
follows:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Utility
Gross Margin
|
||||||||||||
Operating
revenues
|
$ | 1,082,001 | $ | 1,078,824 | $ | 1,005,588 | ||||||
Less:
|
||||||||||||
Gas
purchases
|
709,906 | 753,249 | 687,201 | |||||||||
Energy
and other taxes
|
66,768 | 58,539 | 56,475 | |||||||||
Regulatory
rider expense
|
44,992 | 39,666 | 37,605 | |||||||||
Total
Utility Gross Margin
|
$ | 260,335 | $ | 227,370 | $ | 224,307 | ||||||
Operation
and maintenance expense
|
106,814 | 98,035 | 97,006 | |||||||||
Depreciation
and amortization
|
29,417 | 37,723 | 35,648 | |||||||||
Other
taxes not reflected in utility gross margin
|
3,740 | 3,476 | 3,125 | |||||||||
Operating
income
|
$ | 120,364 | $ | 88,136 | $ | 88,528 | ||||||
Other
income
|
3,474 | 3,460 | 3,468 | |||||||||
Interest
expense, net of capitalized interest
|
18,706 | 21,277 | 21,182 | |||||||||
Income
tax provision
|
39,729 | 27,840 | 26,334 | |||||||||
Net
income
|
$ | 65,403 | $ | 42,479 | $ | 44,480 |
The
following table summarizes Utility Gross Margin and Throughput in billion cubic
feet (Bcf) of natural gas by type:
2009
|
2008
|
2007
|
||||||||||||||||||||||
($
in thousands)
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Margin
|
Bcf
|
||||||||||||||||||
Utility
Gross Margin/Throughput
|
||||||||||||||||||||||||
Residential
|
$ | 170,509 | 43.6 | $ | 154,307 | 40.8 | $ | 152,129 | 41.8 | |||||||||||||||
Commercial,
Industrial and other
|
47,767 | 9.8 | 45,503 | 9.0 | 45,418 | 9.4 | ||||||||||||||||||
Firm
Transportation
|
29,683 | 9.4 | 19,722 | 8.9 | 17,963 | 8.6 | ||||||||||||||||||
Total
Firm Margin/Throughput
|
247,959 | 62.8 | 219,532 | 58.7 | 215,510 | 59.8 | ||||||||||||||||||
Incentive
programs
|
12,057 | 66.1 | 7,656 | 34.5 | 8,125 | 36.5 | ||||||||||||||||||
Interruptible
|
319 | 4.1 | 482 | 6.4 | 672 | 6.5 | ||||||||||||||||||
BPU
settlement
|
— | — | (300 | ) | — | — | — | |||||||||||||||||
Total
Utility Gross Margin/Throughput
|
$ | 260,335 | 133.0 | $ | 227,370 | 99.6 | $ | 224,307 | 102.8 |
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 utility firm
gross margin, incentive programs and utility gross margin from interruptible
customers. Management
Page
31
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
believes
that utility gross margin provides a more meaningful basis than revenue for
evaluating utility operations since natural gas costs, sales tax, TEFA and
regulatory rider expenses are included in operating revenue and passed through
to customers and, therefore, have no effect on utility gross
margin.
Natural
gas costs are charged to operating expenses on the basis of therm sales at the
prices in NJNG’s BGSS tariff approved by the BPU. The BGSS tariff rate includes
projected natural gas costs, net of supplier refunds, the impact of hedging
activities and credits from non-firm sales and transportation activities. Any
underrecoveries or overrecoveries from the projected amounts are deferred and
reflected in the BGSS tariff rate in subsequent years.
TEFA,
which is included in Energy and other taxes in the Consolidated Statements of
Income, is calculated on a per-therm basis and excludes sales to cogeneration
facilities, other utilities and off-system sales. TEFA represents a regulatory
allowed assessment imposed on all energy providers in the state of New Jersey,
as TEFA has replaced the previously used utility gross receipts tax
formula.
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 increased by $3.2 million, or 0.3 percent, and Gas purchases
decreased by $43.3 million, or 5.8 percent, for fiscal 2009, as compared with
fiscal 2008 as a result of:
|
Ÿ
|
an
increase in Operating revenue related to firm sales in the amount of $79.9
million as a result of increases in BGSS, base rates, rates associated
with riders and sales tax and TEFA as described below and an increase in
Gas purchases in the amount of $39.2 million, as a result of the BGSS
increases;
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to firm sales in
the amount of $52.2 million and $34.2 million, respectively, due primarily
to weather being 8.9 percent colder than the same period of the prior
fiscal year, partially offset by a decrease in Operating revenue of $19.2
million, as a result of lower accruals relating to the CIP during fiscal
2009;
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to off-system
sales in the amount of $85.4 million and $86.6 million, respectively, as a
result of a 47 percent lower average sales prices that decreased from
$10.13/dth to $5.37/dth due to the change in the wholesale price of
natural gas;
|
|
Ÿ
|
a
net decrease in Operating revenue and Gas purchases of $15 million related
to fiscal 2009 temporary rate credits of approximately $45 million
extended to customers, compared with a BGSS refund of $30 million given to
customers during fiscal 2008. NJNG extends these credits and refunds to
its customers to manage the recovery of its gas costs during periods when
wholesale natural gas costs are declining in comparison with the
established rate included in NJNG’s BGSS
tariff;
|
|
Ÿ
|
a
decrease of $6.5 million in Gas purchases related to increased amounts
received through the storage incentive program due primarily to the timing
of the incentive margins during the program's injection period as compared
with the same period in the prior fiscal
year;
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to interruptible
sales in the amount of $6.1 million and $5.4 million, respectively, due to
a decrease in sales to electric co-generation customers;
and
|
|
Ÿ
|
a
decrease of $1.7 million in Gas purchases related to increased amounts
earned through the financial risk management (FRM) and capacity release
incentive programs of $3.8 million in fiscal 2009 as compared with $2.1
million in fiscal 2008 due primarily to lower NYMEX market prices in
comparison to published benchmark prices, resulting in additional
opportunities to purchase call options that were below the established
quarterly Financial Risk Management (FRM) benchmark pricing
levels.
|
NJNG’s
Operating revenues increased by $73.2 million, or 7.3 percent, and Gas purchases
increased by $66.0 million, or 9.6 percent, respectively, for fiscal 2008, as
compared with fiscal 2007, primarily as a result of:
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to off-system
sales in the amount of $49.2 million and $47.5 million, respectively, due
primarily to the change in the wholesale price of natural gas. During
fiscal 2008, NJNG sold 29.2 Bcf at an average price of $10.13 per Bcf
compared with 32.0 Bcf at an average price of $7.54 per Bcf during fiscal
2007 in the off-system market;
|
Page
32
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
|
Ÿ
|
a
reduction in BGSS customer refunds provided to residential and small
commercial customers of $44.3 million for Operating revenue, inclusive of
sales tax refunds of $2.9 million, resulting in a reduction of $41.4
million for Gas purchases. In fiscal 2008 BGSS customer refunds were $32.1
million, as compared with $76.4 million in fiscal 2007. These customer
refunds were the result of anticipated reductions in cost to acquire
wholesale natural gas, compared with the established rate included in
NJNG’s BGSS tariff;
|
|
Ÿ
|
an
increase of $5.6 million in Operating revenue due to an increase of the
amounts accrued through the CIP program as a result of lower customer
usage and warmer weather, as described
below;
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to interruptible
sales in the amount of $4.7 million and $4.5 million, respectively, due to
an increase in sales to electric co-generation
customers;
|
|
Ÿ
|
an
increase in Operating revenue related to storage incentive revenue in the
amount of $1.0 million, as a result of opportunities available in the
wholesale energy market due to changing market conditions relative to
established benchmarks;
|
|
Ÿ
|
an
increase in Operating revenue related to natural gas transport in the
amount of $3.2 million due to an increase in sales as a result of an
increase in customers using transportation only
service;
|
|
Ÿ
|
an
increase in Gas purchases of $300,000 as a result of a non-recurring
charge to the BGSS associated with a settlement agreement related to a
BGSS filing for fiscal 2007 partially offset
by;
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases of $34.9 million and $30.2
million, respectively, as a result of a decrease in firm sales due to a
decline in customer usage.
|
Sales tax
and TEFA, which are presented as both components of Revenues and Operating
Expenses in the Consolidated Statements of Income, totaled $66.8 million, $58.5
million and $56.5 million in fiscal years 2009, 2008 and 2007, respectively. For
fiscal 2009, sales tax increased as a result of the increase of $120.1 million
in Operating revenue from firm sales, as compared with fiscal 2008. This
increase in fiscal 2008 as compared with fiscal 2007 is due primarily to an
increase in Operating revenue of 7.3 percent.
Regulatory
rider expenses are calculated on a per-therm basis. Regulatory rider expenses
totaled $45 million, $39.7 million and $37.6 million in fiscal 2009, 2008, and
2007, respectively. The increase in regulatory rider expenses in fiscal 2009 is
due primarily to an increase in the rider rate along with an increase in firm
throughput of 4.1 Bcf compared with fiscal 2008. The increase in regulatory
rider expenses in fiscal 2008 compared with fiscal 2007 was a result of an
increase in the rider rate offset by a decrease in therms sold to customers as a
result of reduced usage.
Utility
gross margin is comprised of three major categories:
Ÿ
|
Utility
Firm Gross Margin, which is derived from residential and commercial
customers who receive natural gas service from NJNG through either sales
or transportation tariffs;
|
|
|
Ÿ
|
Incentive
programs, where revenues or margins generated or savings achieved from
BPU-approved off-system sales, capacity release, Financial Risk Management
or storage incentive programs (defined in Incentive Programs, below) are
shared between customers and NJNG; and
|
|
|
Ÿ
|
Utility
gross margin from interruptible customers who have the ability to switch
to alternative fuels.
|
Utility
Firm Gross Margin
Utility
firm gross margin is earned from residential and commercial customers who
receive natural gas service from NJNG through either sales or transportation
tariffs.
As a
result of NJNG’s implementation of the CIP, utility gross margin is no longer
linked to customer usage. The CIP eliminates the disincentive to promote
conservation and energy efficiency and facilitate normalizing NJNG’s utility
gross margin recoveries for variances not only in weather but also in other
factors affecting usage, including customer conservation. Recovery of utility
gross margin for the non-weather variance through the CIP is limited to the
amount of certain gas supply cost savings achieved and is subject to an earnings
test, which contains a return on equity component of 10.3
percent.
Page
33
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
NJNG’s
total utility gross margin is not negatively affected by customers who use its
transportation service and purchase natural gas from another supplier because
its tariff is designed so that no profit is earned on the commodity portion of
sales to firm customers. All customers who purchase natural gas from another
supplier continue to use NJNG for transportation service.
Total
utility firm gross margin increased $28.4 million, or 12.9 percent, in fiscal
2009, as compared with fiscal 2008, due primarily to an increase in residential
and commercial margin as a result of an increase in base rates effective October
3, 2008, partially offset by a decrease in the amounts accrued through the CIP
program. Firm margin was also favorably impacted by the increase in residential
and commercial firm and transport customers of approximately 3,000 over fiscal
2008.
Total
utility firm gross margin increased $4.0 million, or 1.9 percent, in fiscal
2008. The changes in fiscal 2008 were due primarily to a $1.9 million increase
in residential sales service due to an increase in customer growth of 0.6
percent and a $1.8 million increase in residential and commercial transport
margin due to an increase in customer growth of 16.2 percent.
Utility
firm gross margin from residential service sales increased to $170.5 million for
fiscal 2009, as compared with $154.3 million for fiscal 2008. NJNG delivered
43.6 Bcf compared with 40.8 Bcf, to its firm residential customers, due
primarily to weather being 8.9 percent colder. Utility firm gross margin from
residential service sales increased $2.2 million for fiscal 2008, as compared
with $152.1 million in fiscal 2007. NJNG delivered 41.8 Bcf in fiscal 2007, to
its firm residential customers.
The
weather for fiscal 2009, was 0.9 percent colder-than-normal, based on a 20-year
average, which resulted in a negative adjustment of utility gross margin under
the weather component of the CIP of $(177,000), compared with fiscal 2008, which
was 8.7 percent warmer than normal and had an accrual of $9.1 million. The
weather in fiscal 2007 was 5.6 percent warmer than normal, which resulted in an
accrual of $8.2 million. Under the provisions of the CIP, accruals related to
the weather portion are dependent on the occurrence of degree days and the
magnitude of the variance in relation to a normal degree day.
Customer
usage was lower than the established benchmark during fiscal 2009, which
resulted in an accrual of utility gross margin under the CIP of $3.1 million,
compared with $13 million for fiscal 2008. The change in the weather and
non-weather components of the CIP include the effect of adjustments, normal
degree days, consumption factors and benchmarks related to the baseline use per
customer, which was amended with NJNG’s new base rates approved by the BPU
effective October 3, 2008. Customer usage was also lower than the established
benchmark during fiscal 2007, which resulted in an accrual of $8.3
million.
NJNG
added 5,841, 7,175 and 8,421 new customers and added natural gas heat and other
services to another 709, 728 and 770 existing customers in fiscal 2009, 2008 and
2007, respectively. The decline in customer growth rate is driven by a slower
new construction market.
In fiscal
2010 and 2011, NJNG currently expects to add, in total, approximately 12,000 to
14,000 new customers. In addition, NJNG expects to convert an additional 700
existing customers per year to natural gas heat and other services. Achieving
these expectations would represent an estimated annual customer growth rate of
approximately 1.2 percent and result in an estimated sales increase of
approximately 0.85 Bcf, annually. The Company believes that this growth would
increase utility gross margin under NJNG’s CIP tariff, as provided by the Rate
Order, by approximately $3.4 million annually.
These
growth expectations are based upon management’s review of local planning board
data, recent market research performed by third parties, builder surveys and
studies of population growth rates in NJNG’s service territory. However, future
sales will be affected by the weather, actual energy usage patterns of NJNG’s
customers, economic conditions in NJNG’s service territory, conversion and
conservation activity, the impact of changing from a regulated to a competitive
environment, changes in state regulation and other marketing efforts, as has
been the case in prior years.
The
following table shows residential and commercial customers using transportation
services as of the fiscal years ended September 30:
2009
|
2008
|
2007
|
||||||||||
Residential
transport
|
14,608 | 11,542 | 9,229 | |||||||||
Commercial
transport
|
6,357 | 5,288 | 4,875 | |||||||||
Total
transport
|
20,965 | 16,830 | 14,104 |
Utility
firm gross margin from firm transportation service increased $10 million, or
50.5 percent in fiscal 2009. NJNG transported 9.4 Bcf for its firm customers in
fiscal 2009, compared with 8.9 Bcf in fiscal 2008 due primarily to an increase
in the number of residential and commercial transport customers. The increase in
transportation customers was due primarily to an increase in marketing activity
by third party natural gas providers in NJNG’s distribution
territory.
Page
34
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Utility
firm gross margin from firm transportation service increased $1.8 million, or
9.8 percent in fiscal 2008. NJNG transported 8.9 Bcf for its firm customers in
fiscal 2008, compared with 8.6 Bcf in fiscal 2007. The increase in utility firm
gross margin in fiscal 2008 was due primarily to an increase in the number of
residential and commercial customers switching from firm sales service to firm
transportation services, combined with the impact of the CIP
program.
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.
Gross
margin under NJNG’s incentive programs increased $4.4 million in fiscal 2009 to
$12.1 million and totaled 66.1 Bcf in fiscal 2009, compared with $7.7 million of
utility gross margin and 34.5 Bcf in fiscal 2008. The increase in utility gross
margin was due primarily to an increase of $1.2 million in off-systems sales, an
increase of $1.5 million in capacity release and an increase of $ 1.5 million in
storage incentives, as previously discussed.
Interruptible
Revenues
As of
September 30, 2009, NJNG serves 45 customers through interruptible sales as
compared to 46 customers in fiscal 2008 and 45 customers in fiscal 2007.
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 4.1 Bcf, or
3.1 percent of total throughput for fiscal 2009, 6.4 Bcf, or 6.4 percent of the
total throughput during fiscal 2008 and 6.5 Bcf, or 6.3 percent of total
throughput for fiscal 2007, they accounted for less than 1 percent of the total
utility gross margin in each year as a result of the natural gas commodity costs
being the largest component of the sales price.
Operation
and Maintenance Expense
Operation
and maintenance expense increased $8.8 million, or 9 percent, during fiscal
2009, as compared with fiscal 2008, due primarily to:
|
Ÿ
|
increased
benefit costs of $3.1 million, primarily due to a $1.4 million credit in
fiscal 2008, that did not recur in fiscal 2009, related to an adjustment
to accrued medical premium expenses to reflect lower costs based on actual
claims, coupled with higher medical claims in fiscal 2009 and increased
Pension/OPEB costs;
|
|
Ÿ
|
an
increase in the bad debt expense of $2.5 million associated with higher
operating revenues and additional write-offs as a result of the economic
recession and the aging of
receivables;
|
|
Ÿ
|
increased
labor costs of $1.1 million due primarily to annual wage increases and an
increase in the number of
employees;
|
Page
35
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
|
Ÿ
|
an
increase in computer software leasing and maintenance of $1.0
million;
|
|
Ÿ
|
higher
pipeline integrity management costs of $641,000 due
to additional system assessments;
and
|
|
Ÿ
|
an
increase of $515,000 in contractors expenses due to third party damage
repair and increased maintenance.
|
Operation
and maintenance expense increased $1.0 million, or 1.1 percent, in fiscal 2008
as compared with fiscal 2007 due primarily to:
|
Ÿ
|
higher
compensation costs of $5.9 million as a result of an increase in the
number of employees and overtime labor as well as annual wage
increases;
|
|
|
Ÿ
|
an
increase of $1.5 million due primarily to an increase in NJNG’s shared
services expenses, including labor costs and consulting fees related to
various tax positions;
|
|
|
Ÿ
|
an
increase of $1.2 million due primarily to an increase in bad debt expense
as a result of the broad impacts from the U.S. economy on customers in
NJNG’s service territory, based on a greater amount of outstanding
receivables in excess of 150 days due; partially offset
by
|
|
Ÿ
|
$4.0
million in settlement charges associated with the Long Branch/Mass Tort
litigation case in fiscal 2007 that did not recur in fiscal
2008;
|
|
|
Ÿ
|
a
$1.4 million credit as a result of adjusting accrued medical premium
expenses to reflect lower costs based on actual claims paid, partially
offset by increased claims; and
|
|
|
Ÿ
|
lower
pipeline integrity costs of $1.4
million.
|
Depreciation
Expense
Depreciation
expense decreased $8.3 million in fiscal 2009 compared to fiscal 2008 due to a
rate reduction from 3 percent to 2.34 percent and amortization of previously
recovered asset retirement obligations, both of which were part of the
settlement of the base rate case. Depreciation expense in fiscal 2008 increased
$2.1 million, as compared with fiscal 2007, as a result of greater utility plant
being placed into service.
Operating
Income
Operating
income increased $32.2 million, or 36.6 percent, in fiscal 2009, as compared
with fiscal 2008, due primarily to:
|
Ÿ
|
an
increase in total Utility gross margin of $33 million, as previously
discussed;
|
|
Ÿ
|
a
decrease in depreciation expense of $8.3 million, as previously discussed;
partially offset by
|
|
Ÿ
|
an
increase in Operations and maintenance expense in the amount of $8.8
million, as previously discussed;
and.
|
|
Ÿ
|
a
decrease in interest income of $660,000, due primarily to a settlement of
a counterparty receivable that included interest income on escrowed
amounts in fiscal 2008.
|
Operating
income remained relatively consistent at $88.1 million and $88.5 million,
respectively, in fiscal 2008 as compared with fiscal 2007, due primarily
to:
|
Ÿ
|
an
increase in total Utility gross margin of $3.1 million, as previously
discussed;
|
|
|
Ÿ
|
an
increase in Depreciation expense of $2.1 million, as a result of greater
utility plant being placed into service; partially offset
by
|
|
|
Ÿ
|
an
increase in Operation and maintenance expenses of $1.0 million, as
previously discussed; and
|
|
Ÿ
|
Interest
income remained relatively
consistent.
|
Page
36
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Interest
Expense
Interest
expense decreased $2.6 million in fiscal 2009, compared with fiscal 2008, due
primarily to:
|
Ÿ
|
lower
average interest rates and balances related to NJNG’s commercial paper
program, as well as lower rates associated with its variable rate EDA
bonds; partially offset by
|
|
Ÿ
|
the
issuance of long-term fixed rate debt of $125 million in May 2008,
partially offset by the redemption of a $30 million bond on November 1,
2008.
|
Interest
expense in fiscal 2008 remained consistent as compared with fiscal 2007. NJNG
issued additional fixed-rate debt during fiscal 2008 and incurred higher rates
on it variable-rate debt, however, the resulting increases in interest expense
were offset by lower rates on NJNG’s commercial paper as well as lower BGSS
interest due to a decrease in overrecovered gas costs.
Net
Income
Net
income increased $22.9 million, or 54 percent, to $65.4 million in fiscal 2009,
as compared with fiscal 2008 due primarily to an increase in Operating income of
approximately $32.2 million and lower Interest expense of $2.6 million, as
discussed above, partially offset by higher income tax expense of $11.9 million,
as a result of the higher pre-tax income.
Net
income decreased $2.0 million, or 4.5 percent, in fiscal 2008, as compared with
fiscal 2007 due primarily to lower Operating income as described above and an
increase in income tax expense of approximately $1.5 million due to a one-time
net after tax charge of $1.0 million related to a tax position associated with
utility property.
Energy
Services Operations
NJRES is
a non-regulated natural gas marketer principally engaged in the optimization of
natural gas storage and transportation assets ultimately resulting in physical
delivery of natural gas to its customers, while managing its exposure to the
price risk associated with its natural gas commodity supply through the use of
financial derivative contracts. NJRES has physical storage and transportation
capacity contracts with natural gas storage facilities and pipelines which allow
it to take advantage of the continuous changes in supply and demand that it
faces in the market areas in which it participates and also assist natural gas
marketers, local distribution companies, industrial companies, electric
generators and retail aggregators in managing their supply needs.
When
NJRES enters into contracts for the future delivery and sales of physical
natural gas, it simultaneously enters into financial derivative contracts at
market prices to establish an initial financial margin for each of its
forecasted physical commodity transactions. The financial derivative contracts
also serve to protect the cash flows of the transaction from volatility in
commodity prices as NJRES locks in pricing and can include futures, options, and
swap contracts, which are all predominantly actively quoted on the
NYMEX.
Through
the use of its contracts for natural gas storage and pipeline capacity, NJRES is
able to take advantage of pricing differences between geographic locations,
commonly referred to as “locational spreads,” as well as over different time
periods, for the delivery of natural gas to its customers, thereby improving the
initially established financial margin result. NJRES utilizes financial futures,
forwards and swap contracts to establish economic hedges that fix and protect
the cash flows surrounding these transactions.
Page
37
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Accordingly,
NJRES utilizes these contractual assets to optimize its opportunities to
increase its financial margin by capitalizing on changes or events in the
marketplace that impact natural gas demand levels. NJRES generates financial
margin through three primary channels:
|
Ÿ
|
Storage: NJRES
attempts to take advantages of differences in market prices occurring over
different time periods (time spreads) as
follows:
|
|
|
*
|
NJRES
can purchase gas to inject into storage and concurrently lock in gross
margin with a contract to sell the natural gas at a higher price at a
future date; and
|
|
|
*
|
NJRES
can purchase a future contract with an early delivery date at a lower
price and simultaneously sell another future contract with a later
delivery date having a higher
price.
|
|
|
Ÿ
|
Transportation
(Basis): Similarly, NJRES benefits from pricing
differences between various receipt and delivery points along a natural
gas pipeline as follows:
|
|
|
*
|
NJRES
can utilize its pipeline capacity by purchasing natural gas at a lower
price location and transporting to a higher value location. NJRES can
enter into a basis swap contract, a financial commodity derivative based
on the price of natural gas at two different locations, when it will lead
to positive cash flows and financial margin for
NJRES.
|
|
Ÿ
|
Daily Sales Optimization
(Cash): Consists of buying and selling flowing gas on a
daily basis while optimizing existing transport positions during
short-term market price movements to benefit from locational
spreads:
|
|
|
*
|
Involves
increasing the financial margin on established transportation hedges by
capitalizing on price movements between specific
locations.
|
Typically,
periods of greater price volatility provide NJRES with additional opportunities
to generate financial margin by optimizing its storage and transport capacity
assets, and capturing their respective time or locational spreads. The
combination of strategically positioned natural gas storage and transportation
capacities provides NJRES with a significant amount of arbitrage opportunities
that are typically more prevalent during periods of high price
volatility.
Predominantly
all of NJRES’ physical purchases and sales of natural gas result in the physical
delivery of natural gas. Prior to fiscal 2009, NJRES applied normal accounting
treatment as allowed by GAAP to certain of its physical commodity contracts,
under which related liabilities incurred and assets acquired were recorded when
title to the underlying commodity passed. As of October 1, 2008, NJRES has
elected not to use normal accounting treatment. Therefore, all NJRES physical
commodity contracts are recorded at fair value in the 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 Consolidated Statements of Income.
The
changes in fair value of NJRES’ financial derivative instruments, which are
financial futures, swaps and option contracts are also recognized in the
Consolidated Statements of Income, as a component of Gas purchases.
NJRES’
financial and physical contracts will result, over time, in earning a gross
margin on the entire transaction. For financial reporting purposes under GAAP,
the change in fair value associated with derivative instruments used to
economically hedge these transactions are recorded as a component of Gas
purchases in the Consolidated Statements of Income during the duration of the
financial instrument or commodity contract. These changes in fair value are
referred to as unrealized gains and losses. In other instances, certain
financial contracts designed to economically fix or hedge the price of natural
gas that is purchased and placed into storage, to be sold at a later date,
settle and result in realized gains, which are also recorded as a component of
Gas purchases in the Consolidated Statements of Income.
These
unrealized gains or losses from the change in fair value of unsettled financial
instruments and physical commodity contracts, or realized gains or losses
related to financial instruments that economically hedge natural gas inventory
that has not been sold as part of a planned transaction, cause large variations
in the reported gross margin and earnings of NJRES. NJRES will continue to earn
the gross margin established at inception of the transaction over the duration
of the forecasted transaction and may be able to capitalize on events in the
marketplace that enable it to increase the initial margin; however, gross margin
or earnings during periods prior to the delivery of the natural gas will not
reflect the underlying economic result.
Page
38
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
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 for the fiscal years ended September 30 are summarized as
follows:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Operating
revenues
|
$ | 1,498,742 | $ | 2,714,733 | $ | 1,994,682 | ||||||
Gas
purchases (including demand charges)
|
1,537,634 | 2,577,667 | 1,938,359 | |||||||||
Gross
(loss) margin
|
(38,892 | ) | 137,066 | 56,323 | ||||||||
Operation
and maintenance expense
|
16,468 | 27,384 | 18,521 | |||||||||
Depreciation
and amortization
|
205 | 206 | 214 | |||||||||
Other
taxes
|
1,574 | 1,134 | 660 | |||||||||
Operating
(loss) income
|
(57,139 | ) | 108,342 | 36,928 | ||||||||
Other
income
|
570 | 204 | 555 | |||||||||
Interest
expense, net
|
322 | 2,574 | 4,222 | |||||||||
Income
tax (benefit) provision
|
(24,259 | ) | 38,806 | 14,311 | ||||||||
Net
(loss) income
|
$ | (32,632 | ) | $ | 67,166 | $ | 18,950 |
NJRES
records its financial derivative instruments using fair market values. The
mark-to-market changes on these financial instruments are reflected as a
component of Gas purchases in the Consolidated Statements of
Income.
As of
September 30, 2009, NJRES’ portfolio of financial derivative instruments was
comprised of:
|
Ÿ
|
31.5
Bcf of net short futures contracts and fixed swap positions, with an
average fixed price of $6.31 per dekatherm
(dth);
|
|
Ÿ
|
11.5
Bcf of net short basis swap
positions.
|
As of
September 30, 2008, NJRES’ portfolio of financial derivative instruments was
comprised of:
|
Ÿ
|
20.7
Bcf of net short futures contracts and fixed swap positions, with an
average fixed price of $12.04 per
dth;
|
|
Ÿ
|
46.4
Bcf of net short basis swap
positions.
|
NJRES’
portfolio as of September 30, 2007, was comprised of:
|
Ÿ
|
28.4
Bcf of net short futures contracts and fixed swap positions, with an
average fixed price of $10.79 per
dth;
|
|
Ÿ
|
49.9
Bcf of net short basis swap
positions.
|
Gross
Margin
Gross
margin for fiscal 2009, decreased by $176 million, compared with fiscal 2008,
due primarily to higher realized losses associated with economic hedges of the
purchase prices of our natural gas in inventory as well as increased unrealized
losses during fiscal 2009. The combination of these changes in values generated
a net unfavorable variance of $(136.5) million in overall values on its
financial and physical commodity contracts compared with fiscal
2008.
NJRES’
results during fiscal 2009, were impacted by the continuing decline in the price
of natural gas resulting in realized (losses) related to gas in inventory of
$(55.9) million compared to gains of $14.5 million during the prior year. The
realized (losses) gains pertain to the settlement of certain purchased futures
and fixed swap contracts, which economically hedge planned natural gas
purchases. The losses incurred during fiscal 2009 resulted from a lower
settlement price as compared to the original hedge price (or trade price)
consistent with a general decline in the market price of natural gas.
Conversely, fiscal 2008 was a period of rising commodity prices, therefore NJRES
recorded realized gains as a result of settlement prices that were generally
higher in comparison to initial trade prices.
Page
39
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
As these
financial contracts settle, the physical gas is purchased and injected into
storage. These physical gas injections and the associated financial hedges are
part of the NJRES’ business strategy to subsequently sell the natural gas from
storage in the future. The realized amounts are a component of the anticipated
financial margin associated with the overall strategy, and as a result of
certain accounting requirements, are recognized in current earnings and result
in a timing difference until the related gas is sold at which time, NJRES will
realize the entire margin on the transaction.
In
addition to the realized amounts discussed above, NJRES had unrealized (losses)
gains of $(47.6) million and $18.4 million during fiscal 2009 and fiscal 2008,
respectively. The unrealized losses relate to certain derivative contracts that
have not yet settled. 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. These unrealized amounts relate to physical
and financial contracts that lock in a sale price on the physical gas that will
be sold. When NJRES sells the purchased gas, the associated financial hedges
will be settled and any previously recognized unrealized amounts related to
these transactions will be realized.
Also
contributing to the lower margin that resulted from the higher net losses
discussed above, was a decrease in storage spreads during fiscal 2009, as
described further in the discussion of financial margin in the Non-GAAP measures
section.
NJRES had
a gross margin of $137.1 million and $56.3 million in fiscal 2008 and fiscal
2007, respectively. The increase in gross margin of approximately 143.4 percent
is primarily due to larger gains on derivative contracts in fiscal 2008 as
compared to fiscal 2007.
Since
NJRES’ portfolio of financial derivative instruments is comprised of net short
positions, the overall higher average fixed prices resulted in unrealized and
realized gains of $18.4 million and $14.5 million, respectively, for fiscal
2008, as compared with unrealized losses and realized gains of $(63.5) million
and $28.6 million, respectively, in fiscal 2007. The realized gains noted above
of $14.5 million in fiscal 2008 and $28.6 in fiscal 2007, resulted from the
settlement of open derivative instruments that were economically hedging natural
gas still in storage inventory and not yet sold.
NJRES’
gross margin in fiscal 2008 benefitted from a 46 percent decline in average
market prices during the fourth quarter. Average market prices related to the
financial derivatives in NJRES’ portfolio decreased from $14.64 per dth as of
June 30, 2008 to $7.95 per dth as of September 30, 2008, resulting in unrealized
and realized gains during the fourth quarter of $195.5 million and $2.3 million,
respectively.
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.
Page
40
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
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 fiscal
years ended September 30:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Operating
revenues
|
$ | 1,498,742 | $ | 2,714,733 | $ | 1,994,682 | ||||||
Gas
purchases
|
1,537,634 | 2,577,667 | 1,938,359 | |||||||||
Add:
|
||||||||||||
Unrealized
loss (gain) on derivative instruments
|
47,631 | (18,449 | ) | 63,474 | ||||||||
Effects
of economic hedging related to natural gas inventory and certain demand
fees
|
55,940 | (14,528 | ) | (28,598 | ) | |||||||
Financial
margin
|
$ | 64,679 | $ | 104,089 | $ | 91,199 |
A
reconciliation of Operating income, the closest GAAP financial measurement, to
the financial margin of NJRES is as follows for the years ended September
30:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Operating
(loss) income
|
$ | (57,139 | ) | $ | 108,342 | $ | 36,928 | |||||
Add:
|
||||||||||||
Operation
and maintenance expense
|
16,468 | 27,384 | 18,521 | |||||||||
Depreciation
and amortization
|
205 | 206 | 214 | |||||||||
Other
taxes
|
1,574 | 1,134 | 660 | |||||||||
Subtotal
– Gross margin
|
(38,892 | ) | 137,066 | 56,323 | ||||||||
Add:
|
||||||||||||
Unrealized
loss (gain) on derivative instruments
|
47,631 | (18,449 | ) | 63,474 | ||||||||
Effects
of economic hedging related to natural gas inventory and certain demand
fees
|
55,940 | (14,528 | ) | (28,598 | ) | |||||||
Financial
margin
|
$ | 64,679 | $ | 104,089 | $ | 91,199 |
A
reconciliation of Net (loss) income to net financial earnings is as follows for
the years ended September 30:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Net
(loss) income
|
$ | (32,632 | ) | $ | 67,166 | $ | 18,950 | |||||
Add:
|
||||||||||||
Unrealized
loss (gain) on derivative instruments, net of taxes
|
29,337 | (10,838 | ) | 37,986 | ||||||||
Effects
of economic hedging related to natural gas inventory and certain demand
fees, net of taxes
|
34,474 | (9,325 | ) | (16,788 | ) | |||||||
Net
financial earnings
|
$ | 31,179 | $ | 47,003 | $ | 40,148 |
Financial
margin in fiscal 2009 and fiscal 2008, was $64.7 million and $104.1 million,
respectively. The decrease of $39.4 million is due to the expiration of a
favorable physical transport capacity contract servicing the Northeast market
region that was no longer available for asset optimization in fiscal 2009, along
with the transportation portfolio experiencing lower hedged values coupled with
higher capacity fees, and a decrease in financial margin from the storage
portfolio. Financial margin from the storage portfolio decreased by $22.6
million, as compared with fiscal 2008, due primarily to lower average spreads on
storage positions in fiscal 2009.
NJRES'
financial margin in fiscal 2008 increased $12.9 million, compared with fiscal
2007, due primarily to the acquisition of additional transport contracts for the
Northeast market region during the first quarter of fiscal 2008. The additional
transport contracts enabled NJRES to transact greater volumes in the market
region along with establishing more favorable locational spreads that
contributed to higher margins. The average maximum daily quantity of firm
transportation capacity (excluding asset management contracts) increased to
803,776 dth in fiscal 2008 from 766,403 dth in fiscal 2007.
Page
41
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
The
increase in financial margin during fiscal 2008 was also due to additional
arbitrage opportunities for NJRES’ daily sales optimization activities. The
arbitrage opportunities were partly attributable to market price volatility that
primarily benefited NJRES’ Northeast market region during the fourth quarter of
fiscal 2008. Locational price fluctuations may arise from numerous factors,
including severe weather patterns such as those experienced during fiscal 2009
by hurricanes Ike and Gustav in the Gulf of Mexico. NJRES’ overall sales volumes
increased to 292.5 Bcf during fiscal 2008 from 260.1 Bcf during fiscal
2007.
Partially
offsetting the increase in financial margin from the above described activities
were lower average time spreads on storage positions, which decreased to $0.372
per dth in fiscal 2008 from $0.528 per dth in fiscal 2007. The decrease in
average time spreads on storage positions is attributable primarily to pricing
conditions that existed during the month of February 2007, primarily as a result
of weather conditions, which enabled NJRES to transact a significant volume of
withdrawals from existing storage positions that generated higher storage
margins in the prior fiscal year. Fiscal 2008 did not experience a similar
pricing event for time spreads.
Operation
and Maintenance Expense (O&M)
Operation
and maintenance expense decreased $10.9 million, or 39.9 percent, during fiscal
2009, as compared with fiscal 2008, due primarily to a $5.4 million decrease in
incentive-based compensation expense and a $5.3 million decrease in charitable
contributions.
Operation
and maintenance expense increased by $8.9 million in fiscal 2008 due primarily
to an increase of $4.8 million in charitable contributions, an aggregate
increase of $4.1 million for corporate services, compensation costs (as a result
of higher salary and incentive costs based on performance measures), greater
support expenses and increased accounting fees. In March 2008, NJRES established
a physical presence near the Gulf region by opening a satellite office in
Houston, Texas, which also contributed to some of the increases in compensation
and support costs.
Future
results are subject to NJRES’ ability to maintain and expand its wholesale
marketing activities and are contingent upon many other factors, including an
adequate number of appropriate counterparties, volatility in the natural gas
market, availability of storage arbitrage opportunities, sufficient liquidity in
the energy trading market and continued access to the capital
markets.
Retail
and Other Operations
The
consolidated financial results of Retail and Other for the fiscal years ended
September 30 are summarized as follows:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Operating
revenues
|
$ | 14,008 | $ | 22,850 | $ | 21,776 | ||||||
Operation
and maintenance expense
|
$ | 26,073 | $ | 23,162 | $ | 21,074 | ||||||
Equity
in earnings, net of tax
|
$ | 4,265 | $ | 1,988 | $ | 1,662 | ||||||
Net
loss
|
$ | (5,529 | ) | $ | (477 | ) | $ | (497 | ) |
Operating
revenue decreased $8.8 million, or 38.7 percent, in fiscal 2009, to $14 million
as compared with $22.9 million in fiscal 2008, due primarily to greater
unrealized losses at NJR Energy, which were the result of declining market
prices within a portfolio of net long financial derivative positions along with
a decrease in installation revenue at NJRHS.
Operating
revenue in fiscal 2008, increased $1.1 million compared with fiscal 2007 due
primarily to increased rental income of $1.0 million at CR&R as a result of
an increase of office space leased in a building completed in May 2007, and $1.1
million at NJRHS due primarily to increased service contract revenue, partially
offset by higher unrealized losses related to NJR Energy’s financial derivative
contracts. The portfolio of swap contracts is comprised primarily of long
positions, which decrease in value during periods of declining market
prices
Operation
and maintenance expenses in fiscal 2009 increased $2.9 million, as compared with
fiscal 2008, due primarily to higher labor costs and increased building and
utilities expenses and higher health care costs at NJRHS. Operation and
maintenance expense increased by $2.1 million in fiscal 2008 compared with
fiscal 2007, due primarily to higher compensation costs resulting from annual
wage increases and increased shared services expenses.
Page
42
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Taxes
netted in Equity in earnings from Iroquois are $1.8 million, $1.3 million and
$1.1 million and are included in the Consolidated Statements of Income for the
fiscal years ended September 30, 2009, 2008 and 2007, respectively. Equity in
earnings from Iroquois is driven by the underlying performance of natural gas
transportation through its existing pipeline, which is based on FERC-regulated
tariffs. Similarly, Equity in earnings from Steckman Ridge is driven by storage
revenues based on FERC-regulated tariff. Taxes netted in Equity in earnings from
Steckman Ridge were $1.1 million in fiscal 2009.
Net loss
for fiscal 2009, increased $5.1 million, compared with fiscal 2008, due
primarily to the decreased operating revenue at NJR Energy and NJRHS and the
increased O&M expenses, partially offset by an increase in equity in
earnings and lower income tax expense as a result of the lower Operating
income.
Net loss
in fiscal 2008 remained constant as compared with fiscal 2007. The increased
operating revenue at NJRHS and CR&R, as previously discussed, and increased
earnings from the investment in Iroquois were offset by the increased Operation
and maintenance expenses and unrealized losses at NJR Energy.
NJR
Energy has an economic hedge associated with a long-term fixed price contract to
sell gas to a counterparty. Unrealized losses or gains at NJR Energy are the
result of the change in value associated with financial derivative instruments
(futures contracts) designed to economically hedge the long-term fixed-price
contract.
The
Income statement impact includes unrealized (losses) associated with these
derivative instruments of $(16.8) million, $(8.2) million and $(7.2) for the
fiscal years ended September 30, 2009, 2008 and 2007, respectively, which are
recorded, pre-tax, as a component of Operating revenues.
Additionally,
management of the Company uses the non-GAAP measure “net financial earnings”,
when viewing the results of NJR Energy to monitor the operational results
without the impact of unsettled derivative instruments.
A
reconciliation of Net (loss) income to Net financial earnings, a non-GAAP
measure, is as follows:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Net
loss
|
$ | (5,529 | ) | $ | (477 | ) | $ | (497 | ) | |||
Add:
|
||||||||||||
Unrealized
loss on derivative instruments, net of taxes
|
9,917 | 4,810 | 4,223 | |||||||||
Net
financial earnings
|
$ | 4,388 | $ | 4,333 | $ | 3,726 |
Net
financial earnings remained relatively flat for fiscal 2009 compared with fiscal
2008. Equity in earnings, net of tax, increased $2.3 million due to improved
earnings at Iroquois, partially offset by a increases in Operation and
maintenance and Interest expense, as noted above.
Net
financial earnings increased $607,000 in fiscal 2008 compared with fiscal 2007,
due primarily to increases in Operating revenue, and equity in earnings, offset
by an increase in O&M as previously discussed.
Liquidity
and Capital Resources
NJR’s
objective is to maintain a consolidated capital structure that reflects the
different characteristics of each business segment and business operations and
provides adequate financial flexibility for accessing capital markets as
required.
NJR’s
consolidated capital structure at September 30 was as follows:
2009
|
2008
|
|||||||
Common
stock equity
|
53 | % | 51 | % | ||||
Long-term
debt
|
35 | 32 | ||||||
Short-term
debt
|
12 | 17 | ||||||
Total
|
100 | % | 100 | % |
When
netting NJR’s cash balance of $36.2 million and $42.6 million at September 30,
2009 and 2008, respectively, with short-term debt balances, the corresponding
capital ratios of common stock equity, long-term debt and short term debt are 55
percent, 36 percent and 9 percent at September 30, 2009 and 53 percent, 33
percent and 14 percent at September 30, 2008.
Page
43
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
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 that were granted 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. NJR issued approximately 549,000 shares
related to the DRP and exercised options during fiscal 2009.
On
January 23, 2008, NJR’s Board of Directors approved a 3-for 2-stock split in the
form of a dividend for the Company’s common stock shareholders of record on
February 8, 2008. The additional shares were issued on March 3, 2008, resulting
in an increase in average shares outstanding from approximately 28 million to
approximately 42 million.
The
Company has a share repurchase program that provides for the repurchase of up to
6.8 million shares on a split-adjusted basis. As of September 30, 2009, the
Company repurchased approximately 6.5 million of those shares and has the
ability to repurchase approximately 325,000 additional shares under the approved
program.
Debt
NJR and
its unregulated subsidiaries rely on cash flows generated from operating
activities and utilization of committed credit facilities to provide liquidity
to meet working capital and external debt-financing requirements.
As of
September 30, 2009, NJR, NJRES and NJNG had committed credit facilities of $605
million with approximately $448.9 million available under these facilities
(see Note 8. Short-term
debt and credit
facilities).
NJR
believes that as of September 30, 2009, NJR and NJNG were, and currently are, in
compliance with all financial covenants, which consists of a debt-to-capital
ratio covenant and an additional interest coverage ratio covenant for
NJNG.
NJR
believes that its existing borrowing availability and cash flow from operations
will be sufficient to satisfy its and its subsidiaries’ working capital, capital
expenditures and dividend requirements for the foreseeable future. NJR, NJNG and
NJRES currently anticipate that its financing requirements in fiscal 2010 and
2011 will be met through the issuance of short-term and long-term debt and
proceeds from the Company’s DRP. The continued tightening of the U.S.
credit markets and the continuing flight of banks to preserve capital have led
to a slowdown of lending between banks, which has trickled downstream to
businesses. A prolonged constriction of credit availability could possibly
affect management’s ability to borrow.
On August
24, 2009, NJNG, filed a petition in Docket No. GF09080702 with the BPU ,
pursuant to N.J.S.A. 48:3-7 and 48:3-9 and N.J.A.C. 14:1-5.9, 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.
NJR
On
September 24, 2007, NJR issued $50 million of Unsecured Senior Notes, which were
used for financing its initial investment in Steckman Ridge and general
corporate purposes, including refinancing short-term debt. These notes have a
10-year maturity and an interest rate of 6.05 percent.
On March
15, 2009, NJR fully repaid its $25 million, 3.75 percent, Unsecured Senior notes
at maturity.
On
December 13, 2007, NJR refinanced its prior senior credit facility, which was
scheduled to expire on December 16, 2007, into a new $325 million five-year
revolving unsecured credit facility. The new credit facility permits the
borrowing of revolving loans and swing loans, as well as the issuance of letters
of credit. Swing loans are loans made available on a same-day basis for an
aggregate principal amount of up to $50 million and repayable in full within a
maximum of seven days of borrowing. It also permits an increase to the facility,
from time to time, with the existing or new lenders, in a minimum of $5 million
increments up to a maximum $100 million at the lending banks discretion.
Borrowings under the new facility are conditional upon compliance with a maximum
leverage ratio, as defined in the new credit facility, of not more than 0.65 to
1.00 at any time. NJR used the initial borrowings under the new credit facility
to refinance its prior credit facility. In addition, certain of NJR’s
non-regulated subsidiaries have guaranteed to the lenders all of NJR’s
obligations under the new credit facility.
Depending
on borrowing levels and credit ratings, NJR’s interest rate can either be, at
its discretion, the LIBOR or the Federal Funds Open Rate plus an applicable
spread and facility fee. As of September 30, 2009, NJR’s effective rate was 0.57
percent on outstanding borrowings of $143.4 million under this credit
facility.
Page
44
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Financial
covenants contained in NJR’s credit facility include a maximum debt-to-total
capitalization of 65 percent. At September 30, 2009, the debt-to-total
capitalization was 46 percent after adjustments for the fair value of derivative
assets and liabilities and standby letters of credit, as defined in NJR’s credit
facility.
NJR’s
short-term borrowings at September 30, 2009, increased to $143.4 million from
$32.7 million at September 30, 2008 due primarily to NJR’s increased investment
in Steckman Ridge and additional share repurchases.
As of
September 30, 2009, NJR had a $12 million letter of credit outstanding on behalf
of NJRES, which will expire on December 31, 2009, which is used for margin
requirements for natural gas transactions. NJR also has a $675,000 letter of
credit outstanding on behalf of CR&R, which will expire on December 3, 2009
and 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.
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 for energy tax payments, through the issuance of
commercial paper and short-term bank loans.
On
November 1, 2008, upon maturity, NJNG redeemed in full its $30 million, 6.27
percent, Series X First Mortgage bonds.
In
October 2007, NJNG entered into an agreement for standby letters of credit that
may be drawn upon through December 15, 2009, for up to $50 million. As of
September 30, 2009, no letters of credit have been issued under this agreement.
These letters of credit would not reduce the amount available to be borrowed
under NJNG’s credit facility.
To
support the issuance of commercial paper, NJNG has a $250 million committed
credit facility with several banks, with a 5-year term expiring in December
2009. NJNG currently plans to renew or replace this facility prior to or upon
its expiration. NJNG had no commercial paper outstanding as of September 30,
2009, compared with $145.5 million as of September 30, 2008. 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.
In May
2008, NJNG issued $125 million of 5.6 percent senior notes due May 15, 2018, in
the private placement market pursuant to a note purchase agreement. The notes
are secured until the release date (which is the date at which the security
provided by the pledge under NJNG’s mortgage indenture would no longer be
available to holders of any outstanding series of NJNG’s senior secured notes,
and such indebtedness would become senior unsecured indebtedness) by an equal
amount of NJNG first mortgage bonds (Series LL), and interest is payable on the
Notes semi-annually. The proceeds from the notes were used to refinance
short-term debt and to fund capital expenditure requirements.
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,
when an auction is held for the purposes of determining the securities. The
interest rates associated with the NJNG’s variable-rate debt are based on the
rates of the related EDA ARS. As of September 30, 2009, all of the auctions
surrounding the EDA ARS have failed, resulting in those bonds bearing interest
at their maximum rates, as defined in the EDA ARS, as the lesser of (i) 175
percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as applicable to
such series of ARS. As of September 30, 2009, the 30-day LIBOR rate was 0.25
percent. While the failure of the ARS auctions does not signify or constitute a
default on NJNG, the EDA ARS does impact NJNG’s borrowing costs of the
variable-rate debt. As such, NJNG currently has a weighted average interest rate
of 0.44 percent as of September 30, 2009, compared with a weighted
average
Page
45
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
interest
rate of 4.6 percent as of September 30, 2008. There can be no assurance that the
EDA ARS will have enough market liquidity to avoid failed auctions in the
future, 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.
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. As of September 30, 2009, there were no borrowings under this
facility. Upon expiration, the credit facility was not renewed.
Sale-Leaseback
NJNG
received approximately $6.3 million, $7.5 million and $5.5 million in fiscal
2009, 2008 and 2007, respectively, related to the sale-leaseback of a portion of
its gas meters. NJNG also plans to continue its meter sale-leaseback program at
approximately $5 million annually.
Contractual
Obligations
The
following table is a summary of NJR, NJNG and NJRES contractual cash obligations
and financial commitments and their applicable payment due dates as of September
30, 2009.
Up
to
|
2-3 | 4-5 |
After
|
|||||||||||||||||
(Thousands)
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
|||||||||||||||
Long-term
debt (1)
|
$ | 561,262 | $ | 16,973 | $ | 51,195 | $ | 89,526 | $ | 403,568 | ||||||||||
Capital
lease obligations (1)
|
83,448 | 9,943 | 21,499 | 15,379 | 36,627 | |||||||||||||||
Operating
leases (1)
|
10,459 | 2,938 | 3,984 | 2,034 | 1,503 | |||||||||||||||
Short-term
debt
|
143,400 | 143,400 | — | — | — | |||||||||||||||
New
Jersey Clean Energy Program (1)
|
39,369 | 10,920 | 23,973 | 4,476 | — | |||||||||||||||
Construction
obligations
|
3,789 | 3,789 | — | — | — | |||||||||||||||
Accelerated
Infrastructure Program (AIP)
|
67,281 | 46,725 | 20,556 | — | — | |||||||||||||||
Remediation
expenditures (2)
|
146,700 | 17,360 | 38,000 | 11,500 | 79,840 | |||||||||||||||
Natural
gas supply purchase obligations–NJNG
|
55,883 | 54,239 | 1,644 | — | — | |||||||||||||||
Demand
fee commitments - NJNG
|
717,524 | 106,854 | 191,789 | 161,335 | 257,546 | |||||||||||||||
Natural
gas supply purchase obligations–NJRES
|
722,588 | 444,490 | 267,510 | 10,588 | — | |||||||||||||||
Demand
fee commitments - NJRES
|
192,199 | 79,219 | 59,430 | 27,966 | 25,584 | |||||||||||||||
Total
contractual cash obligations
|
$ | 2,743,902 | $ | 936,850 | $ | 679,580 | $ | 322,804 | $ | 804,668 |
(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.
In fiscal
2009, the Company had 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 plans. 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 $5
million to $7 million annually over the next five years in accordance with BPU
requirements. Actual contributions may be higher or lower based on market
conditions and various assumptions.
As of
September 30, 2009, there were NJR guarantees covering approximately $345
million of natural gas purchases and demand fee commitments of NJRES and NJNG
included in natural gas supply purchase obligations above, not yet reflected in
Accounts payable on the Consolidated Balance Sheet.
Page
46
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
The
Company is obligated to fund up to $132.5 million associated with the
construction and development of Steckman Ridge. As of September 30, 2009, NJR
has invested approximately $122.5 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.
NJNG’s
total capital expenditures are estimated at $110.2 million and $86.5 million in
fiscal 2010 and 2011, respectively, and consist primarily of its construction
program to support customer growth, maintenance of its distribution system and
replacement needed under pipeline safety regulations. Capital expenditures in
fiscal 2010 and 2011 include an estimated $44.2 million and $20.6 million,
respectively, related to AIP construction costs.
Off-Balance-Sheet
Arrangements
The
Company does not have any off-balance-sheet financing arrangements.
Cash
Flow
Operating
Activities
As
presented in the Consolidated Statements of Cash Flows, cash flow generated from
operating activities totaled $267.2 million in fiscal 2009, compared with $132.4
million in fiscal 2008. NJR employs the indirect method when preparing its
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 decreased $81.9 million during fiscal 2009, due primarily to higher
realized losses associated with natural gas in inventory at NJRES, as well as
higher unrealized losses associated with decreases in the values of financial
derivative instruments at NJRES and NJR Energy. In addition, changes in working
capital that contributed to the increase in operating cash flows during fiscal
2009, as compared with fiscal 2008 are as follows:
|
Ÿ
|
lower
costs associated with natural gas inventory at NJRES due primarily to the
decline in commodity prices in fiscal 2009 compared to rising prices
during fiscal 2008. As a general indicator, NYMEX prices declined
approximately 50 percent during fiscal 2009 compared with an increase of
approximately 16 percent during fiscal
2008;
|
|
Ÿ
|
a
reduction in receivable balances at NJRES due primarily to a 63 percent
decrease in average sales price in fiscal 2009 compared with an increase
in receivable balances during fiscal 2008, which resulted from a 31
percent increase in volumes coupled with a 37 percent increase in average
sales prices;
|
|
Ÿ
|
an
increase in NJNG’s gas costs recovered during fiscal 2009 as a result of
gas costs falling below the commodity component of NJNG’s BGSS rate billed
to its customers compared with fiscal 2008. The amount of gas costs
overrecovered was moderated by a BGSS refund of $30 million issued to
NJNG’s customers during fiscal 2008 and temporary rate credits of $45
million during fiscal 2009;
|
These
increases in operating cash flows were offset by the following:
|
Ÿ
|
discretionary
cash contributions of $27.7 million to NJR’s postemployment benefit plans;
and
|
|
Ÿ
|
a
decrease in NJRES payable balances primarily related to a 70 percent
decrease in the cost of natural gas purchases, offset by a 25 percent
increase in purchase volumes as compared with an increase in both cost and
volumes, during fiscal 2008, as described
below.
|
Page
47
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Cash flow
generated from operating activities totaled $132.4 million in fiscal 2008,
compared with $122.4 million in fiscal 2007. Higher net income contributed to
the increase, primarily driven by higher net unrealized gains and realized gains
associated with natural gas in inventory. The increase was offset by changes in
the following components of working capital:
|
Ÿ
|
at
NJRES, an increase in natural gas inventory balances during fiscal 2008 to
facilitate greater sales volumes, coupled with a 25 percent rise in the
Company’s average cost of gas compared with fiscal
2007;
|
|
Ÿ
|
an
increase in sales volumes at NJRES of approximately 5.6 Bcf in fiscal 2008
compared with 2.9 Bcf in fiscal 2007 that resulted in an increase in
receivable balances as of September 30, 2008, as compared with September
30, 2007. NJRES receivable balances, were impacted by a 37 percent
increase in the average sales price for the month of September 2008 as
compared with September 2007, as a result of the increase in the wholesale
price of natural gas;
|
|
Ÿ
|
an
increase in NJNG broker margin balances which were impacted by adverse
price movements on its natural gas futures
contracts;
|
|
Ÿ
|
a
change in deferred gas costs of $37.6 million at NJNG as a result of
wholesale natural gas prices that were higher during fiscal 2008 in
comparison to the amounts billed to customers, which included a lower BGSS
rate as a result of lower estimated natural gas costs that were factored
into the BGSS rates during the year; partially offset
by
|
|
Ÿ
|
operating
cash flows generated by an increase in gas purchases payables balances at
NJRES as a result of a 15 percent increase in purchase activity during the
month of September 2008 to accommodate higher sales volumes, coupled with
a 50 percent increase in the cost of those purchases, compared with
purchases during the month of September
2007.
|
NJNG’s
MGP expenditures are currently expected to total $17.4 million in fiscal 2010
(see Note 13. Commitments and
Contingent Liabilities).
Investing
Activities
Cash flow
used in investing activities totaled $121.3 million in fiscal 2009, compared
with $103.9 million in fiscal 2008. The increase in cash used was due primarily
to an increased investment in Steckman Ridge and higher NJNG utility plant
expenditures offset by the drawdown from the restricted cash construction
fund.
Cash
flows used in investing activities decreased $14.8 million in fiscal 2008, from
$118.7 million in fiscal 2007. The decrease was due primarily to a reduction in
the investments in Steckman Ridge offset by increases in utility plant
expenditures.
The
Company’s capital expenditures for fiscal 2007 through fiscal 2009 and projected
capital requirements for fiscal years 2010 and 2011 are as follows:
(Thousands)
|
2011
|
2010
|
2009
|
2008
|
2007
|
|||||||||||||||
Natural
Gas Distribution
|
$ | 86,547 | $ | 110,192 | $ | 82,757 | $ | 80,131 | $ | 67,937 | ||||||||||
Energy
Services
|
200 | 200 | — | 86 | — | |||||||||||||||
Retail
and Other
|
700 | 700 | 388 | 1,031 | 2,777 | |||||||||||||||
Total
|
$ | 87,447 | $ | 111,092 | $ | 83,145 | $ | 81,248 | $ | 70,714 |
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 and 2011 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 and $20.5 million,
respectively.
Retail
and Other capital expenditures each year have been made primarily in connection
with investments made to preserve the value of real estate holdings. At
September 30, 2009, CR&R owned 83 acres of undeveloped land and a
56,400-square-foot building on 5 acres of land. In fiscal 2009 and fiscal 2008,
capital expenditures of $289,000 and $408,000, respectively, were primarily
related to CR&R’s construction of the 56,400-square-foot office
building.
Page
48
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
On June
5, 2008, the Federal Energy Regulatory Commission (FERC) issued Steckman Ridge a
certificate of public convenience and necessity authorizing the ownership,
construction and operation of its natural gas storage facility and associated
facilities. On April 1, 2009, Steckman Ridge received authorization to place
certain injection related facilities into commercial operation. Customers have
begun to inject natural gas inventory in preparation for the initial withdrawal
season. An additional drilling program will be reviewed in the third quarter of
fiscal 2010. As of September 30, 2009, NJR has invested $122.5 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.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2010.
Financing
Activities
Financing
cash flows generally are seasonal in nature and are impacted by the volatility
in pricing in the natural gas markets. NJNG’s inventory levels are built up
during its natural gas injection season (April through October) and reduced
during withdrawal season (November through March) in response to the supply
requirements of its customers. As well, changes in financing cash flows have
been impacted during the current and prior fiscal years by the growth and
funding demands of NJRES’ gas management and marketing functions.
Cash flow
used in financing activities totaled $(152.4) million in fiscal 2009, compared
with cash generated during fiscal 2008 of $9.1 million. During fiscal 2009, NJNG
repaid its $30 million, 6.27 percent, Series X Mortgage bonds and NJR repaid its
$25 million, 3.75 percent, unsecured senior notes. In addition, the Company
reduced its short-term borrowings as a result of improved cash flows from
operations.
Cash flow
generated from financing activities totaled $9.1 million in fiscal 2008,
compared with $(3.5) million used in fiscal 2007. The increase was due primarily
to an increase in total borrowings, including a long-term fixed rate debt
issuance of $125 million offset by payments of short-term debt of $78.3 million
and an increase in common stock dividend payments and share
repurchases.
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 0.44 percent as of September
30, 2009, NJNG continues to review alternatives that would eliminate or mitigate
the inherent interest rate risk associated with its variable rate
debt.
NJNG
received $6.3 million and $7.5 million in December 2008 and 2007, respectively,
in connection with the sale-leaseback of its natural gas meters. This
sale-leaseback program is expected to be continued on an annual
basis.
Credit
Ratings
The table
below summarizes NJNG’s current credit ratings issued by two rating entities,
Standard and Poor’s (S&P) and Moody’s Investors Service, Inc.
(Moody’s):
Standard
and Poor’s
|
Moody’s
|
|
Corporate
Rating
|
A
|
N/A
|
Commercial
Paper
|
A-1
|
P-1
|
Senior
Secured
|
A+
|
Aa3
|
Ratings
Outlook
|
Stable
|
Negative
|
On April
3, 2008, S&P adjusted NJNG’s corporate credit rating from A+ to A. On April
30, 2009, S&P affirmed its ratings and changed its outlook from negative to
stable.
On
December 12, 2008, Moody’s adjusted NJNG’s credit ratings outlook from stable to
negative.
Page
49
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
NJNG’s
S&P and Moody’s ratings are investment-grade ratings. S&P and Moody’s
give NJNG’s commercial paper the highest rating within the Commercial Paper
investment-grade category. NJR is not a rated entity.
NJNG is
not party to any lending agreements that would accelerate the maturity date of
any obligation caused by a failure to maintain any specific credit rating. If
such ratings are downgraded below investment grade, borrowing costs could
increase, as will the costs of maintaining certain contractual relationships and
for future financing. Even if ratings are downgraded without falling below
investment grade, NJR and NJNG could still face increased borrowing costs under
their credit facilities. A rating set forth above is not a recommendation to
buy, sell or hold the Company’s or NJNG’s securities and may be subject to
revision or withdrawal at any time. Each rating set forth above should be
evaluated independently of any other rating.
The
timing and mix of any external financings will target a common equity ratio that
is consistent with maintaining the Company’s current short- and long-term credit
ratings.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Financial
Risk Management
Commodity
Market Risks
Natural
gas is a nationally traded commodity, and its prices are determined effectively
by the New York Mercantile Exchange (NYMEX) and over-the-counter markets. The
prices on the NYMEX and over-the-counter markets generally reflect the notional
balance of natural gas supply and demand, but are also influenced significantly
from time to time by other events.
The
regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations in the price of
natural gas. To economically hedge against such fluctuations, the Company and
its subsidiaries have entered into futures contracts, options agreements and
swap agreements. To manage these derivative instruments, the Company has
well-defined risk management policies and procedures that include daily
monitoring of volumetric limits and monetary guidelines. The Company’s natural
gas businesses are conducted through three of its operating subsidiaries. First,
NJNG is a regulated utility that uses futures, options and swaps to economically
hedge against price fluctuations, and its recovery of natural gas costs is
governed by the BPU. Second, NJRES uses futures, options, 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
2.6 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 from September 30, 2008, to September 30, 2009:
Balance
|
Increase
|
Less
|
Balance
|
|||||||||||||
September
30,
|
(Decrease) in Fair
|
Amounts
|
September
30,
|
|||||||||||||
(Thousands)
|
2008
|
Market
Value
|
Settled
|
2009
|
||||||||||||
NJNG
|
$ | (49,610 | ) | $ | (69,710 | ) | $ | (111,247 | ) | $ | (8,073 | ) | ||||
NJRES
|
89,571 | 99,866 | 161,511 | 27,926 | ||||||||||||
NJR
Energy
|
20,190 | (20,986 | ) | (4,151 | ) | 3,355 | ||||||||||
Total
|
$ | 60,151 | $ | 9,170 | $ | 46,113 | $ | 23,208 |
There
were no changes in methods of valuations during the year ended September 30,
2009.
The
following is a summary of fair market value of financial derivatives related to
natural gas purchases and sales at September 30, 2009, by method of valuation
and by maturity for each fiscal year period:
(Thousands)
|
2010
|
2011
|
2012-2014 |
After
2014
|
Total
Fair
Value
|
|||||||||||||||
Price
based on NYMEX
|
$ | 10,272 | $ | (2,755 | ) | $ | 68 | — | $ | 7,585 | ||||||||||
Price
based on other external data
|
13,316 | 1,157 | 1,150 | — | 15,623 | |||||||||||||||
Total
|
$ | 23,588 | $ | (1,598 | ) | $ | 1,218 | — | $ | 23,208 |
Page
50
New
Jersey Resources Corporation
Part
II
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The
following is a summary of financial derivatives by type as of September 30,
2009:
Volume Bcf |
Price
per Mmbtu |
Amounts
included in
Derivatives |
|||||||||||
NJNG
|
Futures
|
21.4 | $4.61 - $9.19 | $ | (4,740 | ) | |||||||
Swaps
|
(14.5 | ) | $2.90 - $7.16 | (5,860 | ) | ||||||||
Options
|
8.0 | $4.50 - $9.50 | 2,527 | ||||||||||
NJRES
|
Futures
|
(19.8 | ) | $2.47 - $10.35 | 11,492 | ||||||||
Swaps
|
(23.2 | ) | $2.41 - $12.44 | 16,354 | |||||||||
Options
|
4.0 | $1.75 - $4.25 | 80 | ||||||||||
NJR
Energy
|
Swaps
|
2.6 | $3.55 - $ 4.46 | 3,355 | |||||||||
Total
|
$ | 23,208 |
The
following table reflects the changes in the fair market value of physical
commodity contracts from September 30, 2008 to September 30, 2009:
(Thousands)
|
Balance September 30, |
Increase (Decrease) in Fair |
Less Amounts |
Balance September 30, |
||||||||||||
NJRES
- Prices based on other external data
|
$ | 20,237 | $ | 8,160 | $ | 12,102 | $ | 16,295 |
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 September 30, 2009, using the variance-covariance method with a 95 percent
confidence level and a 1-day holding period, was $930,000. The VaR with a 99
percent confidence level and a 10-day holding period was $4.1 million. The
calculated VaR represents an estimate of the potential change in the value of
the net positions. These estimates may not be indicative of actual results
because actual market fluctuations may differ from forecasted
fluctuations.
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy engage in wholesale marketing activities. NJR monitors and
manages the credit risk of its wholesale marketing operations through credit
policies and procedures that management believes reduce overall credit risk.
These policies include a review and evaluation of prospective counterparties’
financial statements and/or credit ratings, daily monitoring of counterparties’
credit limits, daily communication with traders regarding credit status and the
use of credit mitigation measures, such as minimum margin requirements,
collateral requirements and netting agreements. Examples of collateral include
letters of credit and cash received for either prepayment or margin
deposit.
The
Company’s Risk Management Committee (RMC) continuously monitors NJR’s credit
risk management policies and procedures. The RMC is 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.
Page
51
New
Jersey Resources Corporation
Part
II
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The
following is a summary of gross and net credit exposures, grouped by investment
and noninvestment grade counterparties, as of September 30, 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.
NJNG’s
counterparty credit exposure as of September 30, 2009, is as
follows:
Gross
Credit
|
Net
Credit
|
|||||||
(Thousands)
|
Exposure
|
Exposure
|
||||||
Investment
grade
|
$ | 19,543 | $ | 17,421 | ||||
Noninvestment
grade
|
373 | — | ||||||
Internally
rated investment grade
|
64 | 62 | ||||||
Internally
rated noninvestment grade
|
— | — | ||||||
Total
|
$ | 19,980 | $ | 17,483 |
All
other counterparty credit exposure as of September 30, 2009, is as
follows:
Gross
Credit
|
Net
Credit
|
|||||||
(Thousands)
|
Exposure
|
Exposure
|
||||||
Investment
grade
|
$ | 75,791 | $ | 57,660 | ||||
Noninvestment
grade
|
8,833 | 3,733 | ||||||
Internally
rated investment grade
|
13,717 | 6,146 | ||||||
Internally
rated noninvestment grade
|
4,786 | 928 | ||||||
Total
|
$ | 103,127 | $ | 68,467 |
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
September 30, 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 September 30, 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 0.44 percent as of September 30, 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
September 30, 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.
Page
52
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
Management’s
Report on Internal Control over Financial Reporting
Management
of New Jersey Resources Corporation (NJR or the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13A-15(f) and 15d-15(f) of the Securities and Exchange Act of
1934, as amended. The Company’s internal control over financial reporting is a
process designed to provide reasonable assurance to the Company’s Management and
Board of Directors regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes policies and procedures
that:
|
Ÿ
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
Ÿ
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
Ÿ
|
improvements
in the design of internal control over financial reporting related to the
accounting of commodity transacting, resulting in the implementation of
new and expanded processes and controls;
and
|
Under the
supervision and with the participation of the Company’s management, including
its principal executive officer and principal financial officer, management
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting as of September 30, 2009. In making this assessment,
management used the criteria for effective internal control over financial
reporting described in the “Internal Control-Integrated Framework” set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the assessment, management concluded that, as of September 30, 2009,
the Company’s internal control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles in the Unites States.
The
conclusions of the Company’s principal executive officer and principal financial
officer is based on the recognition that there are inherent limitations in all
systems of internal control over financial reporting. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements, errors or fraud. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s independent registered public accounting firm, Deloitte & Touche
LLP, has issued its report on the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2009, which appears
herein.
November
30, 2009
Page
53
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
New
Jersey Resources Corporation:
We have
audited the accompanying consolidated balance sheets and consolidated statements
of capitalization of New Jersey Resources Corporation and subsidiaries (the
"Company") as of September 30, 2009 and 2008, and the related consolidated
statements of income, common stock equity, comprehensive income, and cash flows
for each of the three years in the period ended September 30, 2009. Our audits
also included the financial statement schedules listed in the Index at Item 15.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 2009 and
2008, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 2009, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of September 30, 2009, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated November 30, 2009
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
November
30, 2009
Page
54
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
of New
Jersey Resources Corporation
We have
audited the internal control over financial reporting of New Jersey Resources
Corporation and subsidiaries (the "Company") as of September 30, 2009, based on
criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2009, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedules as of and for the year ended September 30, 2009 of
the Company and our report dated November 30, 2009 expressed an unqualified
opinion on those financial statements and financial statement
schedules.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
November
30, 2009
Page
55
New Jersey Resources
Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
CONSOLIDATED
STATEMENTS OF INCOME
(Thousands)
|
||||||||||||
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
OPERATING
REVENUES
|
$ | 2,592,460 | $ | 3,816,210 | $ | 3,021,765 | ||||||
OPERATING
EXPENSES
|
||||||||||||
Gas
purchases
|
2,245,169 | 3,330,756 | 2,625,560 | |||||||||
Operation
and maintenance
|
149,151 | 148,384 | 136,601 | |||||||||
Regulatory
rider expenses
|
44,992 | 39,666 | 37,605 | |||||||||
Depreciation
and amortization
|
30,328 | 38,464 | 36,235 | |||||||||
Energy
and other taxes
|
74,750 | 65,602 | 62,499 | |||||||||
Total
operating expenses
|
2,544,390 | 3,622,872 | 2,898,500 | |||||||||
OPERATING
INCOME
|
48,070 | 193,338 | 123,265 | |||||||||
Other
income
|
4,409 | 4,368 | 4,294 | |||||||||
Interest
expense, net of capitalized interest
|
21,014 | 25,811 | 27,613 | |||||||||
INCOME
BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
|
31,465 | 171,895 | 99,946 | |||||||||
Income
tax provision
|
8,488 | 64,715 | 38,675 | |||||||||
Equity
in earnings of affiliates, net of tax
|
4,265 | 1,988 | 1,662 | |||||||||
NET
INCOME
|
$ | 27,242 | $ | 109,168 | $ | 62,933 | ||||||
EARNINGS
PER COMMON SHARE
|
||||||||||||
BASIC
|
$ | 0.65 | $ | 2.61 | $ | 1.50 | ||||||
DILUTED
|
$ | 0.64 | $ | 2.59 | $ | 1.49 | ||||||
DIVIDENDS
PER COMMON SHARE
|
$ | 1.24 | $ | 1.11 | $ | 1.01 | ||||||
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
||||||||||||
BASIC
|
42,119 | 41,878 | 41,855 | |||||||||
DILUTED
|
42,465 | 42,176 | 42,113 |
Page
56
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Thousands) | ||||||||||||
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
Net
income
|
$ | 27,242 | $ | 109,168 | $ | 62,933 | ||||||
Adjustments
to reconcile net income to cash flows from operating
activities:
|
||||||||||||
Unrealized
loss (gain) on derivative instruments
|
64,465 | (12,929 | ) | 58,394 | ||||||||
Depreciation
and amortization
|
31,142 | 39,367 | 36,536 | |||||||||
Impairment
charge
|
— | — | 4,000 | |||||||||
Allowance
for equity used during construction
|
(568 | ) | — | — | ||||||||
Allowance
for bad debt expense
|
9,739 | 4,530 | 3,348 | |||||||||
Deferred
income taxes
|
(31,435 | ) | 13,715 | 16,127 | ||||||||
Manufactured
gas plant remediation costs
|
(12,867 | ) | (18,958 | ) | (20,171 | ) | ||||||
Equity
in earnings from investments, net of distributions
|
2,924 | (52 | ) | (556 | ) | |||||||
Cost
of removal – asset retirement obligations
|
(943 | ) | (969 | ) | (880 | ) | ||||||
Contributions
to postemployment benefit plans
|
(27,676 | ) | (1,014 | ) | (685 | ) | ||||||
Changes
in:
|
||||||||||||
Components
of working capital
|
154,271 | (35,992 | ) | (66,984 | ) | |||||||
Other
noncurrent assets
|
5,886 | (4,591 | ) | 23,707 | ||||||||
Other
noncurrent liabilities
|
45,061
|
40,093 | 6,637 | |||||||||
Cash
flows from operating activities
|
267,241 | 132,368 | 122,406 | |||||||||
CASH
FLOWS USED IN INVESTING ACTIVITIES
|
||||||||||||
Expenditures
for
|
||||||||||||
Utility
plant
|
(75,107 | ) | (72,329 | ) | (60,747 | ) | ||||||
Real
estate properties and other
|
(388 | ) | (1,117 | ) | (2,777 | ) | ||||||
Cost
of removal
|
(6,139 | ) | (6,833 | ) | (6,310 | ) | ||||||
Investments
in equity investees
|
(43,843 | ) | (23,662 | ) | (54,978 | ) | ||||||
Release
from restricted cash construction fund
|
4,200 | — | 4,300 | |||||||||
Proceeds
from asset sales and available for sale investments
|
— | — | 1,792 | |||||||||
Cash
flows used in investing activities
|
(121,277 | ) | (103,941 | ) | (118,720 | ) | ||||||
CASH
FLOWS (USED IN) FROM FINANCING ACTIVITIES
|
||||||||||||
Proceeds
from issuance of common stock
|
16,441 | 16,028 | 18,515 | |||||||||
Proceeds
from long-term debt
|
— | 125,000 | 49,850 | |||||||||
Tax
benefit from stock options exercised
|
1,686 | 630 | 1,761 | |||||||||
Proceeds
from sale-leaseback transaction
|
6,268 | 7,485 | 5,482 | |||||||||
Payments
of long-term debt
|
(60,362 | ) | (5,565 | ) | (4,031 | ) | ||||||
Purchases
of treasury stock
|
(30,670 | ) | (11,039 | ) | (9,024 | ) | ||||||
Payments
of common stock dividends
|
(50,967 | ) | (45,201 | ) | (41,869 | ) | ||||||
Net
payments of short-term debt
|
(34,800 | ) | (78,279 | ) | (24,221 | ) | ||||||
Cash
flows (used in) from financing activities
|
(152,404 | ) | 9,059 | (3,537 | ) | |||||||
Change
in cash and temporary investments
|
(6,440 | ) | 37,486 | 149 | ||||||||
Cash
and temporary investments at beginning of year
|
42,626 | 5,140 | 4,991 | |||||||||
Cash
and temporary investments at end of year
|
$ | 36,186 | $ | 42,626 | $ | 5,140 | ||||||
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
||||||||||||
Receivables
|
$ | 117,733 | $ | (98,326 | ) | $ | 1,958 | |||||
Inventories
|
169,157 | (50,747 | ) | 54,301 | ||||||||
Recovery
of gas costs
|
64,197 | (37,577 | ) | 7,873 | ||||||||
Gas
purchases payable
|
(193,487 | ) | 134,335 | (96,618 | ) | |||||||
Prepaid
and accrued taxes
|
(8,047 | ) | 767 | (16,160 | ) | |||||||
Accounts
payable and other
|
(5,593 | ) | (1,117 | ) | 9,152 | |||||||
Restricted
broker margin accounts
|
(14,045 | ) | (15,003 | ) | 19,411 | |||||||
Customers’
credit balances and deposits
|
9,760 | 36,195 | (33,698 | ) | ||||||||
Other
current assets
|
14,596 | (4,519 | ) | (13,203 | ) | |||||||
Total
|
$ | 154,271 | $ | (35,992 | ) | $ | (66,984 | ) | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
||||||||||||
Cash
paid for
|
||||||||||||
Interest
(net of amounts capitalized)
|
$ | 18,866 | $ | 25,877 | $ | 26,403 | ||||||
Income
taxes
|
$ | 34,298 | $ | 28,763 | $ | 52,549 |
Page
57
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
CONSOLIDATED
BALANCE SHEETS
ASSETS
(Thousands)
|
||||||||
September
30,
|
2009
|
2008
|
||||||
PROPERTY,
PLANT AND EQUIPMENT
|
||||||||
Utility
plant, at cost
|
$ | 1,438,945 | $ | 1,366,237 | ||||
Real
estate properties and other, at cost
|
30,195 | 29,808 | ||||||
1,469,140 | 1,396,045 | |||||||
Accumulated
depreciation and amortization
|
(404,701 | ) | (378,759 | ) | ||||
Property,
plant and equipment, net
|
1,064,439 | 1,017,286 | ||||||
CURRENT
ASSETS
|
||||||||
Cash
and temporary investments
|
36,186 | 42,626 | ||||||
Customer
accounts receivable
|
||||||||
Billed
|
101,945 | 227,132 | ||||||
Unbilled
revenues
|
8,616 | 9,417 | ||||||
Allowance
for doubtful accounts
|
(6,064 | ) | (4,580 | ) | ||||
Regulatory
assets
|
5,878 | 51,376 | ||||||
Gas
in storage, at average cost
|
297,464 | 467,537 | ||||||
Materials
and supplies, at average cost
|
6,026 | 5,110 | ||||||
Prepaid
state taxes
|
37,886 | 37,271 | ||||||
Derivatives,
at fair value
|
131,070 | 227,224 | ||||||
Restricted
broker margin accounts
|
26,250 | 41,277 | ||||||
Deferred
taxes
|
20,801 | — | ||||||
Other
|
18,131 | 15,181 | ||||||
Total
current assets
|
684,189 | 1,119,571 | ||||||
NONCURRENT
ASSETS
|
||||||||
Investments
in equity investees
|
160,508 | 115,981 | ||||||
Regulatory
assets
|
391,025 | 340,670 | ||||||
Derivatives,
at fair value
|
9,536 | 24,497 | ||||||
Restricted
cash construction fund
|
— | 4,200 | ||||||
Other
|
11,333 | 13,092 | ||||||
Total
noncurrent assets
|
572,402 | 498,440 | ||||||
Total
assets
|
$ | 2,321,030 | $ | 2,635,297 |
Page
58
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
CAPITALIZATION
AND LIABILITIES
(Thousands)
|
||||||||
September
30,
|
2009
|
2008
|
||||||
CAPITALIZATION
|
||||||||
Common
stock equity
|
$ | 689,726 | $ | 728,068 | ||||
Long-term
debt
|
455,492 | 455,117 | ||||||
Total
capitalization
|
1,145,218 | 1,183,185 | ||||||
CURRENT
LIABILITIES
|
||||||||
Current
maturities of long-term debt
|
6,510 | 60,119 | ||||||
Short-term
debt
|
143,400 | 178,200 | ||||||
Gas
purchases payable
|
130,112 | 323,600 | ||||||
Accounts
payable and other
|
44,448 | 61,735 | ||||||
Dividends
payable
|
13,026 | 11,776 | ||||||
Deferred
and accrued taxes
|
3,475 | 24,720 | ||||||
Regulatory
liabilities
|
36,203 | — | ||||||
New
Jersey clean energy program
|
10,920 | 3,056 | ||||||
Derivatives,
at fair value
|
94,853 | 146,320 | ||||||
Restricted
broker margin accounts
|
— | 29,072 | ||||||
Customers’
credit balances and deposits
|
73,218 | 63,455 | ||||||
Total
current liabilities
|
556,165 | 902,053 | ||||||
NONCURRENT
LIABILITIES
|
||||||||
Deferred
income taxes
|
243,593 | 240,414 | ||||||
Deferred
investment tax credits
|
6,870 | 7,192 | ||||||
Deferred
revenue
|
8,203 | 9,090 | ||||||
Derivatives,
at fair value
|
6,250 | 25,016 | ||||||
Manufactured
gas plant remediation
|
146,700 | 120,730 | ||||||
Postemployment
employee benefit liability
|
89,035 | 52,272 | ||||||
Regulatory
liabilities
|
56,450 | 63,419 | ||||||
New
Jersey clean energy program
|
28,449 | — | ||||||
Asset
retirement obligation
|
25,097 | 24,416 | ||||||
Other
|
9,000 | 7,510 | ||||||
Total
noncurrent liabilities
|
619,647 | 550,059 | ||||||
Commitments
and contingent liabilities (Note 13)
|
||||||||
Total
capitalization and liabilities
|
$ | 2,321,030 | $ | 2,635,297 |
Page
59
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
CONSOLIDATED
STATEMENTS OF CAPITALIZATION
(Thousands,
except share amounts)
|
|||||||||||
September
30,
|
2009
|
2008
|
|||||||||
COMMON
STOCK EQUITY
|
|||||||||||
Common
stock, $2.50 par value; authorized 75,000,000 shares; outstanding
2009–43,762,475; 2008–43,439,329
|
$ | 109,386 | $ | 108,599 | |||||||
Premium
on common stock
|
249,219 | 237,001 | |||||||||
Accumulated
other comprehensive (loss), net of tax
|
(10,052 | ) | (2,714 | ) | |||||||
Treasury
stock at cost and other; shares 2009–2,176,724;
2008–1,381,735
|
(84,598
|
) | (65,564 | ) | |||||||
Retained
earnings
|
425,771
|
450,746
|
|||||||||
Total
Common stock equity
|
689,726 |
728,068
|
|||||||||
LONG-TERM
DEBT
|
|||||||||||
New
Jersey Natural Gas
|
|||||||||||
First
mortgage bonds:
|
Maturity
date:
|
||||||||||
6.27% |
Series
X
|
November
1, 2008
|
— | 30,000 | |||||||
Variable
|
Series
AA
|
August
1, 2030
|
25,000 | 25,000 | |||||||
Variable
|
Series
BB
|
August
1, 2030
|
16,000 | 16,000 | |||||||
6.88% |
Series
CC
|
October
1, 2010
|
20,000 | 20,000 | |||||||
Variable
|
Series
DD
|
September
1, 2027
|
13,500 | 13,500 | |||||||
Variable
|
Series
EE
|
January
1, 2028
|
9,545 | 9,545 | |||||||
Variable
|
Series
FF
|
January
1, 2028
|
15,000 | 15,000 | |||||||
Variable
|
Series
GG
|
April
1, 2033
|
18,000 | 18,000 | |||||||
5% |
Series
HH
|
December
1, 2038
|
12,000 | 12,000 | |||||||
4.50% |
Series
II
|
August
1, 2023
|
10,300 | 10,300 | |||||||
4.60% |
Series
JJ
|
August
1, 2024
|
10,500 | 10,500 | |||||||
4.90% |
Series
KK
|
October
1, 2040
|
15,000 | 15,000 | |||||||
5.60% |
Series
LL
|
May
15, 2018
|
125,000 | 125,000 | |||||||
4.77%
Unsecured senior notes
|
March
15, 2014
|
60,000 | 60,000 | ||||||||
Capital
lease obligation–Buildings
|
June
1, 2021
|
25,620 | 26,371 | ||||||||
Capital
lease obligation–Meters
|
Various
dates
|
35,546 | 34,020 | ||||||||
Capital
lease obligation–Equipment
|
December
1, 2013
|
991 | — | ||||||||
Less:
Current maturities of long-term debt
|
(6,510 | ) | (35,119 | ) | |||||||
Total
New Jersey Natural Gas long-term debt
|
405,492 | 405,117 | |||||||||
New
Jersey Resources
|
|||||||||||
3.75%
Unsecured senior notes
|
March
15, 2009
|
— | 25,000 | ||||||||
6.05%
Unsecured senior notes
|
September
24, 2017
|
50,000 | 50,000 | ||||||||
Less:
Current maturities of long-term debt
|
— | (25,000 | ) | ||||||||
Total
New Jersey Resources long-term debt
|
50,000 | 50,000 | |||||||||
Total
Long-term debt
|
455,492 | 455,117 | |||||||||
Total
Capitalization
|
$ | 1,145,218 | $ |
1,183,185
|
Page
60
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
CONSOLIDATED
STATEMENTS OF COMMON STOCK EQUITY
Premium
|
Accumulated
|
|||||||||||||||||||||||||||
on
|
Other
|
Treasury
|
||||||||||||||||||||||||||
Number
of
|
Common
|
Common
|
Comprehensive
|
Stock
|
Retained
|
|||||||||||||||||||||||
(Thousands)
|
Shares
|
Stock
|
Stock
|
(Loss)
Income
|
And
Other
|
Earnings
|
Total
|
|||||||||||||||||||||
Balance
at September 30, 2006
|
41,438 | $ | 107,612 | $ | 218,300 | $ | 2,742 | $ | (65,039 | ) | $ | 366,247 | $ | 629,862 | ||||||||||||||
Net
income
|
62,933 | 62,933 | ||||||||||||||||||||||||||
Other
comprehensive income
|
491 | 491 | ||||||||||||||||||||||||||
Transition
adjustment - postemployment benefit obligation, net of tax
|
(4,164 | ) | (4,164 | ) | ||||||||||||||||||||||||
Common
stock issued under stock plans
|
684 | 611 | 6,510 | 11,408 | 18,529 | |||||||||||||||||||||||
Tax
benefits from stock plans
|
1,761 | 1,761 | ||||||||||||||||||||||||||
Cash
dividend declared
|
(42,446 | ) | (42,446 | ) | ||||||||||||||||||||||||
Treasury
stock and other
|
(510 | ) | (16,317 | ) | (16,317 | ) | ||||||||||||||||||||||
Balance
at September 30, 2007
|
41,612 | 108,223 | 226,571 | (931 | ) | (69,948 | ) | 386,734 |
650,649
|
|||||||||||||||||||
Net
income
|
109,168 | 109,168 | ||||||||||||||||||||||||||
Other
comprehensive (loss)
|
(1,783 | ) | (1,783 | ) | ||||||||||||||||||||||||
Common
stock issued under stock plans
|
555 | 376 | 9,800 | 6,212 | 16,388 | |||||||||||||||||||||||
Tax
benefits from stock plans
|
630 | 630 | ||||||||||||||||||||||||||
Transition
adjustment - uncertain tax positions
|
1,188 | 1,188 | ||||||||||||||||||||||||||
Cash
dividend declared
|
(46,344 | ) | (46,344 | ) | ||||||||||||||||||||||||
Treasury
stock and other
|
(109 | ) | (1,828 | ) | (1,828 | ) | ||||||||||||||||||||||
Balance
at September 30, 2008
|
42,058 | 108,599 | 237,001 | (2,714 | ) | (65,564 | ) | 450,746 | 728,068 | |||||||||||||||||||
Net
income
|
27,242 | 27,242 | ||||||||||||||||||||||||||
Other
comprehensive (loss)
|
(7,338 | ) | (7,338 | ) | ||||||||||||||||||||||||
Common
stock issued under stock plans
|
636 | 787 | 10,532 | 9,096 | 20,415 | |||||||||||||||||||||||
Tax
benefits from stock plans
|
1,686 | 1,686 | ||||||||||||||||||||||||||
Cash
dividend declared
|
(52,217 | ) | (52,217 | ) | ||||||||||||||||||||||||
Treasury
stock and other
|
(1,108 | ) |
(28,130
|
) |
(28,130
|
) | ||||||||||||||||||||||
Balance
at September 30, 2009
|
41,586 | $ | 109,386 | $ | 249,219 | $ | (10,052 | ) | $ | (84,598 | ) | $ | 425,771 | $ | 689,726 |
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Thousands)
|
||||||||||||
Year
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
Net
income
|
$ | 27,242 | $ | 109,168 | $ | 62,933 | ||||||
Unrealized gain on available for
sale securities, net of tax of $37, $(82) and $(456),
respectively(1)
|
(52 | ) | 118 | 634 | ||||||||
Net
unrealized (loss) on derivatives, net of tax of $74, $81 and $98,
respectively
|
(105 | ) | (122 | ) | (143 | ) | ||||||
Adjustment
to postemployment benefit obligation, net of tax of $4,856 and $1,213,
respectively
|
(7,181 | ) | (1,779 | ) | — | |||||||
Other
comprehensive (loss) income
|
(7,338 | ) | (1,783 | ) | 491 | |||||||
Comprehensive
income
|
$ | 19,904 | $ | 107,385 | $ | 63,424 |
(1)
Available
for sale securities are included in Investments in equity investees in the
Consolidated Balance Sheets.
Page
61
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature
of the Business
New
Jersey Resources Corporation (NJR or the Company) has two principal subsidiaries
and operates two reportable business segments. New Jersey Natural Gas (NJNG),
the Company’s principal utility subsidiary, is a public utility that provides
natural gas utility service to approximately 487,000 retail customers in central
and northern New Jersey and comprises the Natural Gas Distribution segment. NJNG
is subject to rate regulation by the New Jersey Board of Public Utilities
(BPU).
NJR
Energy Services (NJRES) is the Company’s principal non-utility subsidiary that
maintains and trades a portfolio of natural gas storage and transportation
positions and provides wholesale energy and energy management services to
customers from states in the Gulf Coast and Mid-Continent regions to the New
England region, the West Coast and Canada. NJRES comprises the Energy Services
segment.
Other
subsidiaries of the Company, all of which comprise the Company’s retail and
other operations (Retail and Other), include NJR Energy Holdings, which invests
primarily in energy-related ventures through its subsidiary, NJNR Pipeline
(Pipeline), which holds the Company’s 5.53 percent interest in Iroquois Gas and
Transmission System, L.P. (Iroquois), a 412-mile interstate natural gas pipeline
which connects from the northern New York border with Canada to Long Island, NY;
NJR Storage Holdings, which holds the Company’s 50 percent interest in Steckman
Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a natural
gas storage facility that is being developed with a partner in western
Pennsylvania; NJR Energy, which 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.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and transactions have been
eliminated.
Other
financial investments or contractual interests that lack the characteristics of
a voting interest entity, which are commonly referred to as variable interest
entities, are evaluated by NJR to determine if it can absorb a majority of
expected losses or returns and, therefore, would be considered a controlling
financial interest that would NJR would have to consolidate. Based on those
evaluations, NJR has determined that it does not have any investments in
variable interest entities as of September 30, 2009.
Regulatory
Assets & Liabilities
Under
cost-based regulation, regulated utility enterprises generally are permitted to
recover their operating expenses and earn a reasonable return on their utility
investment.
NJNG
maintains its accounts in accordance with the Federal Energy Regulatory
Commission (FERC) Uniform System of Accounts as prescribed by the BPU and in
accordance with the Regulated
Operations Topic of the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC). As a result of the impact of the
ratemaking process and regulatory actions of the BPU, NJNG is required to
recognize the economic effects of rate regulation. Accordingly, NJNG capitalizes
or defers certain costs that are expected to be recovered from its customers as
regulatory assets and recognizes certain obligations representing probable
future expenditures as regulatory liabilities in the Consolidated Balance
Sheets. See Note 2. Regulations, for a more
detailed description of NJNG’s regulatory assets and liabilities.
Gas
in Storage
Gas in
storage is reflected at average cost in the Consolidated Balance Sheets, and
represents natural gas and liquefied natural gas that will be utilized in the
ordinary course of business.
Page
62
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
The
following table summarizes Gas in storage by company as of September
30,
2009
|
2008
|
|||||||||||||||
($
in thousands)
|
Assets
|
Bcf
|
Assets
|
Bcf
|
||||||||||||
NJNG
|
$ | 175,201 | 21.9 | $ | 189,828 | 22.1 | ||||||||||
NJRES
|
122,263 | 36.3 | 277,709 | 28.9 | ||||||||||||
Total
|
$ | 297,464 | 58.2 | $ | 467,537 | 51.0 |
Demand
Fees
For the
purpose of securing adequate storage and pipeline capacity, NJRES and NJNG enter
into storage and pipeline capacity contracts, which require the payment of
certain demand charges in order to maintain the ability to access such natural
gas storage or pipeline capacity, during a fixed time period, which generally
ranges from one to five years. Demand charges are based on established rates as
regulated by FERC. These demand charges represent commitments to pay storage
providers or pipeline companies for the right to store and transport natural gas
utilizing their respective assets. The following table summarizes the demand
charges, which are expensed ratably over the term of the contract and, are
included as a component of Gas purchases in the Consolidated Statements of
Income:
(Millions)
|
2009
|
2008
|
2007
|
|||||||||
NJRES
|
$ | 114.2 | $ | 115.9 | $ | 134.1 | ||||||
NJNG
|
83.2 | 73.9 | 73.9 | |||||||||
Total
|
$ | 197.4 | $ | 189.8 | $ | 208.0 |
NJNG
recovers its costs associated with demand fees as part of its wholesale gas
commodity component of its Basic Gas Supply Service (BGSS), a component of its
tariff.
Derivative
Instruments
NJR
accounts for its financial instruments, such as futures, options and swaps, as
well as its physical commodity contracts related to the purchase and sale of
natural gas at NJRES, as derivatives, and, therefore, recognizes them at fair
value in the Consolidated Balance Sheets. NJR’s unregulated subsidiaries record
changes in the fair value of its derivatives in Gas purchases or Operating
revenues, as appropriate, on the Consolidated Statements of Income. The Derivatives and Hedging Topic
of the ASC also provides for an exception (“normal scope exception”) for
qualifying physical commodity contracts that are intended for purchases and
sales during the normal course of business and for which physical delivery is
probable. NJR applies this exception to physical commodity contracts at NJNG and
NJR Energy and, therefore, does not record changes in the fair value of these
contracts until the contract settles and the underlying natural gas is
delivered. NJNG’s derivatives used to economically hedge its natural gas
purchasing activities are recoverable through its BGSS, a component of its
tariff. Accordingly, the offset to the change in fair value of these derivatives
is recorded as a Regulatory asset or liability on the Consolidated Balance
Sheets.
See Note 3. Derivative
Instruments for additional details regarding natural gas trading and
hedging activities.
NJR has
not designated any derivatives as fair value hedges or cash flow hedges as of
September 30, 2009 and 2008.
Fair
values of exchange-traded instruments, including futures, swaps and certain
options, are based on actively quoted market prices. Fair values are subject to
change in the near term and reflect management’s best estimate based on various
factors. In establishing the fair value of commodity contracts that do not have
quoted prices, such as physical contracts, and over-the-counter options and
swaps, and certain embedded derivatives, management uses available market data
and pricing models to estimate fair values. Estimating fair values of
instruments that do not have quoted market prices requires management’s judgment
in determining amounts which could reasonably be expected to be received from,
or paid to, a third party in settlement of the instruments. These amounts could
be materially different from amounts that might be realized in an actual sale
transaction.
Revenues
Revenues
from the sale of natural gas to customers of NJNG are recognized in the period
that gas is delivered and consumed by customers, including an estimate for
unbilled revenue.
Unbilled
revenues are associated solely with NJNG. Natural gas sales to individual
customers are based on their meter readings, which are performed on a systematic
basis throughout the month. At the end of each month, the amount of natural gas
delivered to each customer after the last meter reading is estimated, and NJNG
recognizes unbilled revenues related to these amounts. The unbilled revenue
estimates are based on monthly send-out amounts, estimated customer usage by
customer type, weather effects, unaccounted-for gas and the most recent
rates.
Page
63
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Certain
derivative instruments at NJRES and NJR Energy (encompassing financial futures,
options or swaps) are designed to economically hedge the cash flows of a
forecasted transaction. These derivative instruments and commodity contracts at
NJRES are recorded at fair value on the Consolidated Balance Sheets, and any
change in fair value is included as a component of Gas purchases or Operating
revenues, as appropriate, on the Consolidated Statements of Income.
NJNG has
elected and continues to elect the normal scope exception related to its
off-system sales of natural gas and consequently recognizes the revenue at
settlement of the contract for delivery of natural gas. Derivative instruments
at NJNG are recorded at fair value on the Consolidated Balance Sheets with
corresponding changes in fair value also being recorded on the Consolidated
Balance Sheets as regulatory assets or liabilities.
Revenues
from all other activities are recorded in the period during which products or
services are delivered and accepted by customers, or over the related
contractual term.
Gas
Purchases
NJNG’s
tariff includes a component for BGSS, which is designed to allow NJNG to recover
the commodity cost of natural gas through rates charged to its customers and is
normally revised on an annual basis. As part of computing its BGSS rate, NJNG
projects its cost of natural gas, net of supplier refunds, the impact of hedging
activities and credits from nonfirm sales and transportation activities, and
recovers or refunds the difference, if any, of such projected costs compared
with those included in rates through levelized monthly charges to customers. Any
underrecoveries or overrecoveries are deferred and, subject to BPU approval,
reflected in the BGSS in subsequent years.
NJRES’
gas purchases represent the total commodity contract cost, recognized upon
completion of the transaction, as well as realized gains and losses of settled
derivative instruments, both for physical purchase contracts and all financial
contracts and unrealized gains and losses on the change in fair value of
financial derivative instruments that have not yet settled.
Income
Taxes
The
Company computes income taxes using the liability method, whereby deferred
income taxes are generally determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
See Note 12. Income
Taxes.
In
addition, NJR evaluates its tax positions to determine the appropriate
accounting and recognition of future obligations associated with unrecognized
tax benefits.
Investment
tax credits have been deferred and are being amortized as a reduction to the tax
provision over the average lives of the related properties.
Capitalized
and Deferred Interest
The
Company’s capitalized interest totaled $3.2 million in fiscal 2009, $4.6 million
in fiscal 2008 and $3.2 million in fiscal 2007 with average interest rates of
4.8 percent, 4.7 percent and 5.4 percent, respectively. Included in the
Consolidated Balance Sheets are capitalized amounts associated with the debt and
equity components of NJNG’s Allowance for funds used during construction,
(AFUDC), which are recorded in Utility plant, as well as capitalized interest
recorded in Real estate properties and other and Investments in equity
investees. Corresponding amounts recognized in Interest expense and Other
income, as appropriate, in the Consolidated Statements of Income are as
follows:
September
30,
|
||||||||||||
($
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
AFUDC
– Utility plant
|
$ | 1,316 | $ | 1,129 | $ | 1,259 | ||||||
Weighted
average interest rates
|
4.33 | % | 4.80 | % | 5.36 | % | ||||||
Capitalized
interest – Real estate properties and other
|
— | $ | 79 | $ | 263 | |||||||
Weighted
average interest rates
|
— | 3.70 | % | 5.45 | ||||||||
Capitalized
interest – Investments in equity investees
|
$ | 1,909 | $ | 3,355 | $ | 1,687 | ||||||
Weighted
average interest rates
|
5.27 | % | 5.70 | % | 5.41 |
Page
64
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
The AFUDC
amounts shown in the table for fiscal years ended September 30, 2008 and 2007,
include an interest cost component only. Effective October 3, 2008, NJNG settled
its base rate case and the BPU issued its final Rate Order. As a result, certain
changes in the design of NJNG’s base rates included the ability for NJNG to
recover an incremental cost of equity component in its AFUDC calculation during
periods when its short-term debt balances are lower than its construction work
in progress. The AFUDC noted above for fiscal 2009 includes these allowed
amounts in accordance with the provisions of the Rate Order. Capitalized amounts
associated with NJNG’s equity component, of $568,000 are included in Other
income in the Consolidated Statements of Income. See Note 2. Regulation.
NJR,
through its subsidiary CR&R, capitalizes interest associated with the
development and construction of its commercial buildings. Also included above is
capitalized interest associated with NJR’s Investment in equity investees,
specifically the acquisition, development and construction of the Steckman Ridge
natural gas storage facility, which became partially operational in fiscal 2009
and is expected to be fully operational in fiscal 2010 (see Note 5. Investments in Equity
Investees).
Pursuant
to a BPU order, NJNG is permitted to recover carrying costs on uncollected
balances related to Societal Benefits Clause (SBC) program costs, which include
NJCEP, RA and USF expenditures. See Note 2. Regulation.
Accordingly, Other income included $2 million, $2.6 million and $3 million of
deferred interest related to these SBC program costs in fiscal 2009, 2008 and
2007, respectively.
Sales
Tax Accounting
Sales tax
and Transitional Energy Facilities Assessment (TEFA) are collected from
customers and presented in both operating revenues and operating expenses on the
Consolidated Statements of Income as follows:
September
30,
|
||||||||||||
(Millions)
|
2009
|
2008
|
2007
|
|||||||||
Sales
Tax
|
$ | 58.7 | $ | 51.0 | $ | 48.7 | ||||||
TEFA
|
8.9 | 8.4 | 8.5 | |||||||||
Total
|
$ | 67.6 | $ | 59.4 | $ | 57.2 |
Statements
of Cash Flows
For
purposes of reporting cash flows, all temporary investments with original
maturities of three months or less are considered cash equivalents.
Utility
Plant and Depreciation
Regulated
property, plant and equipment are stated at original cost. Costs include direct
labor, materials and third-party construction contractor costs, AFUDC and
certain indirect costs related to equipment and employees engaged in
construction. Upon retirement, the cost of depreciable regulated property, plus
removal costs less salvage, is charged to accumulated depreciation with no gain
or loss recorded.
Depreciation
is computed on a straight-line basis for financial statement purposes, using
rates based on the estimated average lives of the various classes of depreciable
property. The composite rate of depreciation was 2.34 percent of average
depreciable property in fiscal 2009, 3.04 percent in fiscal 2008 and 3.02
percent in fiscal 2007. Pursuant to the final rate order October 3, 2008,
commencing in fiscal 2009, the BPU has lowered the depreciation expense to be
charged in base rates to 2.34 percent for NJNG. Note 2. Regulation –Base Rate
Order.
Property,
plant and equipment was comprised of the following as of September 30, 2009 and
2008:
Property
Classifications
|
Estimated
Useful Lives
|
2009
|
2008
|
||||||
Distribution
Facilities
|
38
to 74 years
|
$ | 1,157,585 | $ | 1,099,896 | ||||
Transmission
Facilities
|
35
to 56 years
|
181,908 | 176,346 | ||||||
Storage
Facilities
|
34
to 47 years
|
40,969 | 34,818 | ||||||
All
other property
|
5
to 35 years
|
88,678 | 84,985 | ||||||
1,469,140 | 1,396,045 | ||||||||
Accumulated
depreciation and amortization
|
(404,701 | ) | (378,759 | ) | |||||
Net
Property, plant and equipment
|
$ | 1,064,439 | $ | 1,017,286 |
Page
65
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Impairment
of Long-Lived Assets
The
Company reviews the carrying amount of an asset for possible impairment whenever
events or changes in circumstances indicate that such amount may not be
recoverable.
For the
fiscal years ended September 30, 2009, 2008 and 2007, no other circumstances
indicating impairment were identified.
Available
for Sale Securities
Included
in Investments in equity investees on the Consolidated Balance Sheets are
certain investments in equity securities that have a fair value of $7.9 million
and $8.0 million as of September 30, 2009 and 2008, respectively. Unrealized
(losses) gains associated with these equity securities, which are included as a
part of Accumulated other comprehensive income, a component of Common stock
equity, were approximately $(89,000) ($(52,000), after tax) and $200,000
($118,000, after tax) for the fiscal years ended September 30, 2009 and 2008,
respectively.
Equity
in Earnings
The
Company accounts for its investments in Iroquois and Steckman Ridge using the
equity method and records its share of earnings net of tax as Equity in earnings
in the Consolidated Statements of Income. Iroquois is a limited partnership,
which owns and operates a 412-mile interstate natural gas transmission pipeline
providing service to local gas distribution companies, electric utilities and
electric power generators, as well as marketers and other end-users, directly or
indirectly, by connecting with pipelines and interconnects throughout the
northeastern United States. Taxes netted in Equity in earnings from Iroquois are
$1.8 million, $1.3 million and $1.1 million and are included in the Consolidated
Statements of Income for the fiscal years ended September 30, 2009, 2008 and
2007, respectively. Steckman Ridge is a 17.7 billion cubic foot (Bcf) natural
gas storage facility, with up to 12 Bcf of working capacity, which was jointly
developed and constructed with a partner in western Pennsylvania. Taxes netted
in Equity in earnings from Steckman Ridge were $1.1 million for fiscal
2009.
Common
Stock Equity
NJR
issued additional shares in March 2008, in the form of a 3 for 2 stock split.
Share-related information has been adjusted on a retroactive basis throughout
this report in periods prior to March 31, 2008. As well, Common stock and
Premium on common stock amounts have been adjusted as of the earliest period
presented in the Consolidated Statements of Capitalization and Consolidated
Statements of Common Stock Equity.
Accumulated
Other Comprehensive Income
As of
September 30, 2009 and 2008, Accumulated other comprehensive (loss) was
comprised of the following balances, net of tax:
(Thousands)
|
2009
|
2008
|
||||||
Unrealized
gain on available for sale securities
|
$ | 2,948 | $ | 3,000 | ||||
Net
unrealized gain on derivatives
|
124 | 229 | ||||||
Postemployment
benefit obligation adjustment
|
(13,124 | ) | (5,943 | ) | ||||
Total
current
|
$ | (10,052 | ) | $ | (2,714 | ) |
Customer
Accounts Receivable
Customer
accounts receivable include outstanding billings from the following subsidiaries
as of September 30:
($
in thousands)
|
2009
|
2008
|
||||||||||||||
Customer
accounts receivable - Billed:
|
||||||||||||||||
NJNG
|
$ | 21,239 | 21 | % | $ | 21,398 | 9 | % | ||||||||
NJRES
|
73,451 | 72 | 198,902 | 88 | ||||||||||||
Retail
and Other
|
7,255 | 7 | 6,832 | 3 | ||||||||||||
Total
|
$ | 101,945 | 100 | % | $ | 227,132 | 100 | % |
Page
66
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Asset
Retirement Obligations (ARO)
NJR
recognizes a liability for its AROs based on the fair value of the liability
when incurred, which is generally upon acquisition, construction, development
and/or through the normal operation of the asset. Concurrently, NJR also
capitalizes an asset retirement cost by increasing the carrying amount of the
related asset by the same amount as the liability. In periods subsequent to the
initial measurement, NJR is required to recognize changes in the liability
resulting from the passage of time (accretion) or due to revisions to either
timing or the amount of the originally estimated cash flows to settle the
conditional asset retirement obligation.
Pension
and Postemployment Plans
NJR has
two noncontributory defined pension plans covering substantially all employees,
including officers. Benefits are based on each employee’s years of service and
compensation. NJR’s funding policy is to contribute annually to these plans at
least the minimum amount required under the Employee Retirement Income Security
Act (ERISA) of 1974, as amended, and not more than can be deducted for federal
income tax purposes. Plan assets consist of equity securities, fixed-income
securities and short-term investments. NJR contributed $25.6 million in
aggregate to the plans in fiscal 2009. An additional contribution of $4.4
million was made on October 1, 2009. There were no contributions to the pension
plans in fiscal 2008 and 2007.
NJR also
provides two primarily noncontributory medical and life insurance plans for
eligible retirees and dependents. Medical benefits, which make up the largest
component of the plans, are based upon an age and years-of-service vesting
schedule and other plan provisions. Funding of these benefits is made primarily
into Voluntary Employee Beneficiary Association trust funds. NJR contributed
$1.9 million, $1.0 million and $685,000 in aggregate to these plans in fiscal
2009, 2008 and 2007, respectively.
Foreign
Currency Transactions
NJRES’
market area includes Canadian delivery points and as a result it incurs certain
natural gas commodity costs and demand fees that are denominated in Canadian
dollars. Gains or losses that occur as a result of these foreign currency
transactions are reported as a component of Gas purchases in the Consolidated
Statements of Income and were not material during the fiscal years ended
September 30, 2009, 2008 and 2007.
Accounting
Standards
On July
1, 2009, the FASB ASC became effective as the single source of authoritative
U.S. generally accepted accounting principles (GAAP) for nongovernmental
entities. The ASC restructured GAAP from a standards based model to a topical
based model. All previously issued accounting and reporting standards, with
limited exceptions, are superseded and now organized within approximately 90
accounting and reporting topics. Under the ASC, new standards will be issued in
the form of Accounting Standards Updates (ASU).
ASC Topic
105, Generally Accepted
Accounting Principles, clarifies that the GAAP hierarchy will include
only two levels of GAAP: authoritative and nonauthoritative. The ASC became
effective for financial statements issued for interim and annual periods after
September 15, 2009. There was no impact to NJR’s financial statements upon
adoption, however, NJR has modified certain disclosures surrounding GAAP
guidance throughout this report to reflect the appropriate references in
accordance with the ASC.
Recently
Issued Standards and Updates:
Topic
320, Investments—Debt and
Equity Securities:
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of
Other-Than-Temporary Impairments (ASC 320-10-65-1). The FSP improves
presentation and disclosures in financial statements for other-than-temporary
impairments of debt and equity securities and expands on the factors companies
should consider when evaluating debt securities for other-than-temporary
impairments. The change is effective for interim and annual reporting periods
ending after June 15, 2009. There was no impact to NJR’s statement of financial
position or results of operations or cash flows as a result of NJR’s adoption of
the FSP.
Page
67
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Topic
715, Compensation—Retirement
Benefits:
On
December 30, 2008, the FASB issued FSP 132(R)-1, Employers' Disclosures about
Postretirement Benefit Plan Assets (ASC 715-20-65-2), which requires
additional disclosures surrounding postretirement benefit plan assets.
Specifically, the objective is to provide users of financial statements
information related to a company’s plan assets, investment policies and
strategies and significant concentrations of risk. In addition, certain
disclosure provisions will be applied, including those related to inputs and
valuation techniques that are used to measure plan assets and the effect of
level three measurements on changes in plan assets. The revision is effective
for fiscal years ending after December 15, 2009. As it is a disclosure only
standard, it will have no impact on the Company’s statement of financial
position or results of operations or cash flows.
Topic
810, Consolidation:
On
December 4, 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements. (ASC 810-10-65-1), to
improve the relevance, comparability and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements. This Statement applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only
those entities that have an outstanding non-controlling interest in one or more
subsidiaries. The revision clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements and that a parent
company must recognize a gain or loss in net income when a subsidiary is
deconsolidated. The revision is effective for fiscal years beginning after
December 15, 2008, and early adoption is prohibited. The Company has concluded
that this statement will have no impact on its statement of financial position
or results of operations or cash flows.
Topic
815, Derivatives and
Hedging:
On April
10, 2007, the FASB issued FASB Staff Position (FSP) No. FIN 39-1 (FSP FIN 39-1),
Offsetting of Amounts Related
to Certain Contracts — an interpretation of APB Opinion
No. 10 and FASB Statement No. 105 (ASC 815-10-45), providing additional
guidance for parties that are subject to master netting arrangements.
Specifically, for transactions that are executed with the same counterparty, it
permits companies to offset the fair values of amounts recognized for
derivatives as well as the related fair value amounts of cash collateral
receivables or payables, when certain conditions apply. The standard became
effective for fiscal years beginning after November 15, 2007. As NJR’s policy
has been to present its derivative positions and any receivables or payables
with the same counterparty on a gross basis, this revision had no impact on its
statement of financial position or results of operations or cash
flows.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (ASC 815-10-65-1), The revision
requires enhanced qualitative and quantitative disclosures on the objectives and
accounting for derivatives and related hedging activities, as well as their
impacts on the financial statements. NJR adopted the standard effective January
1, 2009. As the provisions only require additional disclosures, there was no
impact to NJR’s statement of financial position or results of operations or cash
flows upon adoption. See Note
3. Derivative Instruments for a description of NJR’s derivative
activities, including the additional disclosures required by ASC
815.
Topic
820, Fair Value Measurements
and Disclosures:
Effective
October 1, 2008 NJR adopted SFAS No. 157, Fair Value Measurements (ASC 820) for its financial
assets and liabilities, with the exception of its pension assets. On October, 1,
2009, NJR will prospectively apply the provisions of ASC 820 to its
non-financial assets and liabilities that are not measured at least annually. In
addition, the provisions of ASC 820 will be applied to NJR’s annual pension
disclosures in accordance with ASC No. 715, Compensation—Retirement Benefits
(formerly FSP 132(R)-1), beginning in fiscal 2010.
ASC 820
defines fair value as the amount that would be exchanged to sell an asset or
transfer a liability in an orderly transaction between market participants, and
establishes a fair value hierarchy of market and unobservable data that is used
to develop pricing assumptions. The adoption of ASC 820 did not have a material
impact on NJR’s financial position or results of operations. See Note 4. Fair Value, for more
information on the adoption of ASC 820, as well as the required
disclosures.
In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (ASC
815-10-65-4). The revision provides additional guidance for estimating
fair value in accordance with ASC 820 when the volume and level of activity for
the asset or liability have significantly decreased. In addition, it includes
guidance on identifying circumstances that indicate a transaction is not
orderly. The standard became effective for interim and annual reporting periods
ending after June 15, 2009. There was no impact to NJR’s statement of financial
position or results of operations or cash flows as a result of the
adoption.
Page
68
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
In August
2009, the FASB issued ASU 2009-05. The update provides 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 ASU affirms the use of
other valuation techniques outlined in ASC 820. ASU 2009-05 is effective for the
first interim or annual reporting period beginning after the ASU’s issuance. NJR
does not anticipate any impact to its statement of financial position or results
of operations or cash flows upon adoption on October 1, 2009.
Topic
825, Financial
Instruments:
On April
9, 2009, the FASB issued FSP No. FAS 107-1/APB 28-1, Interim Disclosures about Fair
Values of Financial Instruments, which amends SFAS 107, Disclosures about Fair Values of
Financial Instruments (ASC 825-10-65-1), and requires that
companies also disclose the fair value of financial instruments during interim
reporting similar to those that are currently provided annually. NJR adopted the
revision effective June 30, 2009. As it is a disclosure only standard, it had no
impact on the Company’s statement of financial position or results of operations
or cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (ASC 825), which permits entities to elect to
measure eligible items at fair value as an alternative to hedge accounting and
to mitigate volatility in earnings. A company can either elect the fair value
option according to a pre-existing policy, when the asset or liability is first
recognized or when it enters into an eligible firm commitment. Changes in the
fair value of assets and liabilities that the company chooses to apply the fair
value option to, are reported in earnings at each reporting date. The standard
also provides guidance on disclosures that are intended to provide comparability
to other companies’ assets and liabilities that have different measurement
attributes and to other companies with similar financial assets and liabilities.
The standard became effective for NJR as of October 1, 2008; however, since the
Company did not elect the fair value option for any items, there was no impact
its statement of financial position or results of operations or cash
flows.
Topic
855, Subsequent
Events:
In May
2009, the FASB issued SFAS No. 165, Subsequent Events (ASC 855),
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. In addition, companies are required to
disclose the date through which it has evaluated subsequent events. NJR adopted
the provisions effective June 30, 2009. There was no impact to NJR’s statement
of financial position or results of operations or cash flows as a result of the
adoption.
The
following standard has not yet been incorporated in the ASC:
In June
2009, the FASB issued SFAS No. 167 (SFAS 167), Amendments to FASB Interpretation
No. 46 (R) (FIN 46(R)), which will eliminate the quantitative assessments
currently in practice under FIN 46 (R), and instead will require qualitative
assessments to determine whether a company has a controlling financial interest
in a variable interest entity (VIE) and, therefore, would be deemed the primary
beneficiary, resulting in consolidation of the VIE’s operating results. In
addition, SFAS 167 requires ongoing reassessments, rather than limiting the
reassessments to when certain triggering events occur, and additional
disclosures that are intended to provide information on a company’s involvement
with VIE’s. SFAS 167 is effective at the beginning of a company’s annual
reporting period that begins after November 15, 2009, including interim
reporting periods within the first annual reporting period, and thereafter. 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 and results of operations.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires NJR to make
estimates that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingencies during the reporting period. On
a monthly basis, NJR evaluates its estimates, including those related to the
calculation of the fair value of derivative instruments, unbilled revenues,
allowance for doubtful accounts, provisions for depreciation and amortization,
regulatory assets and liabilities, income taxes, pensions and other
postemployment benefits, contingencies related to environmental matters and
litigation and asset retirement obligations, which are evaluated on an annual
basis. NJR bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other
sources.
Page
69
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
NJR has
legal, regulatory and environmental proceedings during the normal course of
business which can result in loss contingencies. When evaluating the potential
for a loss, NJR will establish a reserve if a loss is probable and can be
estimated, in which case it is NJR’s policy to accrue the full amount of such
estimate. Where the information is sufficient only to establish a range of
probable liability, and no point within the range is more likely than any other,
it is NJR’s policy to accrue the lower end of the range.
In the
normal course of business, estimated amounts are subsequently adjusted to actual
results that may differ from estimates.
Subsequent
Events
The
Company evaluates subsequent events through the date it issues its financial
statements. Accordingly, for the period ended September 30, 2009, events
occurring between September 30, 2009 and November 30, 2009, the date the
financial statements have been issued, have been reviewed to determine
appropriate recognition and disclosures. See Note 2. Regulation, and Note 10. Employee Benefit Plans
for subsequent events disclosures.
Immaterial
Restatement of Prior Years Consolidated Financial Statements
NJRES
enters into park and loan transactions whereby it borrows natural gas from a
counterparty with an obligation to return the gas at a future date. In the
fourth quarter of fiscal 2009, management discovered an error in the accounting
for gas in storage, purchase obligations, embedded derivatives and gas demand
fees associated with these transactions. NJR had been incorrectly pricing its
inventory and had not been recognizing the fair value of the embedded
derivative. Specifically, NJR had been using a forward price to value
the inventory and gas purchases liability. Both the natural gas that
was received and the “park and loan” liability should have been initially valued
at the spot market price on the date NJRES received the gas. In addition, NJRES
should have been accounting for the obligation to return the gas as an embedded
derivative, which should have been fair valued (“marked to market”) at each
subsequent balance sheet reporting date until the gas was returned to the
counterparty. As well, the initial spread between the spot price of the natural
gas on the date of the transaction and the forward price, based on the date
NJRES would return the borrowed gas inventory, should have been recognized into
income on a ratable basis over the term of the park and loan agreement. In
addition, demand fees related to these transactions were not , but should have
been recognized
ratably over the term of the contract.
The
Company made a quantitative and qualitative assessment of the impact of the
error to its consolidated financial statements and concluded that the resulting
misstatements were not material to the fiscal years ended September 30, 2009,
September 30, 2008 and September 30, 2007 or to the consolidated balance sheet
as of September 30, 2008. However, because the error did have material effects
on the interim quarterly periods within the fiscal years ended September 30,
2009 and 2008, the Company has amended each of its fiscal 2009 Interim Quarterly
Reports on Form 10-Q to restate all of the interim period financial statements
contained therein. Accordingly, in order to maintain consistency with the
treatment afforded the interim periods, the Company has restated its prior
annual consolidated financial statements contained herein. The
following tables set forth the effects of the error on affected line items
within the Company’s prior years financial statements:
CONSOLIDATED
STATEMENTS OF INCOME
For
the year ended September 30,
|
||||||||||||||||||||||||
2008
|
2007
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Gas
purchases
|
$ | 3,322,644 | $ | 8,112 | $ | 3,330,756 | $ | 2,621,575 | $ | 3,985 | $ | 2,625,560 | ||||||||||||
Total
operating expenses
|
$ | 3,614,760 | $ | 8,112 | $ | 3,622,872 | $ | 2,894,515 | $ | 3,985 | $ | 2,898,500 | ||||||||||||
Operating
Income
|
$ | 201,450 | $ | (8,112 | ) | $ | 193,338 | $ | 127,250 | $ | (3,985 | ) | $ | 123,265 | ||||||||||
Income
before income taxes and equity in earnings of affiliates
|
$ | 180,007 | $ | (8,112 | ) | $ | 171,895 | $ | 103,931 | $ | (3,985 | ) | $ | 99,946 | ||||||||||
Income
tax provision
|
$ | 68,085 | $ | (3,370 | ) | $ | 64,715 | $ | 40,312 | $ | (1,637 | ) | $ | 38,675 | ||||||||||
Net
Income
|
$ | 113,910 | $ | (4,742 | ) | $ | 109,168 | $ | 65,281 | $ | (2,348 | ) | $ | 62,933 | ||||||||||
Basic
earnings per share
|
$ | 2.72 | $ | (0.11 | ) | $ | 2.61 | $ | 1.56 | $ | (0.06 | ) | $ | 1.50 | ||||||||||
Diluted
earnings per share
|
$ | 2.70 | $ | (0.11 | ) | $ | 2.59 | $ | 1.55 | $ | (0.06 | ) | $ | 1.49 |
Page
70
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the year ended September 30,
|
||||||||||||||||||||||||
2008
|
2007
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Net
Income
|
$ | 113,910 | $ | (4,742 | ) | $ | 109,168 | $ | 65,281 | $ | (2,348 | ) | $ | 62,933 | ||||||||||
Unrealized
loss (gain) on derivatives
|
$ | 3,683 | $ | (16,612 | ) | $ | (12,929 | ) | $ | 22,910 | $ | 35,484 | $ | 58,394 | ||||||||||
Deferred
income taxes
|
$ | 17,085 | $ | (3,370 | ) | $ | 13,715 | $ | 17,762 | $ | (1,635 | ) | $ | 16,127 | ||||||||||
Components
of working capital
|
$ | (56,186 | ) | $ | 20,194 | $ | (35,992 | ) | $ | (32,135 | ) | $ | (34,849 | ) | $ | (66,984 | ) | |||||||
Inventories
|
$ | (39,458 | ) | $ | (11,289 | ) | $ | (50,747 | ) | $ | 68,727 | $ | (14,426 | ) | $ | 54,301 | ||||||||
Gas
purchases payable
|
$ | 97,180 | $ | 37,155 | $ | 134,335 | $ | (79,543 | ) | $ | (17,075 | ) | $ | (96,618 | ) | |||||||||
Other
current assets
|
$ | (3,377 | ) | $ | (1,142 | ) | $ | (4,519 | ) | $ | (13,203 | ) | — | $ | (13,203 | ) | ||||||||
Total
working capital
|
$ | (56,186 | ) | $ | 20,194 | $ | (35,992 | ) | $ | (32,135 | ) | $ | (34,849 | ) | $ | (66,984 | ) |
CONSOLIDATED
BALANCE SHEETS
ASSETS
For
the year ended September 30,
|
||||||||||||
2008
|
||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
|||||||||
Gas
in storage, at average cost
|
$ | 478,549 | $ | (11,012 | ) | $ | 467,537 | |||||
Derivatives
(current), at fair value
|
$ | 208,703 | $ | 18,521 | $ | 227,224 | ||||||
Other
(current)
|
$ | 12,785 | $ | 2,396 | $ | 15,181 | ||||||
Total
current assets
|
$ | 1,109,666 | $ | 9,905 | $ | 1,119,571 | ||||||
Total
assets
|
$ | 2,625,392 | $ | 9,905 | $ | 2,635,297 |
CAPITALIZATION
AND LIABILITIES
For
the year ended September 30,
|
||||||||||||
2008
|
||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
|||||||||
Common
stock equity
|
$ | 726,958 | $ | 1,110 | $ | 728,068 | ||||||
Total
capitalization
|
$ | 1,182,075 | $ | 1,110 | $ | 1,183,185 | ||||||
Gas
purchases payable
|
$ | 315,516 | $ | 8,084 | $ | 323,600 | ||||||
Total
current liabilities
|
$ | 893,969 | $ | 8,084 | $ | 902,053 | ||||||
Deferred
income taxes
|
$ | 239,703 | $ | 711 | $ | 240,414 | ||||||
Total
noncurrent liabilities
|
$ | 549,348 | $ | 711 | $ | 550,059 | ||||||
Total
capitalization and liabilities
|
$ | 2,625,392 | $ | 9,905 | $ | 2,635,297 |
Page
71
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
CONSOLIDATED
STATEMENTS OF CAPITALIZATION
For
the year ended September 30,
|
||||||||||||
2008
|
||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
|||||||||
Retained
earnings
|
$ | 449,636 | $ | 1,110 | $ | 450,746 | ||||||
Total
Common stock equity
|
$ | 726,958 | $ | 1,110 | $ | 728,068 | ||||||
Total
Capitalization
|
$ | 1,182,075 | $ | 1,110 | $ | 1,183,185 |
CONSOLIDATED
STATEMENTS OF COMMON STOCK EQUITY
Retained
Earnings
|
Total
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Balance
at September 30, 2006
|
$ | 358,047 | $ | 8,200 | $ | 366,247 | $ | 621,662 | $ | 8,200 | $ | 629,862 | ||||||||||||
Net
income
|
$ | 65,281 | $ | (2,348 | ) | $ | 62,933 | $ | 65,281 | $ | (2,348 | ) | $ | 62,933 | ||||||||||
Balance
at September 30, 2007
|
$ | 380,882 | $ | 5,852 | $ | 386,734 | $ | 644,797 | $ | 5,852 | $ | 650,649 | ||||||||||||
Net
income
|
$ | 113,910 | $ | (4,742 | ) | $ | 109,168 | $ | 113,910 | $ | (4,742 | ) | $ | 109,168 | ||||||||||
Balance
at September 30, 2008
|
$ | 449,636 | $ | 1,110 | $ | 450,746 | $ | 726,958 | $ | 1,110 | $ | 728,068 |
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For
the year ended September 30,
|
||||||||||||||||||||||||
2008
|
2007
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Net
Income
|
$ | 113,910 | $ | (4,742 | ) | $ | 109,168 | $ | 65,281 | $ | (2,348 | ) | $ | 62,933 | ||||||||||
Comprehensive
income
|
$ | 113,906 | $ | (6,521 | ) | $ | 107,385 | $ | 65,772 | $ | (2,348 | ) | $ | 63,424 |
2.
|
REGULATION
|
Energy
Deregulation Legislation
The
Electric Discount and Energy Competition Act (EDECA) is the legal framework for
New Jersey’s public utility and wholesale energy landscape. NJNG is required,
pursuant to a written order by the BPU under EDECA, to have its residential
markets open to competition from third-party natural gas suppliers. Customers
can choose the supplier of their natural gas commodity in NJNG’s service
territory.
As
required by EDECA, NJNG has restructured its prices to segregate BGSS rates into
two primary components, the commodity portion, which represents the wholesale
cost of natural gas, including the cost for interstate pipeline capacity to
bring the gas to NJNG’s service territory, and the delivery portion, which
represents the transportation of the commodity portion through NJNG’s gas
distribution system to the end-use customer. NJNG earns no utility gross margin
on the commodity portion of its natural gas sales. NJNG earns utility gross
margin through the delivery of natural gas to its customers, regardless of
whether it or a third-party supplier provides the wholesale natural gas
commodity.
Page
72
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Under
EDECA, the BPU is required to audit the state’s energy utilities every two
years. The primary purpose of the audit is to ensure that utilities and their
affiliates offering unregulated retail services do not have any unfair
competitive advantage over nonaffiliated providers of similar retail services. A
combined competitive services and management audit of NJNG commenced in November
2006, and a final report on findings and recommendations was approved by the BPU
on January 28, 2009. The BPU’s management audit order requires that the
implementation of all recommendations be completed within two years of the date
of the order.
Base
Rate Order
As a
result of increases in NJNG’s operation, maintenance and capital costs, on
November 20, 2007, NJNG petitioned the BPU to increase base rates for delivery
service by approximately $58.4 million, which included a return on NJNG’s equity
component of 11.5 percent. This request was consistent with NJNG’s objectives of
providing safe and reliable service to its customers and earning a market-based
return on its regulated investments.
On
October 3, 2008, the BPU unanimously approved and made effective the settlement
of NJNG’s base rate case. As a result, NJNG received a revenue increase in its
base rates of $32.5 million, which is inclusive of an approximate $13 million
impact of a change to the Conservation Incentive Program (CIP) baseline usage
rate, received an allowed return on equity component of 10.3 percent, reduced
its depreciation expense component from 3 percent to 2.34 percent and reduced
its annual depreciation expense by $1.6 million as a result of the amortization
of previously recovered asset retirement obligations.
Conservation
Incentive Program (CIP)
The CIP
was designed to decouple the link between customer usage and NJNG’s utility
gross margin to allow NJNG to encourage its customers to conserve energy. In
addition to permitting NJNG to recover utility gross margin variations related
to customer usage in comparison to established benchmarks, the CIP similarly
serves as a tracking mechanism that allows NJNG to mitigate the impact of
weather on its gross margin. As a result, the Weather Normalization Clause (WNC)
that was previously in effect as a weather recovery mechanism has been suspended
pending the continuation of the CIP. As of September 30, 2009, NJNG has a
remaining WNC balance of approximately $78,000. In NJNG’s 2010 Basic Gas Supply
Service (BGSS)/CIP filing, NJNG included a request to reduce the WNC rate to
facilitate recovery of the balance in fiscal 2010.
The CIP’s
initial term was October 1, 2006, through September 30, 2009. The BPU did not
issue an order relative to the continuation of the CIP by October 1, 2009 and in
accordance with the BPU order approving the CIP initially, the CIP will continue
for up to one additional year or until the issuance of a BPU Order. Recovery of
such utility gross margin variations, filed for annually and recovered one year
following the end of the CIP usage year, is subject to additional conditions,
including an earnings test and an evaluation of BGSS-related
savings.
As of
September 30, 2009, under the CIP, NJNG has $5.8 million accrued to recover from
residential and small commercial customers, which includes $1.4 million related
to the weather component of the CIP and $4.4 million related to the usage
component of the CIP.
The
following are NJNG’s BPU filings and results related to CIP since the inception
of the program:
|
Ÿ
|
June
2007 – NJNG filed its CIP Petition for the Annual Review of its CIP
Program for recoverable CIP amounts for fiscal 2007 and to establish its
CIP recovery rates effective October 1,
2007.
|
|
Ÿ
|
August
2007 – NJNG filed an amendment to its June 2007 CIP filing to update
financial information to include actual
data.
|
|
Ÿ
|
October
2007 – the BPU provisionally approved the implementation of NJNG’s initial
CIP recovery rates, based upon program information NJNG included in an
Amendment to its Petition for Annual Review, which was filed with the BPU
in August 2007. The approved rates add 1.7 percent to the average
residential heating customer’s bill and were designed to recover
approximately $15.6 million of previously accrued
amounts.
|
|
Ÿ
|
May
2008 – NJNG filed its CIP Petition for the Annual Review of its CIP
Program for recoverable CIP amounts for fiscal 2008, requesting an
additional $6.8 million, and to modify its CIP recovery rates effective
October 1, 2008.
|
|
Ÿ
|
August
1, 2008 – the BPU issued their final order in approving the CIP petition
for fiscal 2007.
|
|
Ÿ
|
October
3, 2008 – the BPU provisionally approved NJNG’s CIP petition filed in May
2008 requesting an additional $6.8 million for amounts accrued and
estimated through September 30, 2008, effective the date of the Board
Order.
|
Page
73
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
|
Ÿ
|
On
April 1, 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 will remain in effect for an additional year or until a
final order is issued by the BPU.
|
|
Ÿ
|
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. The rate adjustment for fiscal 2009 was provisionally approved by
the BPU in the amount of $6.9 million on September 16,
2009.
|
In
conjunction with the CIP, NJNG incurs costs related to its obligation to fund
programs that promote customer conservation efforts during the pilot program. As
of September 30, 2009, NJNG had a remaining liability of $248,000 related to
these programs.
BGSS
NJNG is
allowed to recover the commodity cost of its gas purchased for sale to its
customers through the BGSS rate component of its customers’ bills. NJNG is
required to make an annual filing by June 1 of each year for review of its BGSS
rate with the BPU. At that time NJNG may also request a potential rate change to
be effective at the beginning of the following fiscal year. NJNG is allowed to
make two interim filings during the fiscal year period to subsequently increase
residential and small commercial customer BGSS rates up to 5 percent on a
self-implementing and provisional basis, after proper notice and BPU action on
the June filing. Such increases, if any, are subject to subsequent BPU review
and final approval.
The cost
of the wholesale natural gas commodity passed through to customers can fluctuate
significantly based on many factors associated with supply and demand in the
marketplace. In addition to the annual and interim filings to adjust BGSS rates,
NJNG is permitted to refund or credit back a portion of the commodity cost
previously collected from customers when the natural gas commodity cost
decreases in comparison to amounts projected or adjusted as a component of the
BGSS rates. Before implementing a refund or credit, proper notification and
supporting documentation is filed with the BPU. Refundable amounts may also be
subject to interest.
The
following are NJNG’s BGSS filings during fiscal 2008 and 2009 related to its
requested rate adjustments and refunds to its residential and small commercial
customers:
|
Ÿ
|
October
2007 – the BPU provisionally approved a decrease to NJNG’s BGSS rate
effective October 4, 2007, which resulted in a 3.6 percent decrease to the
average residential heating customer bill which was subsequently approved
on a final basis in August 2008.
|
|
Ÿ
|
November
2007 – NJNG notified the BPU that it would provide refunds to customers
and subsequently issued a credit totaling $32.0 million in December 2007
as a result of the decrease in the anticipated costs of wholesale natural
gas prices.
|
|
Ÿ
|
March
2008 – NJNG, the BPU staff and Rate Counsel entered into a stipulation to
resolve certain matters related to NJNG’s fiscal 2007 BGSS filing. This
stipulation was approved by the BPU on May 9, 2008, and resulted in NJNG
recording a nonrecurring settlement charge to its BGSS costs of
$300,000.
|
|
Ÿ
|
May
2008 – NJNG filed for an increase to the periodic BGSS factor to be
effective October 1, 2008, that would increase an average residential
heating customer’s bill by approximately 18.0 percent due to an increase
in the price of wholesale natural gas. Subsequent to the time of the
filing, wholesale natural gas prices moderated, and on September 22, 2008,
NJNG, the Staff of the BPU and Rate Counsel signed an agreement for an
increase to the periodic BGSS factor that would increase an average
residential heating customer’s bill by approximately 8.9 percent. On
October 3, 2008, the BPU approved the BGSS increase on a provisional
basis, effective the date of the Board
Order.
|
|
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.
|
Page
74
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
|
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. 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
|
Effective
in the first billing period of 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.
|
Other
Incentive Programs
NJNG is
eligible to receive financial incentives for reducing BGSS costs through a
series of utility gross margin-sharing programs that include off-system sales,
capacity release, storage incentive and financial risk management (FRM)
programs. In October 2007, the BPU approved an extension of the utility gross
margin-sharing programs mentioned above through October 31, 2008. Concurrently,
the BPU reduced the sharing percentage of the margin generated by the FRM
program retained by
NJNG from
20 percent to 15 percent effective November 1, 2007. The July 30, 2008,
agreement between NJNG and the Rate Counsel (Revenue Requirement stipulation)
provides for the extension of the incentive programs through October 31, 2011,
along with a moderate expansion of the storage incentive and FRM
programs.
On
October 3, 2008, the BPU approved the Revenue Requirement stipulation, which
extends the incentive programs through October 31, 2011, and provides for an
increase to the FRM program’s annual cost limitation from $3.2 million to $6.4
million, an annual update to the FRM volume limitations and an increase to the
annual Storage Incentive program volumes from 18 Bcf to 20 Bcf, effective the
date of the Board Order.
Societal
Benefits Clause (SBC)
The SBC
is comprised of three primary components, a Universal Service Fund rider (USF),
a Manufactured Gas Plant (MGP) Remediation Adjustment (RA), and the New Jersey
Clean Energy Program (NJCEP). The USF is a permanent statewide program that was
approved by the BPU in March 2003 for all natural gas and electric utilities for
the benefit of income-eligible customers; the RA is a rider approved by the BPU
in June 1992 that provides for recovery of actual expenditures incurred to
remediate former gas manufacturing facilities; and the NJCEP is a program
approved by the BPU in March 2001 and is designed to promote energy efficiency
and renewable energy. Recovery of SBC program costs is subject to BPU approval
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 rate effective October 1, 2008. In the BPU’s
October 21, 2008 order, the USF increase was approved on a provisional basis,
effective October 24, 2008, and it also approved interest on USF deferred
balances at the Treasury Constant Maturity 2-year rate, plus 60 basis points,
net of deferred income taxes, with the rate changing on a monthly basis. NJNG
believes the increase has a negligible impact on customers.
In June
2009, the natural gas utilities in the State of New Jersey collectively filed
with the BPU to decrease the statewide USF recovery rate effective October 1,
2009. The USF, as filed, will decrease the average monthly bill of a residential
heating customer by 0.6 percent. On October 7, 2009, the BPU approved the USF
decrease, effective October 11, 2009.
Page
75
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
MGP
During
fiscal 2007, NJNG signed a stipulation with the BPU and Rate Counsel, which
resulted in the disallowance of certain costs that had previously been deferred
as recoverable pursuant to a regulatory rider associated with the remediation of
a former manufactured gas plant site. The pre-tax charge of $4
million is reflected as a component of Operations and maintenance expense in the
Consolidated Statements of Income.
In
October 2007, the BPU approved $14.7 million in eligible costs to be recovered
annually for MGP remediation expenditures incurred through June 30, 2006. In
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.
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. NJNG’s
share of the total statewide funding requirement of $1.2 billion is $50.8
million, which is recoverable through the SBC. NJNG’s annual funding amounts
gradually increase from $10.3 million in fiscal 2009 to $15.9 million in fiscal
2012. Accordingly, NJNG recorded the initial obligation and a corresponding
regulatory asset at a present value of $44.3 in the Consolidated Balance Sheets.
As of September 30, 2009, NJNG had a $39.4 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
On
January 20, 2009, NJNG filed two petitions with the BPU seeking approval to
implement programs designed to both stimulate the state and local economy
through infrastructure investments and encourage energy efficiency. The
Accelerated Infrastructure Program (AIP) was approved on April 16, 2009, and
allows NJNG to expedite $70.8 million of 14 previously planned infrastructure
projects, maintaining 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, for $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 NJNG EE Program on July 17, 2009. Both the
AIP and EE Programs include the recovery of NJNG’s overall weighted average cost
of capital on these investments.
Page
76
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Regulatory
Assets & Liabilities
At
September 30, 2009 and 2008, the Company had the following regulatory assets,
all related to NJNG, on the Consolidated Balance Sheets:
(Thousands)
|
2009
|
2008
|
Recovery
|
|||||||||
Regulatory
assets–current
|
||||||||||||
Underrecovered
gas costs
|
$ | — | $ | 27,994 | (1 | ) | ||||||
WNC
|
78 | 919 | (2 | ) | ||||||||
CIP
|
5,800 | 22,463 | (3 | ) | ||||||||
Total
current
|
$ | 5,878 | $ | 51,376 | ||||||||
Regulatory
assets–noncurrent
|
||||||||||||
Remediation
costs (Note 14)
|
||||||||||||
Expended,
net of recoveries
|
$ | 85,461 | $ | 92,164 | (4 | ) | ||||||
Liability
for future expenditures
|
146,700 | 120,730 | (5 | ) | ||||||||
CIP
|
— | 2,397 | (3 | ) | ||||||||
Deferred
income and other taxes
|
11,560 | 12,726 | (6 | ) | ||||||||
Derivatives
(Note 3)
|
8,073 | 49,610 | (1 | ) | ||||||||
Energy
Efficiency Program
|
1,174 | — | (7 | ) | ||||||||
New
Jersey Clean Energy Program
|
39,369 | 3,056 | (7 | ) | ||||||||
Pipeline
Integrity Management
|
448 | — | (8 | ) | ||||||||
Postemployment
benefit costs (Note 10)
|
94,305 | 52,519 | (9 | ) | ||||||||
SBC
|
3,935 | 7,468 | (7 | ) | ||||||||
Total
noncurrent
|
$ | 391,025 | $ | 340,670 |
(1)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(2)
|
Recoverable
as a result of BPU approval in October 2008, without interest. This
balance reflects the net results from winter period of fiscal 2006. No new
WNC activity is being recorded since October 1, 2006 due to the existence
of the CIP.
|
(3)
|
Recoverable
or refundable, subject to BPU annual approval, without
interest.
|
(4)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods.
|
(5)
|
Estimated
future expenditures. Recovery will be requested when actual expenditures
are incurred (see Note
13. Commitments and Contingent Liabilities – Legal
Proceedings).
|
(6)
|
Recoverable
without interest, subject to BPU
approval.
|
(7)
|
Recoverable
with interest, subject to BPU
approval.
|
(8)
|
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 the 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.
|
(9)
|
Recoverable
or refundable, 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.
At
September 30, 2009 and 2008, the Company had the following regulatory
liabilities, all related to NJNG, on the Consolidated Balance
Sheets:
(Thousands)
|
2009
|
2008
|
||||||
Regulatory
liability–current
|
||||||||
Overrecovered
gas costs (1)
|
$ | 36,203 | — | |||||
Total
current
|
$ | 36,203 | — | |||||
Regulatory
liabilities–noncurrent
|
||||||||
Cost
of removal obligation (2)
|
$ | 56,450 | $ | 63,419 | ||||
Total-noncurrent
|
$ | 56,450 | $ | 63,419 |
(1)
|
Refundable,
subject to BPU approval, through BGSS, with
interest.
|
(2)
|
NJNG
accrues and collects for cost of removal in rates. This liability
represents collections in excess of actual expenditures. Approximately
$22.4 million, including accretion of $1.5 million for the fiscal year
ended September 30, 2009, of regulatory assets relating to asset
retirement obligations have been netted against the cost of removal
obligation as of September 30, 2009 (see Note 11. Asset Retirement
Obligations).
|
Page
77
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
3.
|
DERIVATIVE
INSTRUMENTS
|
NJR
accounts for its derivatives in accordance with the Derivatives and Hedging topic
(ASC 815) of the ASC.
In addition, as described in Note 1, Summary of Significant
Accounting Policies, NJR adopted the recently issued provisions of ASC
815-10-50 (originally issued as SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities), which require enhanced disclosures
surrounding the use of and accounting for derivative instruments, as well as the
impact to a company’s financial statements. The additional quantitative and
qualitative disclosures are included throughout this note.
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. Accordingly, all of the financial and certain of
the Company’s physical derivative instruments are recorded at fair value in the
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 Consolidated
Statements of Income as unrealized gains or losses. At settlement, realized
gains and losses on derivative instruments are also recognized in these same
line items. Physically settled sales are included in Operating revenues, and
physically settled gas purchases and all net settled derivatives (including
financial derivative instruments) are included in Gas
purchases.
Changes
in fair value of NJNG’s derivative instruments, however, are recorded as a
component of Regulatory assets or liabilities as per ASC 980 in the 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 NJR’s
derivative instruments, please see Note 4. Fair
Value.
ASC 815
includes a “normal” election that can be applied to physical commodity contracts
that otherwise meet the definition of a derivative when certain conditions are
met, including the probability of physical delivery of the underlying commodity
in the normal course of business. If elected, the scope exception allows
companies to defer recognition of the related assets acquired and liabilities
incurred until settlement of the contract and delivery of the natural gas.
During fiscal 2007 and 2008, NJR employed normal accounting treatment for
certain of its physical forward contracts at NJRES. Due to changes in the
Company’s ability to assert physical delivery, effective October 1, 2008, the
Company chose to no longer apply normal treatment to physical commodity
contracts. Therefore, as of October 1, 2008, all NJRES physical commodity
contracts that meet the definition of a derivative are accounted for at fair
value in the Consolidated Balance Sheets, with changes in fair value included in
earnings as noted above.
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 value 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 which is recorded at fair value on the balance sheet, with changes
in value recognized in current period earnings.
Page
78
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
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 Consolidated Balance Sheets as of September 30,
2009:
Fair
Value
|
|||||||||
(Thousands)
|
Balance
Sheet Location
|
Asset
Derivatives
|
Liability
Derivatives
|
||||||
Derivatives
not designated as hedging instruments under ASC 815:
|
|||||||||
NJNG:
|
|||||||||
Financial
derivative commodity contracts
|
Derivatives
- Current
|
$ | 15,801 | $ | 24,274 | ||||
Derivatives
- Noncurrent
|
1,077 | 677 | |||||||
NJRES:
|
|||||||||
Physical
forward commodity contracts
|
Derivatives
- Current
|
22,674 | 10,044 | ||||||
Derivatives
- Noncurrent
|
3,878 | 214 | |||||||
Financial
derivative commodity contracts
|
Derivatives
- Current
|
89,140 | 60,054 | ||||||
Derivatives
- Noncurrent
|
4,157 | 5,316 | |||||||
NJR
Energy:
|
|||||||||
Financial
derivative commodity contracts
|
Derivatives
- Current
|
3,455 | 481 | ||||||
Derivatives
- Noncurrent
|
424 | 43 | |||||||
Total
fair value of derivatives
|
$ | 140,606 | $ | 101,103 |
* Table
includes gross derivative values not adjusted for taxes.
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 as a component of Operating revenues
and Gas purchases since NJR’s implementation of provisions in ASC 815-10-50
effective January 1, 2009 are as follows:
(Thousands)
|
Location
of Gain or (Loss) Recognized in Income on Derivative
|
Amount
of Gain or (Loss) Recognized in Income on Derivative
|
|||||||
Derivatives
not designated as hedging instruments under ASC 815:
|
Three Months
Ended
|
Nine Months
Ended
|
|||||||
September
30, 2009
|
|||||||||
NJRES:
|
|||||||||
Physical
commodity contracts
|
Operating
revenues
|
$ | (7,578 | ) | $ | 8,762 | |||
Physical
commodity contracts
|
Gas
purchases
|
22,518 | 20,907 | ||||||
Financial
derivatives
|
Gas
purchases
|
(385 | ) | 33,529 | |||||
Subtotal
NJRES
|
14,555 | 63,198 | |||||||
NJR
Energy:
|
|||||||||
Financial
derivatives
|
Operating
revenues
|
49 | (9,899 | ) | |||||
Total
NJRES and NJR Energy unrealized and realized gains
|
$ | 14,604 | $ | 53,299 |
Not
included in the table above are gains (losses) associated with NJNG’s financial
derivatives, that totaled $2.4 million and $(32.8) million for the three and
nine months ended September 30, 2009, respectively. 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.
Page
79
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
As of
September 30, 2009, NJNG, NJRES and NJR Energy had the following outstanding
long (short) derivatives:
Volume
(Bcf)
|
|||||
NJNG
|
Futures
|
21.4 | |||
Swaps
|
(14.5 | ) | |||
Options
|
8.0 | ||||
NJRES
|
Futures
|
(19.8 | ) | ||
Swaps
|
(23.2 | ) | |||
Options
|
4.0 | ||||
Physical
|
58.6 | ||||
NJR
Energy
|
Swaps
|
2.6 |
Generally,
exchange-traded futures contracts require a deposit of margin cash, the amount
of which is subject to change based on market price movements and in accordance
with exchange rules. The Company maintains broker margin accounts for NJNG and
NJRES. The balances as of September 30, by company are as follows:
(Thousands)
|
2009
|
2008
|
||||||
NJNG
broker margin deposit
|
$ | 16,458 | $ | 41,277 | ||||
NJRES
broker margin deposit (liability)
|
$ | 9,792 | $ | (29,072 | ) |
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy are exposed to credit risk as a result of their wholesale
marketing activities. NJR monitors and manages the credit risk of its wholesale
marketing operations through credit policies and procedures that management
believes reduce overall credit risk. These policies include a review and
evaluation of current and prospective counterparties’ financial statements
and/or credit ratings, daily monitoring of counterparties’ credit limits and
exposure, daily communication with traders regarding credit status and the use
of credit mitigation measures, such as collateral requirements and netting
agreements. Examples of collateral include letters of credit and cash received
for either prepayment or margin deposit. Collateral may be requested due to
NJR’s election not to extend credit or because exposure exceeds defined
thresholds. Most of NJR’s wholesale marketing contracts contain standard netting
provisions. These contracts include those governed by the International Swaps
and Derivatives Association (ISDA) and the North American Energy Standards Board
(NAESB). The netting provisions refer to payment netting, whereby receivables
and payables with the same counterparty are offset and the resulting net amount
is paid to the party to which it is due.
As a
result of the inherent volatility in the prices of natural gas commodities and
derivatives, the market value of contractual positions with individual
counterparties could exceed established credit limits or collateral provided by
those counterparties. If a counterparty failed to perform the obligations under
its contract (for example, failed to deliver or pay for natural gas), then the
Company could sustain a loss.
The
following is a summary of gross credit exposures grouped by investment and
noninvestment grade counterparties, as of September 30, 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
|
$ | 95,334 | ||
Noninvestment
grade
|
9,206 | |||
Internally
rated investment grade
|
13,781 | |||
Internally
rated noninvestment grade
|
4,786 | |||
Total
|
$ | 123,107 |
Page
80
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Conversely,
certain of NJRES’, NJNG’s and NJR Energy’s derivative instruments are tied to
agreements containing provisions that would require cash collateral payments
from the Company if certain events occur. These provisions vary based upon the
terms in individual counterparty agreements and can result in cash payments if
NJNG’s credit rating were to fall below its current level. NJNG’s credit rating,
with respect to Standard and Poor’s, reflects the overall corporate credit
profile. Specifically, most, but not all, of these additional payments will be
triggered if NJNG’s debt is downgraded by the major credit agencies, regardless
of investment grade status. As well, some of these agreements include threshold
amounts that would result in additional collateral payments if the values of
derivative liabilities were to exceed the maximum values provided for in
relevant counterparty agreements. Other provisions include payment features that
are not specifically tied to ratings, but are based on certain financial
metrics.
Collateral
amounts associated with any of these conditions, are determined based on a
sliding scale and are contingent upon the degree to which the Company’s credit
rating and/or financial metrics deteriorate, and the extent to which liability
amounts exceed applicable threshold limits. The aggregate fair value of all
derivative instruments with credit-risk-related contingent features that are in
a liability position on September 30, 2009, is $22.3 million for which the
Company has not posted any collateral. If all the thresholds related to the
credit-risk-related contingent features underlying these agreements were invoked
on September 30, 2009, the Company would not be required to post any additional
collateral to its counterparties. This amount differs from the Company’s net
derivative liability because the credit agreements also include clauses,
commonly known as “Rights of Offset,” that would permit the Company to offset
its derivative assets against its derivative liabilities for determining
additional collateral to be posted.
4.
|
FAIR
VALUE
|
Fair
Value of Assets and Liabilities
The fair
value of cash and temporary investments, accounts receivable, accounts payable,
commercial paper and borrowings under revolving credit facilities are estimated
to equal their carrying amounts due to the short maturity of those instruments.
The estimated fair value of long-term debt, excluding current maturities and
capital lease obligations, is based on quoted market prices for similar issues
and is as follows:
September
30,
|
||||||||
(Thousands)
|
2009
|
2008
|
||||||
Carrying
value
|
$ | 399,800 | $ | 399,800 | ||||
Fair
market value
|
$ | 415,700 | $ | 351,400 |
Adoption
of ASC 820, Fair Value Measurements
As noted
in Note 1. Summary of
Significant Accounting Policies, NJR adopted ASC 820 effective October 1,
2008 and has applied the provisions to its financial assets and liabilities, as
appropriate, which include financial derivatives and physical commodity
contracts qualifying as derivatives, available for sale securities and other
financial assets and liabilities. ASC 820 defines and establishes a framework
for measuring fair value and requires that companies consider assumptions market
participants would make when pricing assets and liabilities that are required to
be recognized at fair value in accordance with previously issued accounting
pronouncements.
ASC 820
prescribes disclosures that are intended to convey the reliability of price
inputs used to determine fair value and established a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value based
on the source of the data used to develop the price inputs. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities and the lowest priority to inputs that are based on
unobservable market data and include the following:
Level
1
|
Unadjusted
quoted prices for identical assets or liabilities in active markets; NJR’s
Level 1 assets and liabilities include exchange traded financial
derivative contracts and listed
equities;
|
Level
2
|
Significant
price data, other than Level 1 quotes, that is observed either directly or
indirectly; NJR’s level 2 assets and liabilities include over-the-counter
physical forward commodity contracts and swap contracts or derivatives
that are initially valued using observable quotes and are subsequently
adjusted to include time value, credit risk or estimated transport pricing
components. These additional adjustments are not considered to be
significant to the ultimate recognized
values.
|
Level
3
|
Inputs
derived from a significant amount of unobservable market data; these
include NJR’s best estimate of fair value and are derived primarily
through the use of internal valuation methodologies. Certain of NJR’s
physical commodity contracts that are to be delivered to inactively traded
points on a pipeline are included in this
category.
|
Page
81
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
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.
The
adoption of ASC 820 did not have a material impact on NJR’s financial condition
or results of operations. Assets and liabilities measured at fair value on a
recurring basis as of September 30, 2009, are summarized as
follows:
Quoted
Prices in Active
Markets
for Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
(Thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
||||||||||||
Assets:
|
||||||||||||||||
Physical
forward commodity contracts
|
$ | — | $ | 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 Consolidated Balance Sheets. |
A
reconciliation of the beginning and ending balances of NJRES’ derivatives
measured at fair value based on significant unobservable inputs as of September
30, 2009, is as follows:
Fair
Value Measurements Using
|
||||
Significant Unobservable
Inputs
|
||||
(Thousands)
|
(Level
3)
|
|||
Beginning
balance
|
$ | 937 | ||
Total
gains realized and unrealized
|
320 | |||
Purchases,
sales, issuances and settlements, net
|
(774 | ) | ||
Net
transfers in and/or out of level 3
|
(483 | ) | ||
Ending
balance
|
$ | — | ||
Net
unrealized gains included in net loss relating to
|
||||
derivatives
still held at September 30, 2009
|
$ | — |
NJR will
prospectively apply the measurement and disclosure provisions of ASC 820 to its
non-financial assets and liabilities, which includes NJNG’s asset retirement
obligations, during the first quarter of fiscal 2010. Based on NJR’s current
valuation methodologies, it does not anticipate a material impact upon
application of ASC 820 to the fair value measurement of NJNG’s asset retirement
obligations.
Page
82
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
5.
|
INVESTMENTS
IN EQUITY INVESTEES
|
NJR’s
Investments in equity investees as of September 30, 2009 and 2008, respectively,
include the following investments:
(Thousands)
|
2009
|
2008
|
||||||
Steckman
Ridge
|
$ | 131,555 | $ | 84,285 | ||||
Iroquois
|
21,081 | 23,604 | ||||||
Other
|
7,872 | 8,092 | ||||||
Total
|
$ | 160,508 | $ | 115,981 |
NJR uses
the equity method of accounting for its investments in Steckman Ridge and
Iroquois.
NJR’s
investment in Steckman Ridge increased $47.3 million in fiscal 2009, including
cash investments of $42.7 million, equity in earnings of $2.3 million and
capitalized costs and interest of $2.3 million. Steckman Ridge became
commercially operational during the third quarter of fiscal 2009 with
approximately two-thirds of eventual capacity available for customer
injections.
Included
in the investment in Steckman Ridge are loans including accrued interest from
NJR in the amount of $74.6 million as of September 30, 2009. NJR, as part
of its funding commitment, entered into a loan agreement with Steckman Ridge on
October 15, 2007, whereby NJR is committed to fund up to a total $82.5
million in loans. The principal balance of the loans are due December 31,
2017 and can be prepaid at the option of Steckman Ridge. The principal amount of
the loans accrue interest at a rate of LIBOR plus 0.95%, which resets
quarterly.
The
decrease in NJR’s investment in Iroquois was due primarily to cash distributions
received from the partnership of $7.2 million during fiscal 2009, offset by
equity in earnings of $4.5 million.
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 (losses) gains associated
with these equity securities were approximately $(52,000), net of tax of
$37,000, and $118,000, net of tax of $(82,000), for the years ended September
30, 2009 and 2008, respectively.
The
following tables set forth the financial information for Iroquois for the fiscal
years ended September 30:
(Millions)
|
2009
|
2008
|
2007
|
|||||||||
Operating
revenues
|
$ | 195.2 | $ | 165.9 | $ | 160.4 | ||||||
Operating
income
|
$ | 111.7 | $ | 87.6 | $ | 78.5 | ||||||
Net
income
|
$ | 49.8 | $ | 37.1 | $ | 29.7 |
(Millions)
|
2009
|
2008
|
||||||
Current
assets
|
$ | 92.0 | $ | 64.2 | ||||
Noncurrent
assets
|
$ | 769.3 | $ | 729.2 | ||||
Current
liabilities
|
$ | 240.5 | $ | 39.3 | ||||
Noncurrent
liabilities
|
$ | 264.6 | $ | 348.9 |
6.
|
EARNINGS
PER SHARE
|
The
following table presents the calculation of the Company’s basic and diluted
earnings per share for the fiscal years ended September 30:
(Thousands,
except per share amounts)
|
2009
|
2008
|
2007
|
|||||||||
Net
Income, as reported
|
$ | 27,242 | $ | 109,168 | $ | 62,933 | ||||||
Basic
earnings per share
|
||||||||||||
Weighted
average shares of common stock outstanding–basic
|
42,119 | 41,878 | 41,855 | |||||||||
Basic
earnings per common share
|
$ | 0.65 | $ | 2.61 | $ | 1.50 | ||||||
Diluted
earnings per share
|
||||||||||||
Weighted
average shares of common stock outstanding–basic
|
42,119 | 41,878 | 41,855 | |||||||||
Incremental
shares(1)
|
346 | 298 | 258 | |||||||||
Weighted
average shares of common stock outstanding–diluted
|
42,465 | 42,176 | 42,113 | |||||||||
Diluted
earnings per common share(2)
|
$ | 0.64 | $ | 2.59 | $ | 1.49 |
(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 fiscal 2009, fiscal 2008 and fiscal
2007.
|
Page
83
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
7.
|
LONG-TERM
DEBT, DIVIDENDS AND RETAINED EARNINGS
RESTRICTIONS
|
Annual
long-term debt, excluding capital leases and redemption requirements are as
follows (in millions):
September
30,
|
Redemption
|
|||
2010
|
— | |||
2011
|
$ | 20.0 | ||
2012
|
— | |||
2013
|
— | |||
2014
|
$ | 60.0 | ||
Thereafter
|
$ | 319.8 |
NJNG
First Mortgage Bonds
NJNG’s
mortgage secures its First Mortgage Bonds and represents a lien on substantially
all of its property, including natural gas supply contracts. Certain indentures
supplemental to the mortgage include restrictions as to cash dividends and other
distributions on NJNG’s common stock that apply as long as certain series of
First Mortgage Bonds are outstanding. Under the most restrictive provision,
approximately $233 million of NJNG’s retained earnings were available for such
purposes at September 30, 2009.
NJNG
enters into loan agreements with the New Jersey Economic Development Authority
(the EDA) under which the EDA issues tax-exempt bonds, and the proceeds are
loaned to NJNG to fund capital expenditures for certain portions of its natural
gas service territory. To secure its loans from the EDA, NJNG issues First
Mortgage Bonds to the EDA with interest rates and maturity dates identical to
those of the EDA Bonds.
In
October 2005, NJNG entered into a loan agreement under which the EDA loaned NJNG
the proceeds from $35.8 million of tax-exempt EDA Bonds. NJNG deposited $15
million of the proceeds into a construction fund to finance subsequent
construction in the northern division of NJNG’s territory. NJNG drew down $10.8
million from the construction fund prior to fiscal 2009 and drew down the
remaining $4.2 million in December 2008.
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,
when an auction is held for the purposes of determining the interest rate of the
securities. The interest rate associated with the NJNG variable-rate debt is
based on the rates on the EDA ARS. As of September 30, 2009, all of the auctions
surrounding the EDA ARS have failed, resulting in those bonds bearing interest
at their maximum rates, defined in the EDA ARS as the lesser of (i) 175 percent
of 30-day LIBOR or (ii) 10 to 12 percent per annum, as applicable to such series
of ARS. As of September 30, 2009, the 30-day LIBOR rate was 0.25 percent. As
such, NJNG currently has a weighted average interest rate of 0.44 percent as of
September 30, 2009, compared with a weighted average interest rate of 4.6
percent as of September 30, 2008. While the failure of the ARS auctions does not
signify or constitute a default on NJNG, the EDA ARS does impact NJNG’s
borrowing costs of the variable-rate debt. 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.
NJNG
Medium Term Notes
In May
2008, NJNG issued $125 million of 5.6 percent senior notes due May 15, 2018
(Notes) in the private placement market pursuant to a note purchase agreement.
The Notes are secured until the release date, which is the date at which the
security provided by the pledge under NJNG’s mortgage indenture would no longer
be available to holders of any outstanding series of NJNG’s senior secured notes
and such indebtedness would become senior unsecured indebtedness, by an equal
amount of NJNG first mortgage bonds (Series LL), and interest is payable on the
Notes semi-annually. The proceeds from the Notes were used to refinance
short-term debt and fund capital expenditure requirements.
NJNG
Sale-Leasebacks
NJNG’s
master lease agreement for its headquarters building has a 25.5-year term with
two 5-year renewal options. The present value of the agreement’s minimum lease
payments is reflected as both a capital lease asset and a capital lease
obligation, which are included in Utility plant and Long-term debt,
respectively, on the Consolidated Balance Sheets. In accordance with its
ratemaking treatment, NJNG records rent expense as if the lease was an operating
lease.
Page
84
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
NJNG
received $6.3 million, $7.5 million and $5.5 million for fiscal year 2009, 2008
and 2007, respectively, in connection with the sale-leaseback of a portion of
its natural gas meters. This sale-leaseback program is expected to be continued
on an annual basis.
Contractual
commitments for lease payments, under both sale-leasebacks for the meters and
the building, as of the fiscal year end are as follows (in
millions):
Fiscal
Year Ended September 30,
|
Lease
Payments
|
|||
2010
|
$ | 9.9 | ||
2011
|
13.7 | |||
2012
|
7.8 | |||
2013
|
8.2 | |||
2014
|
7.2 | |||
Thereafter
|
36.6 | |||
Subtotal
|
83.4 | |||
Less:
interest component
|
(21.2 | ) | ||
Total
|
$ | 62.2 |
NJR
Debt
NJR had
no long-term variable-rate debt outstanding at September 30, 2009 and
2008.
In
September 2007, NJR issued $50 million of Unsecured Senior Notes, which were
used for financing its initial investment in Steckman Ridge and general
corporate purposes including refinancing short-term debt. These notes have a
10-year maturity and an interest rate of 6.05 percent.
8.
|
SHORT-TERM
DEBT AND CREDIT FACILITIES
|
A summary
of NJR’s and NJNG’s committed credit facilities, which require commitment fees
on the unused amounts, and NJRES’ committed facility that does not require a
fee, are as follows:
September
30,
|
||||||||
(Thousands)
|
2009
|
2008
|
||||||
NJR(1)
|
||||||||
Bank
credit facilities(1)
|
$ | 325,000 | $ | 325,000 | ||||
Amount
outstanding at end of period
|
||||||||
Notes
payable to banks
|
$ | 143,400 | $ | 32,700 | ||||
Weighted
average interest rate at end of period
|
||||||||
Notes
payable to banks
|
0.57 | % | 2.46 | % | ||||
NJNG
|
||||||||
Bank
credit facilities(1)
|
$ | 250,000 | $ | 250,000 | ||||
Amount
outstanding at end of period
|
||||||||
Commercial
paper
|
— | $ | 145,500 | |||||
Weighted
average interest rate at end of period
|
||||||||
Commercial
paper
|
— | 2.31 | % | |||||
NJRES
|
||||||||
Bank
credit facilities(2)
|
$ | 30,000 | $ | 30,000 | ||||
Amount
outstanding at end of period
|
||||||||
Notes
payable to banks
|
— | — | ||||||
Weighted
average interest rate at end of period
|
||||||||
Notes
payable to banks
|
— | — | % |
(1)
Company is subject to commitment fees on outstanding and unused
amounts.
(2) Facility expired
in October 2009 and was not renewed.Page
85
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
NJR
In
December 2007, NJR refinanced its prior senior credit facility for a new $325
million five-year revolving unsecured credit facility. The new credit facility
permits the borrowing of revolving loans and swing loans, as well as the
issuance of letters of credit. Swing loans are loans made available on a
same-day basis for an aggregate principal amount of up to $50 million and
repayable in full within a maximum of seven days of borrowing. It also permits
an increase to the facility, from time to time, with the existing or new
lenders, in a minimum of $5 million increments up to a maximum $100 million at
the lending bank’s discretion. Borrowings under the new facility are conditioned
upon compliance with a maximum leverage ratio, as defined in the new credit
facility, of not more than 0.65 to 1.00 at any time. NJR used the initial
borrowings under the new credit facility to refinance its prior credit facility.
In addition, certain of NJR’s non-regulated subsidiaries have guaranteed to the
lenders all of NJR’s obligations under the new credit facility.
In
February 2008, NJR entered into a new agreement for a stand-alone letter of
credit that may be drawn upon through February 15, 2009, for up to $15 million.
No amounts have been drawn under this letter of credit as of September 30,
2009.
As of
September 30, 2009, NJR had one letter of credit outstanding, totaling $12
million, on behalf of NJRES which is used for margin requirements for natural
gas transactions and will expire on December 31, 2009.
NJR also
has a $675,000 letter of credit outstanding on behalf of CR&R, which will
expire on December 3, 2009. The letter of credit is in place to support
development activities.
These
letters of credit reduce the amount available under NJR’s committed credit
facility by the same amount. NJR does not anticipate that these letters of
credit will be drawn upon by the counterparties, and they will be renewed as
necessary.
NJNG
In
October 2007, NJNG entered into a new agreement for standby letters of credit
that may be drawn upon through December 15, 2009, for up to $50 million. No
amounts have been drawn under these letters of credit as of September 30, 2009.
These letters of credit do not reduce the amount available to be borrowed under
NJNG’s credit facility. NJNG does not anticipate that these letters of credit
will be drawn upon by the counterparty, and the agreement will be renewed, as
necessary, upon its expiration.
As of
September 30, 2009, NJNG has a $250 million committed facility with several
banks, with a 5-year term expiring in December 2009. Borrowings under this
facility are conditioned upon compliance with a maximum leverage ratio of 0.65
to 1 and interest coverage ratio of 2.50 to 1.00 This facility is used to
support NJNG’s commercial paper program. NJNG had nothing outstanding under this
facility as of September 30, 2009. NJNG currently plans to replace this facility
with a new $200 million 3-year revolving unsecured committed credit
facility.
On August
24, 2009, NJNG, filed a petition in Docket No. GF09080702 with the New Jersey
Board of Public Utilities , pursuant to N.J.S.A. 48:3-7 and 48:3-9 and N.J.A.C.
14:1-5.9, 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.
Neither
NJNG nor the results of its operations are obligated or pledged to support the
NJR or NJRES credit facilities.
NJRES
As of
September 30, 2009, NJRES had a 3-year $30 million committed credit facility
with a multinational financial institution that expired in October 2009. As of
September 30, 2009, there were no borrowings under this facility. Upon
expiration, the credit facility was not renewed.
9.
|
STOCK
BASED COMPENSATION
|
In
January 2007, the NJR 2007 Stock Award and Incentive Plan (2007 Plan) replaced
the 2002 Employee and Outside Director Long-Term Incentive Plan (Long-Term
Plan). Shares can be issued in the form of options, performance shares or
restricted stock. As of September 30, 2009, 2,308,905 and 94,762 shares, remain
available for future issuance to employees and directors,
respectively.
Page
86
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
In fiscal
2009, included in Operation and maintenance expense is $3.1 million related to
stock-based compensation compared with $3.2 million and $1.3 million in fiscal
2008 and 2007, respectively. As of September 30, 2009, there remains $1.4
million of deferred compensation related to unvested shares and options, which
is expected to be recognized over the next 2 years.
The
following table summarizes all stock-based compensation expense recognized
during the following fiscal years:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Stock-based
compensation expense:
|
||||||||||||
Stock
options
|
$ | 148 | $ | 294 | $ | 278 | ||||||
Performance
shares
|
475 | 939 | 292 | |||||||||
Restricted
stock
|
2,477 | 1,989 | 747 | |||||||||
Compensation
expense included in Operation and Maintenance expense
|
3,100 | 3,222 | 1,317 | |||||||||
Income
tax benefit
|
(1,274 | ) | (1,324 | ) | (541 | ) | ||||||
Total,
net of tax
|
$ | 1,826 | $ | 1,898 | $ | 776 |
Stock
Options
There
were no stock options granted in fiscal 2009, 2008 and 2007.
The
following table summarizes the stock option activity for the past three fiscal
years:
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
at September 30, 2006
|
1,005,234 | $ | 22.43 | |||||
Granted
|
— | — | ||||||
Exercised
|
(299,300 | ) | $ | 19.40 | ||||
Forfeited
|
(5,625 | ) | $ | 19.01 | ||||
Outstanding
at September 30, 2007
|
700,309 | $ | 23.75 | |||||
Granted
|
— | — | ||||||
Exercised
|
(121,166 | ) | $ | 19.40 | ||||
Forfeited
|
— | — | ||||||
Outstanding
at September 30, 2008
|
579,143 | $ | 24.66 | |||||
Granted
|
— | — | ||||||
Exercised
|
(245,107 | ) | $ | 22.38 | ||||
Forfeited
|
(575 | ) | $ | 18.11 | ||||
Outstanding
at September 30, 2009
|
333,461 | $ | 26.36 | |||||
Exercisable
at September 30, 2009
|
333,461 | $ | 26.36 | |||||
Exercisable
at September 30, 2008
|
506,130 | $ | 23.93 | |||||
Exercisable
at September 30, 2007
|
551,284 | $ | 22.17 |
For the
stock options listed above, there are no costs related to unvested
options.
The
following table summarizes stock options outstanding and exercisable as of
September 30, 2009:
Outstanding
and Exercisable
|
||||||||||||||||||
Exercise
Price Range
|
Number
Of
Stock
Options
|
Weighted
Average
Remaining
Contractual
Term
(in
years)
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in
thousands)
|
||||||||||||||
$15.18 – $18.22 | 41,140 | 0.8 | $ | 17.66 | $ | 767 | ||||||||||||
$18.22 – $21.25 | 68,758 | 3.0 | $ | 20.70 | 1,073 | |||||||||||||
$21.25 – $24.93 | 6,750 | 3.4 | $ | 22.54 | 93 | |||||||||||||
$24.93 – $27.33 | 8,250 | 4.4 | $ | 25.54 | 89 | |||||||||||||
$27.33 – $30.37 | 208,563 | 5.7 | $ | 30.09 | 1,297 | |||||||||||||
Total
|
333,461 | 4.4 | $ | 26.36 | $ | 3,319 |
Page
87
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Performance
Shares
The
Company has issued performance shares, which are market conditions awards, to
various officers. The following table summarizes the Performance Unit activity
under the Employee and Outside Director Long-Term Incentive Compensation Plan
for the past three fiscal years:
Shares
(1)
|
Weighted
Average
Grant
Date
Fair
Value
|
|||||||
Non-vested
and outstanding at September 30, 2006
|
62,550 | $ | 30.05 | |||||
Granted
|
— | — | ||||||
Vested
|
(15,637 | ) | $ | 30.05 | ||||
Cancelled/forfeited
|
(31,275 | ) | $ | 30.05 | ||||
Non-vested
and outstanding at September 30, 2007
|
15,638 | $ | 30.05 | |||||
Granted
|
61,980 | $ | 31.84 | |||||
Vested
|
(15,638 | ) | $ | 30.05 | ||||
Cancelled/forfeited
|
— | — | ||||||
Non-vested
and outstanding at September 30, 2008
|
61,980 | $ | 31.84 | |||||
Granted
|
— | — | ||||||
Vested
|
— | — | ||||||
Cancelled/forfeited
|
— | — | ||||||
Non-vested
and outstanding at September 30, 2009
|
61,980 | $ | 31.84 |
(1) The
number of common shares issued related to performance shares may range from zero
to 150 percent of the number of shares shown in the table above based on the
Company’s achievement of performance goals associated with NJR total shareowner
return relative to a selected peer group of companies.
The
Company measures compensation expense related to performance shares based on the
fair value of these awards at their date of grant. Compensation expense for
performance shares is recognized for awards that ultimately vest, and is not
adjusted based on actual achievement of the performance goals. The Company
estimated the fair value of the performance shares on the date of grant using a
Lattice model.
There is
$901,000 in costs related to unvested performance shares that are expected to be
recognized over the next two years.
Restricted
Stock
In fiscal
2009, the Company issued 46,500 shares of Restricted Stock, two-thirds of which
vested on October 1, 2009, and one-third of which may vest on October 1, 2010,
subsequent to meeting certain performance milestones. Also, in fiscal 2009,
1,500 shares were issued that vest equally on April 7, 2010 and April 7, 2011.
In fiscal 2008, the Company issued 61,980 shares of Restricted Stock, which vest
in equal annual installments over three years, subject to certain conditions.
Also, in fiscal 2009 and 2008 the Company issued 115,211 and 35,385 shares of
Restricted Stock, respectively, that vested immediately.
There is
$475,000 in costs related to unvested restricted stock shares that are expected
to be recognized over the next two years.
10.
|
EMPLOYEE
BENEFIT PLANS
|
Pension
and Other Postemployment Benefit Plans (OPEB)
NJR has
two trusteed, noncontributory defined benefit retirement plans covering regular
represented and nonrepresented employees with more than one year of service. All
represented employees of NJRHS hired on or after October 1, 2000, and all
non-represented employees hired on or after October 1, 2009, are covered by an
enhanced defined contribution plan instead of the defined benefit
plan.
Defined
benefit plan benefits are based on years of service and average compensation
during the highest 60 consecutive months of employment.
The
Company also maintains an unfunded nonqualified pension equalization plan (PEP)
that was established to provide employees with the full level of benefits as
stated in the qualified plan without reductions due to various limitations
imposed by the provisions of federal income tax laws and regulations. There were
no plan assets in the nonqualified plan due to the nature of the
plan.
Page
88
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
The
Company provides postemployment medical and life insurance benefits to employees
who meet certain eligibility requirements.
NJR’s
funding policy for its pension plans is to contribute at least the minimum
amount required by the Employment Retirement Income Security Act of 1974, as
amended. In fiscal 2009 and 2008, the Company had no minimum funding
requirements; however, NJR made discretionary contributions to the pension plans
during fiscal 2009 totaling $25.6 million. An additional contribution of $4.4
million was made on October 1, 2009. The Company elected to make these
discretionary tax-deductible contributions to improve the funded status of the
pension plans. 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.
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. This resulted in lower annual
contributions over this period, including the amount contributed by the Company
of approximately $1.9 million in fiscal 2009 and $1.0 million in fiscal 2008.
The Company currently estimates contributions of between $5 million to $7
million annually over the next five years. Additional contributions may vary
based on market conditions and various assumptions.
The
accumulated benefit obligation (ABO) for the pension plans, including the
Pension Equalization Plan, at September 30, 2009 and 2008, was $115.9 million
and $89.9 million, respectively. As of September 30, 2009, the ABO exceeded the
fair value of plan assets of $100.6 million, and the projected benefit
obligation was $133.8 million.
The
following summarizes the changes in the funded status of the plans and the
related liabilities recognized in the Consolidated Balance Sheets:
Pension (1)
|
OPEB
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Change
in Benefit Obligation
|
||||||||||||||||
Benefit
obligation at beginning of year
|
$ | 102,383 | $ | 107,875 | $ | 53,452 | $ | 53,031 | ||||||||
Service
cost
|
2,712 | 2,913 | 1,728 | 1,795 | ||||||||||||
Interest
cost
|
7,748 | 6,594 | 4,057 | 3,252 | ||||||||||||
Plan
participants’ contributions
|
48 | 47 | 4 | 4 | ||||||||||||
Actuarial
gain (loss)
|
26,070 | (10,134 | ) | 21,107 | (2,548 | ) | ||||||||||
Benefits
paid, net of retiree subsidies received
|
(5,122 | ) | (4,912 | ) | (2,056 | ) | (2,082 | ) | ||||||||
Benefit
obligation at end of year
|
$ | 133,839 | $ | 102,383 | $ | 78,292 | $ | 53,452 | ||||||||
Change
in plan assets
|
||||||||||||||||
Fair
value of plan assets at beginning of year
|
$ | 80,618 | $ | 105,389 | $ | 22,711 | $ | 29,475 | ||||||||
Actual
return on plan assets
|
(713 | ) | (20,122 | ) | (148 | ) | (5,613 | ) | ||||||||
Employer
contributions
|
25,808 | 215 | 1,868 | 1,014 | ||||||||||||
Benefits
paid, net of plan participants’ contributions
|
(5,074 | ) | (4,864 | ) | (2,237 | ) | (2,165 | ) | ||||||||
Fair
value of plan assets at end of year
|
$ | 100,639 | $ | 80,618 | $ | 22,194 | $ | 22,711 | ||||||||
Funded
status
|
$ | (33,200 | ) | $ | (21,765 | ) | $ | (56,098 | ) | $ | (30,741 | ) | ||||
Amounts
recognized on Consolidated Balance Sheets
|
||||||||||||||||
Postemployment
employee benefit liability
|
||||||||||||||||
Current
|
$ | (145 | ) | $ | (218 | ) | $ | (118 | ) | $ | (148 | ) | ||||
Non-current
|
(33,055 | ) | (21,547 | ) | (55,980 | ) | (30,593 | ) | ||||||||
Total
|
$ | (33,200 | ) | $ | (21,765 | ) | $ | (56,098 | ) | $ | (30,741 | ) |
(1)
Includes
NJR’s Pension Equalization Plan.
Page
89
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
NJR
recognizes a liability for its underfunded benefit plans as required by the
Compensation – Retirement
Benefits Topic of the ASC. NJR records the offset to Regulatory Assets
for the portion of liability relating to its regulated utility and to
Accumulated Other Comprehensive Income for the portion of the liability related
to its non-regulated operations. The amounts recognized in Regulatory Assets and
Accumulated Other Comprehensive Income as of September 30, 2008 and September
30, 2009 are as follows:
Accumulated
Other
|
||||||||||||||||
Regulatory
Assets
|
Comprehensive
Income
|
|||||||||||||||
Pension
|
Pension
|
|||||||||||||||
Plan
|
OPEB
|
Plan
|
OPEB
|
|||||||||||||
Balance
at September 30, 2007
|
$ | 17,351 | $ | 14,821 | $ | 1,667 | $ | 5,401 | ||||||||
Amounts
arising during the period:
|
||||||||||||||||
Net
actuarial loss (gain)
|
14,487 | 6,608 | 4,232 | (1,079 | ) | |||||||||||
Amounts
amortized to net periodic costs:
|
||||||||||||||||
Net
actuarial (loss)
|
(972 | ) | (569 | ) | (129 | ) | (235 | ) | ||||||||
Prior
service cost
|
(39 | ) | (69 | ) | (17 | ) | (9 | ) | ||||||||
Net
Transition Obligation
|
— | (286 | ) | — | (71 | ) | ||||||||||
Balance
at September 30, 2008
|
$ | 30,827 | $ | 20,505 | $ | 5,753 | $ | 4,007 | ||||||||
Amounts
arising during the period:
|
||||||||||||||||
Net
actuarial loss (gain)
|
26,832 | 18,516 | 8,704 | 4,735 | ||||||||||||
Amounts
amortized to net periodic costs:
|
||||||||||||||||
Net
actuarial (loss)
|
(480 | ) | (883 | ) | (74 | ) | (184 | ) | ||||||||
Prior
service cost
|
(39 | ) | (68 | ) | (17 | ) | (10 | ) | ||||||||
Net
Transition Obligation
|
— | (286 | ) | — | (71 | ) | ||||||||||
Balance
at September 30, 2009
|
$ | 57,140 | $ | 37,784 | (1) | $ | 14,366 | $ | 8,477 |
(1)
Balance
represents amounts recognized in accordance with ASC 715 and excludes $1.2
million associated with a regulatory asset approved by the
BPU.
Amounts
included in Regulatory Assets and Accumulated Other Comprehensive Income
expected to be recognized as components of net periodic benefit cost in fiscal
year 2010 are as follows:
Accumulated
Other
|
||||||||||||||||
Regulatory
Assets
|
Comprehensive
Income
|
|||||||||||||||
Pension
|
Pension
|
|||||||||||||||
(Thousands)
|
Plan
|
OPEB
|
Plan
|
OPEB
|
||||||||||||
Net
actuarial gain (loss)
|
$ | 2,190 | $ | 1,842 | $ | 532 | $ | 437 | ||||||||
Prior
service (cost) credit
|
39 | 69 | 16 | 7 | ||||||||||||
Net
Transition Obligation
|
— | 286 | — | 70 | ||||||||||||
Total
|
$ | 2,229 | $ | 2,197 | $ | 548 | $ | 514 |
The
components of the net periodic cost for pension benefits, including NJR’s
Pension Equalization Plan, and OPEB costs (principally health care and life
insurance) for employees and covered dependents were as follows:
Pension
|
OPEB
|
|||||||||||||||||||||||
(Thousands)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
Service
cost
|
$ | 2,712 | $ | 2,913 | $ | 2,932 | $ | 1,728 | $ | 1,795 | $ | 1,819 | ||||||||||||
Interest
cost
|
7,748 | 6,594 | 6,217 | 4,057 | 3,252 | 3,028 | ||||||||||||||||||
Expected
return on plan assets
|
(8,753 | ) | (8,731 | ) | (8,208 | ) | (1,996 | ) | (2,465 | ) | (2,161 | ) | ||||||||||||
Recognized
actuarial loss
|
554 | 1,101 | 1,596 | 1,067 | 804 | 1,063 | ||||||||||||||||||
Recognized
net initial obligation
|
— | — | — | 357 | 357 | 357 | ||||||||||||||||||
Prior
service cost amortization
|
56 | 56 | 84 | 78 | 78 | 78 | ||||||||||||||||||
Net
periodic cost
|
$ | 2,317 | $ | 1,933 | $ | 2,621 | $ | 5,291 | $ | 3,821 | $ | 4,184 |
Page
90
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
The
weighted average assumptions used to determine benefit costs during the fiscal
year and obligations as of September 30 are as follows:
Pension
|
OPEB
|
|||||||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
Benefit
costs:
|
||||||||||||||||||||||||
Discount
rate
|
7.75 | % | 6.25 | % | 6.00 | % | 7.75 | % | 6.25 | % | 6.00 | % | ||||||||||||
Expected
asset return
|
9.00 | % | 9.00 | % | 9.00 | % | 9.00 | % | 8.50 | % | 8.50 | % | ||||||||||||
Compensation
increase
|
3.75 | % | 3.75 | % | 3.75 | % | 3.75 | % | 3.75 | % | 3.75 | % | ||||||||||||
Obligations:
|
||||||||||||||||||||||||
Discount
rate
|
6.25 | % | 7.75 | % | 6.25 | % | 6.25 | % | 7.75 | % | 6.25 | % | ||||||||||||
Compensation
increase
|
3.75 | % | 3.75 | % | 3.75 | % | 3.75 | % | 3.75 | % | 3.75 | % |
In
selecting an assumed discount rate, NJR uses a modeling process that involves
selecting a portfolio of high-quality corporate debt issuances (AA- or better)
whose cash flows (via coupons or maturities) match the timing and amount of
NJR’s expected future benefit payments. NJR considers the results of this
modeling process, as well as overall rates of return on high-quality corporate
bonds and changes in such rates over time, in determination of its assumed
discount rate.
Information
relating to the assumed health care cost trend rate (HCCTR) used to determine
expected OPEB benefits as of September 30, and the effect of a 1 percent change
in the rate, are as follows:
($
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
HCCTR
|
8.0 | % | 9.0 | % | 10.0 | % | ||||||
Ultimate
HCCTR
|
5.0 | % | 5.0 | % | 5.0 | % | ||||||
Year
ultimate HCCTR reached
|
2018 | 2013 | 2013 | |||||||||
Effect
of a 1 percentage point increase in the HCCTR on:
|
||||||||||||
Year-end
benefit obligation
|
$ | 13,181 | $ | 8,052 | $ | 8,493 | ||||||
Total
service and interest cost
|
$ | 1,083 | $ | 973 | $ | 959 | ||||||
Effect
of a 1 percentage point decrease in the HCCTR on:
|
||||||||||||
Year-end
benefit obligation
|
$ | (10,617 | ) | $ | (6,571 | ) | $ | (6,850 | ) | |||
Total
service and interest costs
|
$ | (859 | ) | $ | (771 | ) | $ | (752 | ) |
NJR’s
investment objective is a long-term real rate of return on assets before
permissible expenses that is approximately 6.0 percent greater than the assumed
rate of inflation as measured by the Consumer price Index. The expected
long-term rate of return is based on the asset categories in which the Company
invests and the current expectations and historical performance for these
categories.
The mix
and targeted allocation of the pension and OPEB plans’ assets are as
follows:
2010
|
Assets
at
|
|||||||||||
Target
|
September
30,
|
|||||||||||
Asset
Allocation
|
Allocation
|
2009
|
2008
|
|||||||||
U.S.
equity securities
|
39 | % | 52 | % | 53 | % | ||||||
International
equity securities
|
20 | 18 | 15 | |||||||||
Fixed
income
|
41 | 30 | 32 | |||||||||
Total
|
100 | % | 100 | % | 100 | % |
Page
91
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid during the following years:
(Thousands)
|
Pension
|
OPEB
|
||||||
2010
|
$ | 5,470 | $ | 2,583 | ||||
2011
|
$ | 5,824 | $ | 2,739 | ||||
2012
|
$ | 6,123 | $ | 2,936 | ||||
2013
|
$ | 6,361 | $ | 3,136 | ||||
2014
|
$ | 6,691 | $ | 3,457 | ||||
2015-2019
|
$ | 40,155 | $ | 22,945 |
NJR’s
OPEB plans provide prescription drug benefits that are actuarially equivalent to
those provided by Medicare Part D. Therefore, under the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 NJR qualifies for federal
subsidies.
The
estimated subsidy payments are:
Estimated
Subsidy Payment
|
||||
Fiscal
Year
|
(Thousands)
|
|||
2010
|
$ | 159 | ||
2011
|
$ | 180 | ||
2012
|
$ | 203 | ||
2013
|
$ | 223 | ||
2014
|
$ | 238 | ||
2015-2019
|
$ | 1,501 |
Defined
Contribution Plan
The
Company offers an Employees’ Retirement Savings Plan (Savings Plan) to eligible
employees. The Company matches 50 percent of participants’ contributions up to 6
percent of base compensation.
For
represented NJRHS employees and other employees who are not eligible for
participation in the defined benefit plan and for non-represented employees
hired on or after October 1, 2009, the Company contributes between 2 and 3
percent of base compensation, depending on years of service, into the Savings
Plan on their behalf.
The
amount expensed and contributed for the matching provision of the Savings Plan
was $1.2 million in fiscal 2009, $1.3 million in fiscal 2008 and $1.2 million in
fiscal 2007.
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 are required by New
Jersey law when taking such gas distribution pipeline out of
service.
The
following is an analysis of the change in the ARO liability for the fiscal year
ended September 30:
(Thousands)
|
2009
|
2008
|
||||||
Balance
at October 1
|
$ | 24,416 | $ | 23,895 | ||||
Accretion
|
1,493 | 1,401 | ||||||
Additions
|
131 | 89 | ||||||
Retirements
|
(943 | ) | (969 | ) | ||||
Balance
at September 30
|
$ | 25,097 | $ | 24,416 |
Accretion
amounts are not reflected as an expense on NJR’s Consolidated Statements of
Income, but rather are deferred as a regulatory asset and netted against NJNG’s
regulatory liabilities, for presentation purposes, on the Consolidated Balance
Sheet.
Page
92
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Accretion
for the next five years is estimated to be as follows:
(Thousands)
|
||||
Fiscal
Year Ended September 30,
|
Estimated
Accretion
|
|||
2010
|
$ | 1,564 | ||
2011
|
1,646 | |||
2012
|
1,736 | |||
2013
|
1,830 | |||
2014
|
1,911 | |||
Total
|
$ | 8,687 |
12.
|
INCOME
TAXES
|
The
Company’s federal income tax returns through fiscal 2005 have either been
reviewed by the Internal Revenue Service (IRS), or the related statute of
limitations has expired and all matters have been settled.
A
reconciliation of the United States federal statutory rate of 35 percent to the
effective rate from operations for the fiscal years ended September 30, 2009,
2008 and 2007 is as follows:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Statutory
income tax expense
|
$ | 13,516 | $ | 61,322 | $ | 35,948 | ||||||
Change
resulting from
|
||||||||||||
State
income taxes
|
3,478 | 8,970 | 6,867 | |||||||||
Change
in tax rate
|
(715 | ) | (1,705 | ) | (221 | ) | ||||||
Depreciation
and cost of removal
|
(2,191 | ) | (2,253 | ) | (1,774 | ) | ||||||
Investment
tax credits
|
(322 | ) | (322 | ) | (322 | ) | ||||||
Fin
48 (ASC 740) and other interest accrued/(released)
|
(1,272 | ) | 1,371 | — | ||||||||
Other
|
(1,118 | ) | (1,349 | ) | (720 | ) | ||||||
Income
tax provision (1)
|
$ | 11,376 | $ | 66,034 | $ | 39,778 | ||||||
Effective
income tax rate
|
29.5 | % | 37.7 | % | 38.7 | % | ||||||
(1)
Income tax provision includes taxes associated with investments in Equity
investees of $2.9 million, $1.3 million and $1.1 million for the years
ended September 30, 2009, 2008 and 2007, respectively. These amounts are
reported as part of Equity in earnings of Equity investees, net of tax, in
the Consolidated Statements of Income.
|
The
Income tax provision (benefit) from operations consists of the
following:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Current
|
||||||||||||
Federal
|
$ | 26,860 | $ | 28,534 | $ | 36,846 | ||||||
State
|
7,603 | 4,750 | 12,282 | |||||||||
Deferred
|
||||||||||||
Federal
|
(17,713 | ) | 27,133 | (7,153 | ) | |||||||
State
|
(5,052 | ) | 5,939 | (1,875 | ) | |||||||
Investment
tax credits
|
(322 | ) | (322 | ) | (322 | ) | ||||||
Income
tax provision
|
$ | 11,376 | $ | 66,034 | $ | 39,778 |
Page
93
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
The
temporary differences, which give rise to deferred tax assets and liabilities,
consist of the following:
(Thousands)
|
2009
|
2008
|
||||||
Current
|
||||||||
(Over)Under
Recovered Gas Costs
|
$ | (14,874 | ) | $ | — | |||
Pension
Liability
|
(7,179 | ) | (6,247 | ) | ||||
Other
|
(2,405 | ) | (2,814 | ) | ||||
Total
current deferred tax (assets)
|
$ | (24,458 | ) | $ | (9,061 | ) | ||
(Over)Under
Recovered Gas Costs
|
$ | — | $ | 11,501 | ||||
Pension
Liability
|
2,415 | 9,606 | ||||||
Other
|
1,242 | 1,767 | ||||||
Total
current deferred tax liabilities
|
$ | 3,657 | $ | 22,874 | ||||
Total
net current deferred tax (assets) liabilities
|
$ | (20,801 | ) | $ | 13,813 | |||
Noncurrent
|
||||||||
Unamortized
Investment Tax Credits
|
$ | (3,699 | ) | $ | (3,873 | ) | ||
Deferred
Service Contract Revenue
|
(2,636 | ) | (2,528 | ) | ||||
Deferred
Gain
|
(1,060 | ) | (1,615 | ) | ||||
Total
noncurrent deferred tax (assets)
|
$ | (7,395 | ) | $ | (8,016 | ) | ||
Property
- Related Items
|
$ | 197,475 | $ | 141,255 | ||||
Remediation
Costs
|
35,111 | 35,323 | ||||||
Fair
Value of Derivatives
|
11,329 | 58,821 | ||||||
Other
|
7,073 | 13,031 | ||||||
Total
noncurrent deferred tax liabilities
|
$ | 250,988 | $ | 248,430 | ||||
Total
net noncurrent deferred tax liabilities
|
$ | 243,593 | $ | 240,414 | ||||
Total
net deferred tax liabilities
|
$ | 222,792 | $ | 254,227 |
Effective
October 1, 2007, NJR implemented certain provisions of the Income Taxes Topic
740 of the ASC related to uncertain tax positions. These provisions prescribe a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax return. NJR
is required to recognize a liability as appropriate for a potential future
obligation for certain tax positions that are deemed to be treated as an
unrecognized tax benefit.
In
October 2007, the total amount of liabilities initially recognized, upon
implementation of these provisions, was $6.5 million, including $4.7 million of
uncertain tax liabilities and $1.8 million of interest and penalties. During the
first quarter of fiscal 2009, the Company settled a tax court case with the
State of New Jersey, which resulted in a $2.7 million decrease to the reserve
balance.
During
the second quarter of fiscal 2009, the Company settled the September 30, 2005
Internal Revenue Service (IRS) tax audit. The settlement resulted in an
additional reduction to the remaining balance of $3.8 million bringing it to its
current balance of zero. The prior balance of $3.8 million related to one issue
which has been settled and resulted in no changes to the Company’s tax liability
related to the issue.
Currently
the Company has no reason to believe that there will be any new additions to the
reserve related to uncertain tax positions.
As of
September 30, 2008, the Company’s gross unrecognized tax benefit was $4.7
million. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
(Millions)
|
||||
Balance
at October 1, 2008
|
$ | 4.7 | ||
Additions
based on tax positions related to the current year
|
— | |||
Additions
for tax positions of prior years
|
— | |||
Reductions
for tax positions of prior years
|
— | |||
Settlements
|
$ | (4.7 | ) | |
Expiration
of statute of limitations
|
— | |||
Balance
at September 30, 2009
|
$ | — |
Page
94
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
The
Company and one or more of its subsidiaries files or expects to file income
and/or franchise tax returns in the United States Federal jurisdiction and in
the states of New Jersey, New York, Connecticut, Texas and Louisiana. The
Company neither files in, nor believes it has a filing requirement in, any
foreign jurisdictions.
The
Company is no longer subject to United States federal income tax examinations
for years prior to fiscal 2006. The IRS commenced an examination of the
Company’s fiscal 2006 federal income tax return in the fourth quarter of fiscal
2008. The fiscal 2006 exam is expected to be completed by the end of fiscal
2010.
The
Company is not currently under examination in any state; however, all periods
subsequent to those ended September 30, 2003, are statutorily open to
examination (in New York all periods subsequent to September 30, 2004, are
statutorily open to examination). As previously disclosed, NJNG was party to a
case pending before the Tax Court of New Jersey (the “Tax Court”). In that case,
NJNG disputed the State of New Jersey’s (the “State”) application of its tax
apportionment rules. On April 15, 2008 the Tax Court issued a decision in favor
of the State. NJNG paid the resulting assessment of approximately $3 million
(including interest and penalties) on October 15, 2008. The effect of the Tax
Court’s decision did not impact the Company’s effective tax rate, as this amount
had been fully reserved and was reflected as a component of current Deferred and
accrued taxes in the Consolidated Balance Sheets as of September 30,
2008.
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 $106.8 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
ranges from one to five years. Demand charges are based on established rates as
regulated by the Federal Energy Regulatory Commission (FERC). These demand
charges represent commitments to pay storage providers or pipeline companies for
the right to store and transport natural gas utilizing their respective
assets.
Commitments
as of September 30, 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
|
$ | 444,490 | $ | 140,949 | $ | 126,561 | $ | 10,588 | $ | — | $ | — | ||||||||||||
Storage
demand fees
|
41,292 | 18,862 | 11,841 | 7,018 | 2,835 | 1,576 | ||||||||||||||||||
Pipeline
demand fees
|
37,926 | 18,777 | 9,949 | 10,477 | 7,636 | 24,010 | ||||||||||||||||||
Sub-total
NJRES
|
$ | 523,708 | $ | 178,588 | $ | 148,351 | $ | 28,083 | $ | 10,471 | $ | 25,586 | ||||||||||||
NJNG
|
||||||||||||||||||||||||
Natural
gas purchases
|
$ | 54,239 | $ | 1,644 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Storage
demand fees
|
21,905 | 18,393 | 13,307 | 10,414 | 5,536 | 1,174 | ||||||||||||||||||
Pipeline
demand fees
|
84,949 | 83,520 | 76,569 | 75,590 | 69,795 | 256,372 | ||||||||||||||||||
Sub-total
NJNG
|
$ | 161,093 | $ | 103,557 | $ | 89,876 | $ | 86,004 | $ | 75,331 | $ | 257,546 | ||||||||||||
Total
|
$ | 684,801 | $ | 282,145 | $ | 238,227 | $ | 114,087 | $ | 85,802 | $ | 283,132 |
NJNG’s
capital expenditures are estimated at $110.2 million in fiscal 2010, of which
approximately $3.8 million has been committed, and $86.5 million for fiscal
2011, and consist primarily of its construction program to support customer
growth, maintenance of its distribution system and replacement needed under
pipeline safety regulations. Fiscal 2010 and 2011 include an estimated $44.2
million and $20.5 million, respectively, related to AIP construction
costs.
The
Company’s future minimum lease payments under various operating leases are less
than $2.9 million annually for the next five years and $1.5 million in the
aggregate for all years thereafter.
Page
95
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
Guarantees
As of
September 30, 2009, there were NJR guarantees covering approximately $345
million of natural gas purchases and demand fee commitments of NJRES and NJNG
not yet reflected in accounts payable on the Consolidated Balance
Sheet.
In fiscal
2009, the Company entered into agreements to lease vehicles over a five-year
term, which qualify as operating leases. These agreements contain provisions
that could require the Company to make additional cash payments at the end of
the term for a portion of the residual value of the vehicles. As of September
30, 2009, the present value of the liability recognized on the Consolidated
Balance Sheets is $335,000. In the event performance under the guarantee is
required, the Company’s maximum future payment would be $475,000.
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 a Remediation Adjustment
(RA) approved by the BPU. In October 2007, the BPU approved $14.7 million in
eligible costs to be recovered annually for MGP remediation expenditures
incurred through June 30, 2006. In February 2008, NJNG filed an application
regarding its SBC which included MGP remediation expenditures incurred through
June 30, 2007, resulting in an expected annual recovery of $17.7 million. On
January 27, 2009, NJNG filed an application regarding its SBC including MGP
remediation expenditures incurred through September 30, 2008 resulting in an
expected annual recovery of $20.7 million. As of September 30, 2009, $85.5
million of previously incurred remediation costs, net of recoveries from
customers and insurance proceeds, are included in Regulatory assets on the
Consolidated Balance Sheet.
In
September 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 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, other than as
disclosed above, the ultimate disposition of these matters will not have a
material adverse effect on its financial condition, results of operations or
cash flows.
Page
96
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
14.
|
BUSINESS
SEGMENT AND OTHER OPERATIONS DATA
|
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; the
Retail and Other operations consist of appliance and installation services,
commercial real estate development, investments and other corporate
activities.
Information
related to the Company’s various business segments and other operations,
excluding capital expenditures at NJNG of $81.2 million and at retail and Other
of $388,000 is detailed below.
(Thousands)
|
||||||||||||
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
Operating
Revenues
|
||||||||||||
Natural
Gas Distribution
|
$ | 1,082,001 | $ | 1,078,824 | $ | 1,005,588 | ||||||
Energy
Services
|
1,498,742 | 2,714,733 | 1,994,682 | |||||||||
Segment
subtotal
|
2,580,743 | 3,793,557 | 3,000,270 | |||||||||
Retail
and Other
|
14,008 | 22,850 | 21,776 | |||||||||
Intercompany
revenues (1)
|
(2,291 | ) | (197 | ) | (281 | ) | ||||||
Total
|
$ | 2,592,460 | $ | 3,816,210 | $ | 3,021,765 | ||||||
Depreciation
and Amortization
|
||||||||||||
Natural
Gas Distribution
|
$ | 29,417 | $ | 37,723 | $ | 35,648 | ||||||
Energy
Services
|
205 | 206 | 214 | |||||||||
Segment
subtotal
|
29,622 | 37,929 | 35,862 | |||||||||
Retail
and Other
|
706 | 535 | 373 | |||||||||
Total
|
$ | 30,328 | $ | 38,464 | $ | 36,235 | ||||||
Interest
Income (2)
|
||||||||||||
Natural
Gas Distribution
|
$ | 2,779 | $ | 3,294 | $ | 3,232 | ||||||
Energy
Services
|
570 | 311 | 724 | |||||||||
Segment
subtotal
|
3,349 | 3,605 | 3,956 | |||||||||
Retail
and Other
|
567 | 476 | 59 | |||||||||
Intercompany
interest income (1)
|
(496 | ) | — | — | ||||||||
Total
|
$ | 3,420 | $ | 4,081 | $ | 4,015 | ||||||
Interest
Expense, net of capitalized interest
|
||||||||||||
Natural
Gas Distribution
|
$ | 18,706 | $ | 21,277 | $ | 21,182 | ||||||
Energy
Services
|
322 | 2,574 | 4,222 | |||||||||
Segment
subtotal
|
19,028 | 23,851 | 25,404 | |||||||||
Retail
and Other
|
2,482 | 1,960 | 2,209 | |||||||||
Intercompany
interest expense (1)
|
(496 | ) | — | — | ||||||||
Total
|
$ | 21,014 | $ | 25,811 | $ | 27,613 | ||||||
Income
Tax Provision (Benefit)
|
||||||||||||
Natural
Gas Distribution
|
$ | 39,729 | $ | 27,840 | $ | 26,334 | ||||||
Energy
Services
|
(24,259 | ) | 38,806 | 14,311 | ||||||||
Segment
subtotal
|
15,470 | 66,646 | 40,645 | |||||||||
Retail
and Other
|
(6,982 | ) | (1,931 | ) | (1,970 | ) | ||||||
Total
|
$ | 8,488 | $ | 64,715 | $ | 38,675 | ||||||
Net
Financial Earnings
|
||||||||||||
Natural
Gas Distribution
|
$ | 65,403 | $ | 42,479 | $ | 44,480 | ||||||
Energy
Services
|
31,179 | 47,003 | 40,148 | |||||||||
Segment
subtotal
|
96,582 | 89,482 | 84,628 | |||||||||
Retail
and Other
|
4,388 | 4,333 | 3,726 | |||||||||
Total
|
$ | 100,970 | $ | 93,815 | $ | 88,354 |
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified in
consolidation
(2) Included
in Other income in the Consolidated Statement of
Income
Page
97
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
The chief
operating decision maker of the Company is the Chief Executive Officer (CEO).
The CEO uses net financial earnings as a measure of profit or loss in measuring
the results of the Company’s segments and operations. A reconciliation of
consolidated net financial earnings to consolidated net income is as
follows:
September
30,
|
||||||||||||
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Consolidated
Net Financial Earnings
|
$ | 100,970 | $ | 93,815 | $ | 88,354 | ||||||
Less:
|
||||||||||||
Unrealized
loss (gain) from derivative instruments, net of taxes
|
39,254 | (6,028 | ) | 42,209 | ||||||||
Effects
of economic hedging related to natural gas inventory and certain demand
fees, net of taxes
|
34,474 | (9,325 | ) | (16,788 | ) | |||||||
Consolidated
Net Income
|
$ | 27,242 | $ | 109,168 | $ | 62,933 |
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:
(Thousands)
|
2009
|
2008
|
||||||
Assets
at end of period:
|
||||||||
Natural
Gas Distribution
|
$ | 1,797,165 | $ | 1,761,964 | ||||
Energy
Services
|
327,532 | 699,897 | ||||||
Segment
subtotal
|
2,124,697 | 2,461,861 | ||||||
Retail
and Other
|
223,020 | 231,551 | ||||||
Intercompany
Assets (1)
|
(26,687 | ) | (58,115 | ) | ||||
Total
|
$ | 2,321,030 | $ | 2,635,297 |
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified in
consolidation.
NJRES’
assets decreased 53.2 percent from fiscal 2008 to fiscal 2009, due primarily to
lower inventory values resulting from a decline in commodity
prices.
In fiscal
2009, NJRES had one customer who represented 14 percent of its total revenue.
Management believes that the loss of this customer would not have a material
effect on its financial position, results of operations or cash flows as an
adequate number of alternative counterparties exist.
Page
98
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Continued)
|
15.
|
RELATED
PARTY TRANSACTIONS
|
During
fiscal 2009, NJRES entered into park and loan agreements and firm storage
contracts with Steckman Ridge, an affiliated 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 payable to Steckman Ridge
aggregating approximately $5.5 million annually. As of September, 2009, NJRES’
fees and related payable balances were immaterial.
16.
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
A summary
of financial data for each quarter of fiscal 2009 and 2008 follows. Due to the
seasonal nature of the Company’s businesses, quarterly amounts vary
significantly during the fiscal year. In the opinion of management, the
information furnished reflects all adjustments necessary for a fair presentation
of the results of the interim periods.
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
(Thousands,
except per share data)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||
2009
|
||||||||||||||||
Operating
revenues
|
$ | 801,304 | $ | 937,516 | $ | 441,052 | $ | 412,588 | ||||||||
Gross
margin(1)
|
$ | 91,189 | $ | 95,390 | $ | 21,185 | $ | 13,492 | ||||||||
Operating
income (loss)
|
$ | 49,251 | $ | 52,000 | $ | (23,770 | ) | $ | (29,411 | ) | ||||||
Net
income (loss)
|
$ | 28,272 | $ | 31,988 | $ | (14,155 | ) | $ | (18,863 | ) | ||||||
Earnings
(loss) per share
|
||||||||||||||||
Basic
|
$ | 0.67 | $ | 0.76 | $ | (0.34 | ) | $ | (0.45 | ) | ||||||
Diluted
|
$ | 0.67 | $ | 0.75 | $ | (0.34 | ) | $ | (0.45 | ) | ||||||
2008
|
||||||||||||||||
Operating
revenues
|
$ | 811,138 | $ | 1,177,545 | $ | 1,000,439 | $ | 827,088 | ||||||||
Gross
margin(1)
|
$ | 87,519 | $ | 78,043 | $ | 7,340 | $ | 200,598 | ||||||||
Operating
income (loss)
|
$ | 47,899 | $ | 35,508 | $ | (34,741 | ) | $ | 144,672 | |||||||
Net
income (loss)
|
$ | 26,274 | $ | 21,474 | $ | (24,929 | ) | $ | 86,348 | |||||||
Earnings
(loss) per share
|
||||||||||||||||
Basic
|
$ | 0.63 | $ | 0.51 | $ | (0.59 | ) | $ | 2.05 | |||||||
Diluted
|
$ | 0.63 | $ | 0.51 | $ | (0.59 | ) | $ | 2.04 |
(1)
Gross
margin consists of operating revenue less cost of goods sold and othet direct
expenses at NJR’s unregulated subsidiaries and
utility gross margin at NJNG, which includes natural gas revenues less natural
gas purchases, sales tax, a Transitional Energy Facilities Assessment and
regulatory rider expenses.
The sum
of quarterly amounts may not equal the annual amounts due to
rounding.
Immaterial
Restatement to Prior Year Consolidated Financial Statements
In the
fourth quarter of fiscal 2009, management discovered an error in the accounting
for gas in storage, purchase obligations, embedded derivatives and gas demand
fees associated with park and loan transactions at NJRES. NJR had been
incorrectly pricing its inventory and had not been recognizing the fair value of
the embedded derivative. Specifically, NJR had been using a forward price to
value the inventory and gas purchases liability. Both the natural gas that was
received and the “park and loan” liability should have been initially valued at
the spot market price on the date NJRES received the gas. In addition, NJRES
should have been accounting for the obligation to return the gas as an embedded
derivative, which should have been fair valued (“marked to market”) at each
subsequent balance sheet reporting date until the gas was returned to the
counterparty. As well, the initial spread between the spot price of the natural
gas on the date of the transaction and the forward price, based on the date
NJRES would return the borrowed gas inventory, should have been recognized into
income on a ratable basis over the term of the park and loan agreement. In addition,
demand fees related to these transactions were not but should have been
recognized ratably over the term of the
contract.
The
Company made a quantitative and qualitative assessment of the impact of the
error to its consolidated financial statements for the fiscal years ended
September 30, 2009, September 30, 2008 and September 30, 2007 and for the
consolidated balance sheets as of September 30, 2009 and September 30, 2008 and
concluded that the resulting misstatements were not material. The
cumulative error has been corrected in the fourth quarter of fiscal 2009.
Accordingly, the quarterly amounts presented above for the fourth quarter of
fiscal 2008 have been restated to include an increase in Gross margin and
Operating income of $12.4 million, Net income of $7.6 million and a $0.19 and
$0.18 increase in Basic and Diluted Earnings (loss) per share,
respectively.
These
errors have no impact on the economic value associated with the underlying
forecasted transactions. There was no impact on reported cash flow from
operations or liquidity.
Page
99
New
Jersey Resources Corporation
Part
II
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
|
None
ITEM
9A. CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
Under the
supervision and with the participation of the Company’s management, including
the principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) (the Exchange Act), as of
the end of the period covered by this report. Based on this evaluation, the
Company’s principal executive officer and principal financial officer concluded
that, as of end of the period covered by this report, the Company’s disclosure
controls and procedures 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.
In
connection with the Company’s preparation of its consolidated financial
statements for the fiscal year ended September 30, 2009, the Company reassessed
its accounting for park and loan transactions executed through the Company’s
unregulated subsidiary. NJRES enters into park and loan transactions
whereby it borrows natural gas from a counterparty with an obligation to return
the gas at a future date. The Company had been incorrectly accounting
for gas in storage, gas purchase obligations, embedded derivatives and demand
fees associated with these park and loan transactions. Specifically,
NJR has been using a forward price to value the inventory and gas purchases
liability associated with “park and loan” transactions. Both the
natural gas that was received and the “park and loan” liability should have been
initially valued at the spot price on the date NJRES received the
gas. In addition, NJRES should have been accounting for the
obligation to return the gas as an embedded derivative, which should have been
fair valued (“marked to market”) at each subsequent balance sheet reporting date
until the gas was returned to the counterparty. As well, the initial spread
between the spot price of the borrowed gas liability on the date of the
transaction and the forward price, based on the date NJRES would return the
natural gas, should have been recognized into income on a ratable basis over the
term of the park and loan agreement. In addition, demand fees related to these
transactions were not but should have been recognized ratably over the term of
the contract. Management, in consultation with the Audit Committee,
had concluded that the errors associated with the accounting for park and loan
transactions constituted a material weakness in the Company’s internal controls
over financial reporting for the applicable periods that have been restated, but
do not constitute a material weakness for the fiscal year ended September 30,
2009, because management through its existing disclosure controls and procedures
identified the errors and corrected such errors.
The
Company continually reviews its disclosure controls and procedures and makes
changes, as necessary, to ensure the quality of its financial reporting. The
Company’s management has discussed these issues with the Company’s Audit
Committee.
Management’s
Annual Report on Internal Control over Financial Reporting
The
report of management required under this ITEM 9A is contained in ITEM 8 of this
Form 10-K under the caption “Management’s Report on Internal Control over
Financial Reporting.”
Attestation
Report of Registered Public Accounting Firm
The
attestation report required under this ITEM 9A is contained in ITEM 8 of this
10-K under the caption “Report of Independent Registered Public Accounting
Firm.”
Page
100
New
Jersey Resources Corporation
Part
II
ITEM
9A. CONTROLS AND PROCEDURES (Continued)
|
Changes
in Internal Control over Financial Reporting
During
fiscal 2009, the Company implemented a remediation plan to address material
weaknesses associated with the fair value of certain physical natural gas
transactions and accounting for park and loan transactions. The remediation plan
included the hiring of additional staff with the appropriate accounting
technical expertise as well as the implementation of additional control
procedures and oversight on its derivative transactions, which are outlined
below. Management believes these additional measures remediated the material
weaknesses as of September 30, 2009. The Company implemented the following
measures during fiscal 2009 that were designed to substantially reduce the risk
of a similar material weakness occurring in the future:
|
Ÿ
|
expanded
training, education and accounting reviews for all relevant personnel
involved in the accounting treatment and disclosures for the Company’s
commodity transacting;
|
|
Ÿ
|
investment
in additional resources with appropriate accounting technical expertise,
including the hiring of a Controller- Wholesale
and Midstream Operations;
|
|
Ÿ
|
improvements
in the design of internal control over financial reporting related to the
accounting of commodity transacting, resulting in the implementation of
new and expanded processes and controls;
and
|
|
Ÿ
|
increased
level of review and discussion of significant accounting matters and
supporting documentation with senior finance
management.
|
These
were the only changes in the Company’s internal control over financial reporting
(as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during
the quarter ended September 30, 2009, that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION
|
None
Page
101
New
Jersey Resources Corporation
Part
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
required by this item, including information concerning the Board of Directors
of the Company, the members of the Company’s Audit Committee, the Company’s
Audit Committee Financial Expert, compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, and shareholder proposals, is
incorporated by reference to the Company’s Proxy Statement for the 2010 Annual
Meeting of Shareholders, which will be filed with Securities and Exchange
Commission (SEC) pursuant to Regulation 14A within 120 days after September 30,
2009. The information regarding executive officers is included in this report
following Item 4, as Item 4A, under the caption “Executive Officers of the
Company.”
The Board
of Directors has adopted the Principal Executive Officer and Senior Financial
Officers Code of Ethics governing the chief executive officer and senior
financial officers, in compliance with the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) and SEC regulations and the Code of Conduct, a code for all
directors, officers and employees as required by the New York Stock Exchange, or
NYSE, rules (collectively, the Codes). Copies of both Codes are available free
of charge on the Company’s website at http://investor.njresources.com under the
caption “Corporate Governance.” A printed copy of each Code is available free of
charge to any shareholder who requests it by contacting the Corporate Secretary
at 1415 Wyckoff Road, Wall, New Jersey 07719. The Company will disclose any
amendments to, or waivers from, a provision of the Codes that applies to the
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions that relate to
any element of the Codes as defined in Item 406 of Regulation S-K by posting
such information on the Company’s website.
Because
the Company’s common stock is listed on the NYSE, the chief executive officer is
required to make, and he has made, an annual certification to the NYSE stating
that he was not aware of any violation by the Company of the corporate
governance listing standards of the NYSE. The chief executive officer made his
annual certification to that effect to the NYSE as of February 12, 2009. In
addition, the Company has filed, as exhibits to the Annual Report on Form 10-K,
the certifications of the principal executive officer and principal financial
officer required under Sections 906 and 302 of the Sarbanes-Oxley to be filed
with the SEC regarding the quality of its public disclosure.
ITEM
11. EXECUTIVE COMPENSATION
|
Information
required by this Item is incorporated by reference from the Registrant’s Proxy
Statement.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
Information
required by this Item is incorporated by reference from the Registrant’s Proxy
Statement.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
Information
required by this Item is incorporated by reference from the Registrant’s Proxy
Statement.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Information
required by this Item is incorporated by reference from the Registrant’s Proxy
Statement.
Page
102
New
Jersey Resources Corporation
Part
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
|
|
(a)
1.
|
Financial
Statements.
|
All
Financial Statements of the Registrant are filed as part of this report and
included in Item 8 of Part II of this Form 10-K.
|
(a)
2.
|
Financial
Statement Schedules–See Index to Financial Statement
Schedules in Item 8.
|
(a)
3. Exhibits–See
Exhibit Index on page
109.
Page
103
New
Jersey Resources Corporation
INDEX
TO FINANCIAL STATEMENT SCHEDULES
Page
|
||
Schedule
I—Condensed financial information of registrant for each of the three
years in the period ended September 30, 2009
|
105
|
|
Schedule
II—Valuation and qualifying accounts and reserves for each of the three
years in the period ended September 30, 2009
|
106
|
Schedules
other than those listed above are omitted because they are not required or are
not applicable, or the required information is shown in the financial statements
or notes thereto.
Page
104
New
Jersey Resources Corporation
SCHEDULE
I
NEW
JERSEY RESOURCES CORPORATION (Parent Company)
CONDENSED
FINANCIAL STATEMENTS
YEARS
ENDED SEPTEMBER 30, 2009, 2008 and 2007
STATEMENTS
OF INCOME
(Thousands)
|
||||||||||||
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
Operating
revenues
|
$ | — | $ | — | $ | — | ||||||
Operating
expenses
|
9,159 | 8,667 | 9,068 | |||||||||
Operating
loss
|
(9,159 | ) | (8,667 | ) | (9,068 | ) | ||||||
Other
income
|
9,980 | 10,023 | 10,589 | |||||||||
Interest
expense
|
276 | 1,348 | 1,802 | |||||||||
Income
(loss) before income taxes and equity in earnings of
affiliates
|
545 | 8 | (281 | ) | ||||||||
Income
tax provision (benefit)
|
230 | (51 | ) | (122 | ) | |||||||
Equity
in earnings of subsidiaries, net of tax
|
26,927 | 109,109 | 63,092 | |||||||||
Net
income
|
$ | 27,242 | $ | 109,168 | $ | 62,933 |
STATEMENTS
OF CASH FLOWS
(Thousands)
|
||||||||||||
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
Net
cash provided by operating activities
|
$ | 52,971 | $ | 59,144 | $ | 33,479 | ||||||
Cash
flows (used in) provided by investing activities:
|
||||||||||||
Net
repayments from associated companies
|
$ | (34,085 | ) | $ | 9,584 | $ | 89,529 | |||||
Investments
in affiliates
|
(46,184 | ) | (23,500 | ) | (55,805 | ) | ||||||
Cash
flows (used in) provided by investing activities
|
$ | (80,269 | ) | $ | (13,916 | ) | $ | 33,724 | ||||
Cash
flows from financing activities:
|
||||||||||||
(Payments)
proceeds from long-term debt
|
$ | (25,000 | ) | $ | (493 | ) | $ | 50,000 | ||||
Tax
benefit from stock options exercised
|
1,686 | 630 | 1,761 | |||||||||
Proceeds
from common stock
|
16,441 | 16,028 | 18,515 | |||||||||
Net
borrowings from associated companies
|
5,187 | 2,472 | 2,941 | |||||||||
Purchases
of treasury stock
|
(30,670 | ) | (11,039 | ) | (9,024 | ) | ||||||
Payments
of common stock dividends
|
(50,967 | ) | (45,201 | ) | (42,446 | ) | ||||||
Net
proceeds (payments) of short-term debt
|
110,700 | (7,550 | ) | (88,950 | ) | |||||||
Cash
flows from (used in) financing activities
|
$ | 27,377 | $ | (45,153 | ) | $ | (67,203 | ) | ||||
Change
in cash and temporary investments
|
$ | 79 | $ | 75 | $ | — | ||||||
Cash
and temporary investments, beginning of year
|
75 | — | — | |||||||||
Cash
and temporary investments, end of year
|
$ | 154 | $ | 75 | $ | — |
Page
105
New
Jersey Resources Corporation
SCHEDULE
I
NEW
JERSEY RESOURCES CORPORATION (Parent Company)
CONDENSED
FINANCIAL STATEMENTS (Continued)
BALANCE
SHEETS
(Thousands)
|
||||||||
September
30,
|
2009
|
2008
|
||||||
ASSETS
|
||||||||
Current
assets
|
$ | 18,130 | $ | 16,377 | ||||
Investments
|
710,102 | 737,585 | ||||||
Intercompany
receivable, net
|
170,462 | 106,587 | ||||||
Deferred
charges and other assets
|
2,456 | 2,511 | ||||||
Total
assets
|
$ | 901,150 | $ | 863,060 | ||||
CAPITALIZATION
AND LIABILITIES
|
||||||||
Current
liabilities (1)
|
$ | 158,193 | $ | 81,039 | ||||
Long-term
debt
|
50,000 | 50,000 | ||||||
Deferred
credits and other liabilities
|
3,231 | 3,954 | ||||||
Common
stock equity
|
689,726 | 728,067 | ||||||
Total
capitalization and liabilities
|
$ | 901,150 | $ | 863,060 |
(1)
Includes
current portion of long-term debt.
NOTE
TO CONDENSED FINANCIAL STATEMENTS
1. BASIS
OF PRESENTATION
Pursuant
to rules and regulations of the Securities and Exchange Commission (SEC), the
unconsolidated condensed financial statements of New Jersey Resources
Corporation do not reflect all of the information and notes normally included
with financial statements prepared in accordance with accounting principles
generally accepted in the United States of America. Therefore, these condensed
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in this Form 10-K.
NJR has
accounted for the earnings of its subsidiaries under the equity method in these
unconsolidated condensed financial statements. Cash dividends paid to NJR from
its subsidiaries were $51 million, $45.2 million and $41.9 million during fiscal
2009, 2008 and 2007 respectively.
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
YEARS
ENDED SEPTEMBER 30, 2009, 2008 and 2007
(Thousands)
|
||||||||||||||||
CLASSIFICATION
|
BEGINNING
BALANCE
|
ADDITIONS
CHARGED
TO
EXPENSE
|
OTHER (1)
|
ENDING
BALANCE
|
||||||||||||
2009:
|
||||||||||||||||
Regulatory
asset reserve
|
$ | 102 | $ | — | $ | 180 | $ | 282 | ||||||||
Allowance
for Doubtful Accounts
|
$ | 4,580 | $ | 9,588 | $ | (8,104 | ) | $ | 6,064 | |||||||
2008:
|
||||||||||||||||
Regulatory
asset reserve
|
$ | 2,703 | $ | 529 | $ | (3,130 | ) | $ | 102 | |||||||
Allowance
for Doubtful Accounts
|
$ | 3,166 | $ | 4,422 | $ | (3,008 | ) | $ | 4,580 | |||||||
2007:
|
||||||||||||||||
Regulatory
asset reserve
|
$ | 678 | $ | 2,025 | $ | — | $ | 2,703 | ||||||||
Allowance
for Doubtful Accounts
|
$ | 2,679 | $ | 3,174 | $ | (2,687 | ) | $ | 3,166 |
(1)
Uncollectible
accounts written off, less recoveries and
adjustments.
Page
106
New
Jersey Resources Corporation
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: November
30, 2009
|
|
By:/s/
Glenn C. Lockwood
|
|
Glenn
C. Lockwood
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated:
November
30, 2009
|
/s/
Laurence M. Downes
|
November
30, 2009
|
/s/
Alfred C. Koeppe
|
Laurence
M. Downes
Chairman,
President and
Chief
Executive Officer
Director
|
Alfred
C. Koeppe
Director
|
||
November
30, 2009
|
/s/
Nina Aversano
|
November
30, 2009
|
/s/
Glenn C. Lockwood
|
Nina
Aversano
Director
|
Glenn
C. Lockwood
Senior
Vice President and
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
||
November
30, 2009
|
/s/
Lawrence R. Codey
|
November
30, 2009
|
/s/
J. Terry Strange
|
Lawrence
R. Codey
Director
|
J.
Terry Strange
Director
|
||
November
30, 2009
|
/s/
Donald L. Correll
|
November
30, 2009
|
/s/
David A. Trice
|
Donald
L. Correll
Director
|
David
A. Trice
Director
|
||
November
30, 2009
|
/s/
Robert B. Evans
|
November
30, 2009
|
/s/
William H. Turner
|
Robert
B. Evans
Director
|
William
H. Turner
Director
|
||
November
30, 2009
|
/s/
M. William Howard, Jr.
|
November
30, 2009
|
/s/
George R. Zoffinger
|
M.
William Howard, Jr.
Director
|
George
R. Zoffinger
Director
|
||
November
30, 2009
|
/s/
Jane M. Kenny
|
||
Jane
M. Kenny
Director
|
Page
107
New
Jersey Resources Corporation
EXHIBIT
INDEX
Exhibit
Number
|
Exhibit
Description
|
3.1
|
Certificate
of Incorporation of the Company, as amended (incorporated by reference to
Exhibit 3-1 to the Annual Report on Form 10-K for the year ended September
30, 1996, as filed on December 30, 1996 and Exhibit 3.1 to the Current
Report on Form 8-K, as filed on March 6, 2008)
|
3.2
|
By-Laws
of the Company, as amended on July 14, 2009 (incorporated by reference to
Exhibit 3.2 to the Current Report on Form 8-K, as filed on July 20,
2009)
|
4.1
|
Specimen
Common Stock Certificates (incorporated by reference to Exhibit 4-1 to
Registration Statement No. 033-21872)
|
4.2
|
Indenture
of Mortgage and Deed of Trust between NJNG and Harris Trust and Savings
Bank, as Trustee, dated April 1, 1952, as supplemented by twenty-one
Supplemental Indentures (incorporated by reference to Exhibit 4(g) to
Registration Statement No. 002-9569)
|
4.2(a)
|
Twenty-Fifth
Supplemental Indenture, dated as of July 15, 1995 (incorporated by
reference to Exhibit 4.2(Y) to the Annual Report on Form 10-K for the year
ended September 30, 1995, as filed on December 29,
1995)
|
4.2(b)
|
Twenty-Sixth
Supplemental Indenture, dated as of October 1, 1995 (incorporated by
reference to Exhibit 4.2(X) to the Annual Report on Form 10-K for the year
ended September 30, 1995, as filed on December 29,
1995)
|
4.2(c)
|
Twenty-Seventh
Supplemental Indenture, dated as of September 1, 1997 (incorporated by
reference to Exhibit 4.2(J) to the Annual Report on Form 10-K as filed on
December 29, 1997)
|
4.2(d)
|
Twenty-Eighth
Supplemental Indenture, dated as of January 1, 1998 (incorporated by
reference to Exhibit 4.2(K) to the Annual Report on Form 10-K for the year
ended September 30, 1998, as filed on December 24,
1998)
|
4.2(e)
|
Twenty-Ninth
Supplemental Indenture, dated as of April 1, 1998 (incorporated by
reference to Exhibit 4.2(L) to the Annual Report on Form 10-K for the year
ended September 30, 1988, as filed on December 24,
1998)
|
4.2(f)
|
Thirtieth
Supplemental Indenture, dated as of December 1, 2003 (incorporated by
reference to Exhibit 4.2(J) to the Annual Report on Form 10-K for the year
ended September 30, 2003, as filed on December 16,
2003)
|
4.2(g)
|
Thirty-First
Supplemental Indenture, dated as of October 1, 2005 (incorporated by
reference to Exhibit 4.2(I) to the Annual Report on Form 10-K for the year
ended September 30, 2005, as filed on November 29,
2005)
|
4.2(h)
|
Thirty-Second
Supplemental Indenture, dated as of May 1, 2008 (incorporated by reference
to Exhibit 4.2(i) to the Current Report on Form 8-K, as filed on May 20,
2008)
|
4.3
|
$225,000,000
Revolving Credit Facility Credit Agreement (the “$225,000,000 Revolving
Credit Facility”) by and among NJNG, PNC Bank, NA as Administrative Agent,
the banks party thereto, JPMorgan Chase Bank, NA and Fleet National Bank,
as Syndication Agents, Bank Of Tokyo-Mitsubishi Trust Company and Citicorp
North America, Inc., As Documentation Agents and PNC Capital Markets,
Inc., as Lead Arranger, dated as of December 16, 2004 (incorporated by
reference to Exhibit 4-2 to the Quarterly Report on Form 10-Q as filed on
February 7, 2005)
|
4.3(a)
|
First
Amendment dated as of August 31, 2005 to the $225,000,000 Revolving Credit
Facility, dated as of December 16, 2004 (incorporated by reference to
Exhibit 4-3A to the Annual Report on Form 10-K for the year ended
September 30, 2005, as filed on November 29, 2005)
|
4.3(b)
|
Second
Amendment and Consent dated as of November 15, 2005 to the $225,000,000
Revolving Credit Facility, dated as of December 16, 2004 (incorporated by
reference to Exhibit 4-3B to the Annual Report on Form 10-K for the year
ended September 30, 2005, as filed on November 29,
2005)
|
4.4
|
$325,000,000
Revolving Credit Facility Credit Agreement (the “$325,000,000 Revolving
Credit Facility”) by and among the Company, the guarantors thereto, PNC
Bank, NA as Administrative Agent, the banks party thereto, JPMorgan Chase
Bank, NA and l Bank of America, N.A., as Syndication Agents, Bank Of Nova
Scotia and Citibank, N.A., as Documentation Agents and PNC Capital Markets
LLC., as Lead Arranger, dated as of December 13, 2007 (incorporated by
reference to Exhibit 4.9 to the Quarterly Report on Form 10-Q as filed on
February 6, 2008)
|
Page
108
New
Jersey Resources Corporation
Exhibit
Number
|
Exhibit
Description
|
4.6
|
$60,000,000
Note Purchase Agreement by and among NJNG and J.P. Morgan Securities Inc.,
as Placement Agent, dated March 15, 2004 (incorporated by reference to
Exhibit 4-1 to the Quarterly Report on Form 10-Q as filed on May 10,
2004)
|
4.8
|
$50,000,000
Note Purchase Agreement dated as of September 24, 2007, by and among the
Company, New York Life Insurance Company and New York Life Insurance and
Annuity Company (incorporated by reference to Exhibit 4.8 to the Annual
Report on Form 10-K as filed on December 10, 2007)
|
4.9
|
$125,000,000
Note Purchase Agreement dated as of May 15, 2008, by and among New Jersey
Natural Gas Company and the Purchasers party thereto (incorporated by
reference to Exhibit 4.9 to the Current Report on Form 8-K, as filed on
May 20, 2008)
|
10.2**
|
Retirement
Plan for Represented Employees, as amended on October 1, 1984
(incorporated by reference to Registration Statement No.
002-73181)
|
10.3**
|
Retirement
Plan for Non-Represented Employees, as amended October 1, 1985
(incorporated by reference to Registration Statement No.
002-73181)
|
10.4**
|
Amended
and Restated Supplemental Executive Retirement Plan Agreement between the
Company and Laurence M. Downes dated December 31, 2008 (incorporated by
reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q, as filed
on February 6, 2009)
|
10.4(a)**
|
Schedule
of Supplemental Executive Retirement Plan Agreements for named executive
officers (incorporated by reference to Exhibit 10.4(a) to the Quarterly
Report on Form 10-Q, as filed on February 6, 2009)
|
10.4(b)**
|
Form
of Amendment of Supplemental Executive Retirement Plan Agreement between
the Company and Named Executive Officer (for future use) (incorporated by
reference to Exhibit 10.4(b) to the Quarterly Report on Form 10-Q, as
filed on February 6, 2009)
|
10.5(b)
|
Service
Agreement for Rate Schedule SS-1by and between NJNG and Texas Eastern
Transmission Company, dated as of June 21, 1995 (incorporated by reference
to Exhibit 10-5B to the Annual Report on Form 10-K for the year ended
September 30, 1996, as filed on December 30, 1996)
|
10.6**
|
The
Company’s Officer Incentive Plan effective as of October 1, 1986
(incorporated by reference to Exhibit 10-6 to the Annual Report on Form
10-K for the year ended September 30, 1996, as filed on December 30,
1996)
|
10.7
|
Lease
Agreement between NJNG, as Lessee and State Street Bank and Trust Company
of Connecticut, National Association, as Lessor for NJNG’s Headquarters
Building dated December 21, 1995 (incorporated by reference to Exhibit
10-7 to the Annual Report on Form 10-K for the year ended September 30,
1996, as filed on December 30, 1996)
|
10.10**
|
The
Company’s Long-Term Incentive Compensation Plan, as amended, effective as
of October 1, 1995 (incorporated by reference to Appendix A to the Proxy
Statement for the 1996 Annual Meeting as filed on January 4,
1996)
|
10.12**
|
Employment
Continuation Agreement between the Company and Laurence M. Downes dated
December 31, 2008 (incorporated by reference to Exhibit 10.12 to the
Quarterly Report on Form 10-Q, as filed on February 6,
2009)
|
10.12(a)**
|
Schedule
of Employee Continuation Agreements (incorporated by reference to Exhibit
10.12(a) to the Quarterly Report on Form 10-Q, as filed on February 6,
2009)
|
10.16**
|
Summary
of Company’s Non-Employee Director Compensation (incorporated by reference
to Exhibit 10.16 to the Current Report on Form 8-K as filed on November
13, 2008)
|
10.17**
|
The
Company’s 2007 Stock Award and Incentive Plan (as amended and restated
January 1, 2009) (incorporated by reference to Exhibit 10.17 to the
Quarterly Report on Form 10-Q, as filed on February 6,
2009)
|
10.18**
|
2007
Stock Award and Incentive Plan Form of Stock Option Agreement
(incorporated by reference to Exhibit 10.18 to the Quarterly Report on
Form 10-Q, as filed on February 6,
2009)
|
Page
109
New
Jersey Resources Corporation
Exhibit
Number
|
Exhibit
Description
|
10.19**
|
2007
Stock Award and Incentive Plan Form of Performance Units Agreement
(incorporated by reference to Exhibit 10.19 to the Quarterly Report on
Form 10-Q, as filed on February 6, 2009)
|
10.20**
|
2007
Stock Award and Incentive Plan Form of Restricted Stock Agreement
(incorporated by reference to Exhibit 10.20 to the Quarterly Report on
Form 10-Q, as filed on February 6,
2009)
|
10.21**
|
2007
Stock Award and Incentive Plan Form of Performance Share Agreement
(incorporated by reference to Exhibit 10.21 to the Quarterly Report on
Form 10-Q, as filed on February 6, 2009)
|
10.22**
|
2007
Stock Award and Incentive Plan Form of Performance-Based Restricted Stock
Agreement (incorporated by reference to Exhibit 10.29 to the Current
Report on Form 8-K, as filed on April 1, 2009)
|
10.23
|
Limited
Liability Company Agreement of Steckman Ridge GP, LLC dated as of March 2,
2007 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q, as filed on May 3, 2007)
|
10.24
|
Limited
Partnership Agreement of Steckman Ridge, LP dated as of March 2, 2007
(incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q, as filed on May 3, 2007)
|
10.25**
|
2007
Stock Award and Incentive Plan Form of Deferred Stock Retention Award
Agreement between NJRES and Joseph P. Shields dated as of December 31,
2008 (incorporated by reference to Exhibit 10.25 to the Current Report on
Form 8-K as filed on January 7, 2009)
|
10.26**
|
2007
Stock Award and Incentive Plan Form of Deferred Stock Retention Award
Agreement between NJNG and Kathleen T. Ellis dated as of December 31, 2008
(incorporated by reference to Exhibit 10.26 to the Current Report on Form
8-K as filed on January 7, 2009)
|
10.27**
|
New
Jersey Resources Corporation Savings Equalization Plan (incorporated by
reference to Exhibit 10.27 to the Quarterly Report on Form 10-Q, as filed
on February 6, 2009)
|
10.28**
|
New
Jersey Resources Corporation Pension Equalization Plan (incorporated by
reference to Exhibit 10.28 to the Quarterly Report on Form 10-Q, as filed
on February 6, 2009)
|
10.29**
|
New
Jersey Resources Corporation Directors’ Deferred Compensation Plan
(incorporated by reference to Exhibit 10.25 to the Quarterly Report on
Form 10-Q, as filed on February 6, 2009)
|
10.30**
|
New
Jersey Resources Corporation Officers’ Deferred Compensation Plan
(incorporated by reference to Exhibit 10.26 to the Quarterly Report on
Form 10-Q, as filed on February 6, 2009)
|
21.1*
|
Subsidiaries
of the Registrant
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm
|
31.1*
|
Certification
of the Chief Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act
|
31.2*
|
Certification
of the Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act
|
32.1*†
|
Certification
of the Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act
|
32.2*†
|
Certification
of the Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act
|
_______________________________
* Filed
herewith
** Denotes
compensatory plans or arrangements or management contracts
† This
certificate accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 or any other provision of the Securities Exchange Act of
1934, as amended.
Page 110