<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998 Commission file number 1-8359
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
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:
The number of shares outstanding of $2.50 par value Common Stock as of February
5, 1999 was 17,895,018.
<PAGE> 2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
(Thousands, except per share data) 1998 1997
-------- --------
<S> <C> <C>
OPERATING REVENUES ............................... $244,590 $220,395
-------- --------
OPERATING EXPENSES
Gas purchases .................................. 176,337 155,075
Operation and maintenance ...................... 21,137 20,217
Depreciation and amortization .................. 7,399 7,057
Energy and other taxes ......................... 10,480 12,899
State income taxes ............................. 2,325 457
Federal income taxes ........................... 6,941 5,928
-------- --------
Total operating expenses ......................... 224,619 201,633
-------- --------
OPERATING INCOME ................................. 19,971 18,762
Other income, net ................................ 552 1,318
Interest charges, net ............................ 5,280 5,467
-------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS .......... 15,243 14,613
Preferred stock dividends ........................ 91 397
-------- --------
NET INCOME ....................................... $ 15,152 $ 14,216
======== ========
EARNINGS PER COMMON SHARE
BASIC ................................... $ .85 $ .80
======== ========
DILUTED ................................. $ .84 $ .79
======== ========
DIVIDENDS PER COMMON SHARE ....................... $ .42 $ .41
======== ========
AVERAGE SHARES OUTSTANDING
BASIC ................................... 17,844 17,844
======== ========
DILUTED ................................. 17,963 17,938
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
(Thousands) 1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income .......................................... $ 15,152 $ 14,216
Adjustments to reconcile net income to cash flows
Depreciation and amortization ...................... 7,399 7,057
Amortization of deferred charges ................... 770 562
Deferred income taxes .............................. 6,118 5,615
Changes in working capital ......................... (25,615) (39,288)
Other, net ......................................... (893) (4,439)
-------- --------
Net cash flows from (used in) operating activities ..... 2,931 (16,277)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt ........................ 6,800 13,500
Proceeds from common stock .......................... 2,317 13
Payments of long-term debt .......................... -- (20,500)
Payments of preferred stock ......................... (20,000) --
Purchase of treasury stock .......................... (129) (1,300)
Payments of common stock dividends .................. (7,304) (7,161)
Net change in short-term debt ....................... 32,300 29,340
-------- --------
Net cash flows from financing activities ............... 13,984 13,892
-------- --------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Expenditures for
Utility plant ...................................... (11,038) (9,079)
Real estate properties ............................. (23) (634)
Cost of removal .................................... (1,052) (535)
Proceeds from sale of assets ........................ -- 15,200
-------- --------
Net cash flows (used in) from investing activities ..... (12,113) 4,952
-------- --------
Net change in cash and temporary investments ........... 4,802 2,567
Cash and temporary investments at September 30 ......... 2,476 5,467
-------- --------
Cash and temporary investments at December 31 .......... $ 7,278 $ 8,034
======== ========
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables ......................................... $(83,528) $(65,530)
Inventories ......................................... 14,887 (3,685)
Deferred gas costs .................................. 9,037 (1,286)
Accounts payable .................................... (11,546) (6,144)
Purchased gas ....................................... 40,553 34,217
Prepaid and accrued taxes, net ...................... 11,359 12,740
Customers' credit balances and deposits ............. 556 (4,381)
Other, net .......................................... (6,933) (5,219)
-------- --------
Total .................................................. $(25,615) $(39,288)
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized) .............. $ 6,545 $ 6,251
Income taxes ....................................... $ 1,737 --
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1998 1997
(Thousands) (unaudited) (unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost .................. $ 906,070 $ 895,321 $ 863,339
Real estate properties, at cost ......... 24,513 24,490 23,515
----------- ----------- -----------
930,583 919,811 886,854
Accumulated depreciation and amortization (245,767) (239,814) (224,617)
----------- ----------- -----------
Property, plant and equipment, net ...... 684,816 679,997 662,237
----------- ----------- -----------
CURRENT ASSETS
Cash and temporary investments .......... 7,278 2,476 8,034
Construction fund ....................... 16,000 16,000 --
Customer accounts receivable ............ 111,295 48,805 88,073
Unbilled revenues ....................... 24,548 3,795 29,888
Allowance for doubtful accounts ......... (1,622) (1,907) (2,508)
Gas in storage, at average cost ......... 37,686 52,797 37,841
Materials and supplies, at average cost . 4,070 3,846 5,441
Deferred gas costs ...................... 5,249 16,589 5,659
Prepaid state taxes ..................... 568 11,752 133
Other ................................... 11,618 7,324 12,240
----------- ----------- -----------
Total current assets .................... 216,690 161,477 184,801
----------- ----------- -----------
DEFERRED CHARGES AND OTHER
Equity investments ...................... 8,856 9,196 6,720
Regulatory assets ....................... 40,553 40,297 38,413
Long-term deferred gas costs ............ 24,136 21,833 30,043
Other ................................... 33,753 30,218 17,487
----------- ----------- -----------
Total deferred charges and other ........ 107,298 101,544 92,663
----------- ----------- -----------
Total assets ............................ $ 1,008,804 $ 943,018 $ 939,701
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1998 1997
(Thousands) (unaudited) (unaudited)
---------- ---------- ----------
<S> <C> <C> <C>
CAPITALIZATION
Common stock equity ................... $ 301,229 $ 290,804 $ 286,327
Redeemable preferred stock ............ 640 20,640 20,760
Long-term debt ........................ 333,541 326,741 284,407
---------- ---------- ----------
Total capitalization .................. 635,410 638,185 591,494
---------- ---------- ----------
CURRENT LIABILITIES
Current maturities of long-term debt .. 1,957 1,957 138
Short-term debt ....................... 93,000 60,700 77,340
Purchased gas ......................... 88,014 47,461 92,096
Accounts payable and other ............ 18,160 29,706 22,487
Dividends payable ..................... 7,507 7,304 7,322
Accrued taxes ......................... 7,204 7,029 6,565
Customers' credit balances and deposits 14,208 13,652 9,145
---------- ---------- ----------
Total current liabilities ............. 230,050 167,809 215,093
---------- ---------- ----------
DEFERRED CREDITS
Deferred income taxes ................. 79,877 73,759 69,116
Deferred investment tax credits ....... 10,580 10,628 10,847
Deferred revenue ...................... 19,088 19,375 20,253
Other ................................. 33,799 33,262 32,898
---------- ---------- ----------
Total deferred credits ................ 143,344 137,024 133,114
---------- ---------- ----------
Total capitalization and liabilities .. $1,008,804 $ 943,018 $ 939,701
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The preceding financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC). The September 30, 1998 balance sheet data is derived from the audited
financial statements of New Jersey Resources Corporation (the Company). Although
management believes that the disclosures are adequate to make the information
presented not misleading, it is recommended that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's 1998 Annual Report on Form 10-K.
In the opinion of management, the information furnished reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results of the interim periods. Because of the seasonal
nature of the Company's utility operations and other factors, the results of
operations for the interim periods presented are not indicative of the results
to be expected for the entire year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries -- New Jersey Natural Gas Company (NJNG), NJR Energy
Holdings Corporation (Energy Holdings) and NJR Development Company (NJR
Development). NJR Energy Services Company (Energy Services), New Jersey Natural
Energy Company (Natural Energy) and NJR Energy Corporation (NJR Energy) are
wholly-owned subsidiaries of Energy Holdings and Commercial Realty & Resources
Corp. (CR&R), is a wholly-owned subsidiary of NJR Development. Significant
intercompany accounts and transactions have been eliminated.
3. New Accounting Standards
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130 "Reporting Comprehensive Income," which states that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 also requires
that the Company classify items of other comprehensive income by their nature in
a financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in-capital in the
equity section of a statement of financial position. The impact of adopting SFAS
No. 130 does not have a material effect on either the Company's financial
condition or results of operations.
In June 1997, the Financial Accounting Standards Boards (FASB) issued SFAS
No. 131 "Disclosure About Segments of an Enterprise and Related Information" and
in February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits." These statements will be adopted
for the fiscal year ending 1999. It is management's opinion that these
statements will not have a material effect on either the Company's financial
condition or results of operations. In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Investments and Hedging Activities," which
5
<PAGE> 7
must be adopted by the quarter ending December 31, 1999. The Company is
currently evaluating the effects of SFAS No. 133 on its financial condition and
results of operations, which will vary based on the Company's use of derivative
instruments at the time of adoption.
4. Capitalized Interest
The Company's capitalized interest totaled $182,000 and $193,000 for the
three months ended December 31, 1998 and 1997, respectively.
5. Legal and Regulatory Proceedings
a. Levelized Gas Adjustment (LGA) and Other Adjustment Clauses
In September 1998, NJNG filed with New Jersey Board of Public Utilities (BPU)
to extend the current $.1842 per therm LGA billing factor for a 15-month term
rather than for 12 months. By using the 15-month LGA billing factor, the Company
would move to a calendar year basis for LGA recovery. Further, NJNG proposed a
flexible LGA pricing mechanism to transition toward market-based pricing. The
15-month proposal is currently being discussed by the parties to the proceeding.
NJNG also requested the collection of $15.8 million of Weather Normalization
Clause (WNC) margins accrued but not collected due to the impact of
warmer-than-normal weather during fiscal year 1998 and minimal adjustments to
its Remediation Adjustment (RA), Demand Side Management Adjustment Clause
(DSMAC) and Transportation Education and Implementation charge (TEI) factors.
b. Energy Deregulation Legislation
The "Electric Discount and Energy Restructuring Act" was signed into law by
Governor Whitman on February 9, 1999. The Act includes various provisions
relating to natural gas utilities. These provisions provide all customer classes
with the ability to choose their natural gas supplier other than their incumbent
utility by December 31, 1999. The Act also allows continuation of the utilities
role as a gas supplier at least until December 31, 2002, when the BPU must
decide whether to make the gas supply function competitive. The Act allows
natural gas utilities to stay in competitive services (i.e., appliance
services), and customers to choose their provider of account services (i.e.,
meter reading, billing and collections) by December 31, 2000.
c. Gas Remediation
NJNG has identified eleven former manufactured gas plant (MGP) sites, dating
back to the late 1800's and early 1900's, which contain contaminated residues
from the former gas manufacturing operations. Ten of the eleven sites in
question were acquired by NJNG in 1952. All of the gas manufacturing operations
ceased at these sites at least by the mid-1950's and in some cases had been
discontinued many years earlier, and all of the old gas manufacturing facilities
were subsequently dismantled by NJNG or the former owner. NJNG is currently
involved in administrative proceedings with the New Jersey Department of
Environmental Protection (NJDEP) and local government authorities with respect
to the plant sites in question, and is 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. Since October 1989, NJNG has entered into
Administrative Consent
6
<PAGE> 8
Orders or Memoranda of Agreement with the NJDEP covering all eleven sites. These
documents establish the procedures to be followed by NJNG in developing a final
remedial clean-up plan for each site.
Most of the cost of such studies and investigations is being shared under an
agreement with the former owner and operator of ten of the MGP sites. Through a
Remediation Rider approved by the BPU, NJNG is recovering its expenditures
incurred through June 1997 over a seven-year period. Costs incurred subsequent
to June 30, 1997 will be reviewed annually and, subject to BPU approval,
recovered over seven-year periods.
In March 1995, NJNG filed a complaint in New Jersey Superior Court against
various insurance carriers for declaratory judgment and for damages arising from
such defendants' breach of their contractual obligations to defend and/or
indemnify NJNG against liability for claims and losses (including defense costs)
alleged against NJNG relating to environmental contamination at the former MGP
sites and other sites. NJNG is seeking (i) a declaration of the rights, duties
and liabilities of the parties under various primary and excess liability
insurance policies purchased from the defendants by NJNG from 1951 through 1985,
and (ii) compensatory and other damages, including costs and fees arising out of
defendants' obligations under such insurance policies. The complaint was amended
in July 1996 to name Kaiser-Nelson Steel & Salvage Company (Kaiser-Nelson) and
its successors as additional defendants. The Company is seeking (a) a
declaration of the rights, duties and liabilities of the parties under
agreements with respect to claims against the Company that allege property
damage caused by various substances used, handled or generated by NJNG or the
predecessor in title that were removed from several of the MGP sites by
Kaiser-Nelson, and (b) money damages or compensatory relief for the harm caused
by Kaiser-Nelson's aforementioned actions. Discovery is proceeding in this
matter. There can be no assurance as to the outcome of these proceedings.
d. South Brunswick Asphalt, L.P.
NJNG has been named a defendant in a civil action commenced in New Jersey
Superior Court by South Brunswick Asphalt, L.P. (SBA) and its affiliated
companies seeking damages arising from alleged environmental contamination at
three sites owned or occupied by SBA and its affiliated companies. Specifically,
the suit charges that tar emulsion removed from 1979 through 1983 by an
affiliate of SBA (Seal Tite, Inc.) from NJNG's former gas manufacturing plant
sites has been alleged by the NJDEP to constitute a hazardous waste and that the
tar emulsion has contaminated the soil and ground water at the three sites in
question. In February 1991, the NJDEP issued letters classifying the tar
emulsion/sand and gravel mixture at each site as dry industrial waste, a
non-hazardous classification. In April 1996, in a meeting with all parties to
the litigation and the judge assigned to the case, the NJDEP confirmed the
non-hazardous classification, which will allow for conventional disposal. In May
1997, SBA submitted applications to NJDEP for permits to allow SBA to recycle
the tar emulsion/sand and gravel mixture at each site into asphalt, to be used
as a paving material. These applications are currently under review by NJDEP. In
July 1998, SBA filed an amended complaint adding NJDEP to the proceedings to
facilitate the resolution of the applications. The Company does not believe that
the ultimate resolution of these matters will have a material adverse effect on
its consolidated financial condition or results of operations.
7
<PAGE> 9
e. BPU Inquiry
In August 1998, NJNG was informed by the BPU that the Audit Division staff
had concluded an informal review of certain gas purchases made by NJNG from 1989
to 1995, including purchases relating to the Freehold cogeneration project, and
was recommending that its conclusions be referred to the BPU's counsel for a
determination of whether any of the BPU's statutes or regulations may have been
violated. The Company has not been informed of the results of that referral. The
Company and NJNG are currently in discussions with senior staff of the BPU
concerning a possible resolution of the open audits and related BPU docket
items, including those related to the subject matter of the Audit Division
staff's informal review and the proper disposition of any proceeds NJNG may
receive from a settlement with the owners of the Freehold cogeneration project.
Although the Company cannot currently predict the outcome of such discussions,
management does not believe that a resolution of these matters as a whole would
have a material adverse effect on the Company's financial condition or results
of operations.
f. Combe Fill South Landfill
NJNG has been joined as a third-party defendant in two civil actions
commenced in October 1998 in the U.S. District Court for the district of New
Jersey by the U.S. Environmental Protection Agency and NJDEP. These two actions
seek recovery of cost expended in connection with and for continuation of the
cleanup of the Combe Fill South Landfill, a Superfund site in Chester, New
Jersey. The plaintiffs claim that hazardous waste NJNG is alleged to have
generated was sent to the site. There are approximately 180 defendants and
third-party defendants in the actions thus far. Each third-party complaint seeks
damages under CERCLA Section 113 and the New Jersey Spill Act, declaratory
relief holding each third-party defendant strictly liable, and contribution and
indemnification under the common law of the United States and New Jersey. No
specific monetary demands or scope of cleanup work have been set forth to date.
NJNG is in the process of investigating the allegations, formulating its
position with respect thereto, and notifying its insurance carriers. NJNG is
currently unable to predict the extent, if any, to which it may have cleanup or
other liability with respect to these civil actions, but would seek recovery of
any such costs through the rate-making process. No assurance can be given as to
the timing or extent of the ultimate recovery of any such costs.
g. Various
The Company is party to various other claims, legal actions and complaints
arising in the ordinary course of business. In management's opinion, the
ultimate disposition of these matters will not have a material adverse effect on
its financial condition or results of operations.
6. Earnings Per Share
The Company has adopted SFAS No. 128 "Earnings per Share" which establishes
standards for computing and presenting basic and diluted earnings per share
(EPS). The incremental shares required for inclusion in the denominator for the
diluted EPS calculation were 119,874 and 91,636 for the three months ended
December 31, 1998 and 1997, respectively. These shares relate to stock options
and restricted stock and were calculated using the treasury stock method. The
numerator for both the basic and diluted calculation was net income. The impact
was a one-cent dilutive effect for both the three months ended December 31, 1998
and 1997.
8
<PAGE> 10
7. Other
At December 31, 1998 there were 17,874,296 shares of common stock
outstanding and the book value per share was $16.85.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998
A. RESULTS OF OPERATIONS
Consolidated net income for the quarter ended December 31, 1998 increased
by 7% to $15.2 million, compared with $14.2 million for the same period last
year. Basic EPS increased 6% to $.85, compared with $.80 last year. Diluted EPS
also increased 6% to $.84, compared with $.79 last year. The increase in
consolidated earnings was attributed primarily to continued profitable customer
growth at the Company's principal subsidiary, NJNG, and improved overall
unregulated operating results.
NJNG OPERATIONS
NJNG's financial results are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
------- -------
(Thousands)
<S> <C> <C>
Gross margin
Residential and commercial $43,679 $41,550
Firm transportation 7,159 5,598
Interruptible 148 130
Off-system and capacity management 1,321 1,356
------- -------
Total gross margin $52,307 $48,634
======= =======
Appliance service revenues $ 3,057 $ 2,875
======= =======
Operating income before federal income taxes $24,776 $25,119
======= =======
Net income $14,118 $13,735
======= =======
</TABLE>
Gross Margin
Prior to January 1, 1998, gross margin was defined as gas revenues less gas
costs and gross receipts and franchise taxes. Effective January 1, 1998, gross
margin is defined as gas revenues less gas costs, sales tax and a transitional
energy facilities assessment (TEFA). Gross margin provides a more meaningful
basis for evaluating utility operations, since gas costs, sales tax and TEFA are
passed through to customers and, therefore, have no effect on earnings. Gas
costs are charged to operating expenses on the basis of therm sales at the rates
included in NJNG's tariff. The LGA clause allows NJNG to recover gas costs that
exceed the level reflected in its base rates. Sales tax is calculated at 6% of
revenue and excludes sales to other utilities, off-system sales and federal
accounts. TEFA is calculated on a per therm basis and excludes sales to other
utilities and off-system sales.
10
<PAGE> 12
State income taxes are included in operating expenses. The revised tax
structure allows NJNG to be more competitive with other energy providers, and
has not adversely impacted NJNG's net income.
The comparison of gross margin between periods will be impacted by the
state tax change described above.
Residential and Commercial
Residential and commercial (i.e., firm) gross margin is subject to the WNC,
which provides for a revenue adjustment if the weather varies by more than
one-half of 1% from normal, or 20-year average, weather. The WNC does not fully
protect NJNG from factors such as unusually warm weather and declines in
customer usage patterns, which were set at the conclusion of NJNG's last base
rate case in January 1994. The accumulated adjustment from one heating season
(i.e., October-May) is billed or credited to customers in subsequent periods.
This mechanism reduces the variability of both customer bills and NJNG's
earnings due to weather fluctuations.
Gross margin from sales to firm customers increased by $2.1 million during
the first fiscal quarter, compared with the same period last year. The increase
was due to the impact of 11,659 customer additions during the twelve months
ended December 31, 1998, the impact of the WNC and the aforementioned changes in
state taxes which more than offset lower therm sales. Firm sales for the three
months of this fiscal year decreased by 13% compared with the same period last
year due to 15% warmer weather and the impact of customers switching to firm
transportation service, which more than offset customer growth.
The weather for the three months ended December 31, 1998 was 11% warmer
than normal, which, in accordance with the WNC, resulted in $3.8 million of
gross margin being accrued for future recovery from customers.
Firm Transportation
Gross margin from firm transportation increased by $1.6 million, or 28%,
reflecting an increase in the number of customers choosing this service. NJNG
transported 2.6 billion cubic feet (Bcf) and 2.1 Bcf for the three months ended
December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997 NJNG
provided firm transportation service to 28,512 and 8,200 customers,
respectively. The growth in the number of firm transportation customers is due
primarily to NJNG's residential pilot program which allows up to 40,000
residential customers to change natural gas suppliers. Under this program 24,459
and 4,834 residential customers were using this service at December 31, 1998 and
1997, respectively. The number of transportation customers are expected to grow
as customers select other suppliers. Under the new legislation NJNG's total
gross margin is not negatively impacted by customers who utilize its firm
transportation service and purchase their gas from another supplier, as NJNG's
tariffs are designed such that no profit is earned on the commodity portion of
sales to firm customers, and all customers who do purchase gas from another
supplier continue to utilize NJNG for transportation.
11
<PAGE> 13
Off-System and Capacity Management
In order to reduce the overall cost of its gas supply commitments, NJNG has
entered into contracts to sell gas to customers outside its franchise territory
when the gas is not needed for system requirements. These sales enable NJNG to
spread its fixed demand costs, which are charged by pipelines to access their
supplies year round, over a larger and more diverse customer base. NJNG also
participates in the capacity release market on the interstate pipeline network
when the capacity is not needed for its own system requirements. Through
September 30, 1998, NJNG retained 20% of the gross margin from these sales, with
the balance credited to firm sales customers through the LGA clause. Effective
October 1, 1998 through December 31, 2001, NJNG will retain 15% of the gross
margin from these sales.
Also effective October 1, 1998, is a new incentive mechanism designed to
reduce the fixed cost of NJNG's gas supply portfolio. Any savings achieved
through the permanent reduction or replacement of capacity or other services
will be shared between customers and shareowners. Under this program, NJNG
retains 40% of the savings for the first 12 months following any transaction and
retains 15% for the remaining period through December 31, 2001, with the
balances credited to firm sales customers through the LGA clause.
NJNG's off-system and capacity management sales totaled 38.6 Bcf and
generated $1.3 million of gross margin in the first quarter of fiscal 1999,
compared with 22.7 Bcf and $1.4 million of gross margin in the same period a
year ago. The margin decrease was due primarily to warmer weather, which
increased the availability of supply and capacity and resulted in lower margins
per therm.
Interruptible
NJNG services 49 customers through interruptible sales and/or
transportation tariffs. Sales made under the interruptible sales tariff are
priced on market-sensitive oil and gas parity rates. Although therms sold and
transported to interruptible customers represented 3% and 6% of total therm
throughput in the three months ended December 31, 1998 and 1997, respectively,
they accounted for less than 1% of the total gross margin in each period due to
the margin-sharing formulas that govern these sales. Under these formulas, NJNG
retains 10% of the gross margin from the interruptible sales and 5% of the gross
margin from transportation sales, with the balance credited to firm sales
customers through the LGA clause.
Operating Income Before Federal Income Taxes
Operating income before income taxes decreased by $343,000, or 1%, in the
first quarter of fiscal 1999, compared with the same period last year, primarily
due to higher operation and maintenance costs, which were partially offset by
customer growth and increased appliance service revenues.
Net Income
Net income increased by $383,000, or 3%, in the first quarter of fiscal
1999, compared with the same period last year, primarily due to lower preferred
stock dividends, which resulted from the redemption of NJNG's $20 million 7.72%
series preferred stock in October 1998, and lower interest costs, which more
than offset lower operating income before federal taxes.
12
<PAGE> 14
ENERGY HOLDINGS OPERATIONS
Energy Holdings' consolidated financial results, which include Energy
Services and Natural Energy, the Company's unregulated fuel and capacity
management and marketing subsidiaries, and the continuing operations of NJR
Energy, which consist primarily of its equity investment in the Iroquois Gas
Transmission System, L.P., are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
------- -------
(Thousands)
<S> <C> <C>
Revenues $75,406 $52,306
======= =======
Operating income before federal income taxes $ 1,667 $ 749
======= =======
Net income $ 913 $ 401
======= =======
</TABLE>
Energy Holdings revenues increased for the three months ended December 31,
1998, compared to the same period last year, reflecting primarily higher fuel
and capacity management sales. Operating income before federal income taxes and
net income increased due primarily to higher margins from daily gas sales and
fuel management agreements, partially offset by lower margins from retail sales.
Energy Service's gas under management totaled 30.5 Bcf and 23.3 Bcf, and
retail gas sales totaled 1.9 Bcf and 2.1 Bcf for the three months ended December
31, 1998 and 1997, respectively.
NJR DEVELOPMENT OPERATIONS
NJR Development's consolidated financial results, which consist solely of
CR&R's operations, are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
---- ----
(Thousands)
<S> <C> <C>
Revenues $ 251 $ 155
====== ======
Other income, net $ 102 $1,035
====== ======
Net income $ 27 $ 272
====== ======
</TABLE>
In 1996, CR&R entered into a sale-leaseback transaction which generated a
pre-tax gain of $17.8 million, which is included in Deferred revenue and is
being amortized to Other income, net over 25 years in accordance with generally
accepted accounting principles. The primary tenant of the facility, NJNG, is
leasing the building under a long-term master lease agreement and continues to
occupy a majority of the space in the building.
13
<PAGE> 15
In fiscal 1998, CR&R sold a 280,000 square-foot office building for $15.6
million. Other income, net for the three months ended December 31, 1997,
includes $900,000 related to this transaction.
THE YEAR 2000 ISSUE
The Company's overall goal is to be Year 2000 ready. "Year 2000 ready"
means that critical systems, devices, applications or business relationships
have been evaluated and are expected to be suitable for continued use into and
beyond the Year 2000, or contingency plans are in place.
The Company began addressing the Year 2000 issue in 1994 by assessing its
enterprise computer systems, such as general ledger, payroll, inventory control,
accounts receivable and Customer Information and Billing System (CIS). The
majority of these systems have been replaced and have been running the Company's
day-to-day computing environment since 1995. The vendor of the software systems
notified the Company that the new CIS, installed in August 1997, is Year 2000
compliant and the balance of the systems will be compliant with a scheduled
system upgrade that will take place the first half of 1999.
In 1997, a Year 2000 Project was established to provide leadership and
direction to the Year 2000 efforts throughout the Company and its subsidiaries.
The project scope was also expanded to include "embedded" systems (such as chart
recorders, data loggers and calibration equipment), end-user computing hardware
and software, plant and corporate facilities, gas control hardware and software,
meter reading equipment and remittance processing equipment, and business
relationships with key suppliers and customers. Additionally, the Year 2000
Project includes intelligent devices used in field operations.
The Company is using a multi-step approach in conducting its Year 2000
Project. These steps are inventory, assessment, remediation, testing, and
contingency planning. The first step, an inventory of all systems and devices
with potential Year 2000 problems, was completed in May 1998. The next step,
also completed in May 1998, was to conduct an initial assessment of the
inventory to determine the state of its Year 2000 readiness. As part of the
assessment phase, remediation strategies are being identified and remediation
cost estimates are being developed. The Company will utilize both internal and
external resources to remediate and test for Year 2000 readiness. The testing
and contingency phases are scheduled to end in September 1999. The Company has
initiated formal communications with the suppliers with which it has active
contracts to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. Key vendors have
been mailed surveys regarding their Year 2000 compliance, however not all
responses have been received. The Company will continue to pursue its key
vendors to obtain their Year 2000 readiness.
Costs
The capitalized costs through December 31, 1998 of updating its enterprise
computer systems, including the CIS described above, was $18 million. The
Company expects to incur $6.2 million in 1999 for projects which will also
address Year 2000 readiness, of which $5.9 million is for new software and
hardware which the Company expects to capitalize. The costs of the projects and
the date on which the Company plans to complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third parties' Year 2000 readiness and other factors.
14
<PAGE> 16
Risk Assessment
At this time, the Company believes its most reasonably likely worst case
scenario is a temporary disruption of service to its gas customers, including
the disruptions caused by key vendors on which the Company relies for its gas
deliveries. In particular, the Company believes that most of the gas movement
components can be manually controlled. The Company has been informed that its
major gas supplier will have staff standing by at the time of transition. The
Company is assessing the risk of these scenarios and is formulating contingency
plans, currently scheduled to be completed during the second quarter of 1999, to
mitigate the potential impact.
Contingency Plans
Contingency plans will be prepared so that the Company's critical business
processes can be expected to continue to function on January 1, 2000 and beyond.
The Company's contingency plans will be structured to address both remediation
of systems and their components and overall business operating risk. The work on
the contingency plan is focusing primarily on high priority items that affect
customer safety, continuation of service and revenue. These plans are intended
to mitigate both internal risks as well as potential risks in the supply chain
of the Company's suppliers and customers. The Company's Year 2000 project is
designed to provide corrective action with respect to Year 2000 risks. If the
plan is not successfully carried out in a timely manner, or if unforeseen events
occur, Year 2000 problems could have a material adverse impact on the Company.
Management does not expect such problems to have such an effect on its financial
position or results of operations.
B. LIQUIDITY AND CAPITAL RESOURCES
In order to meet the working capital and external debt financing
requirements of its unregulated subsidiaries, as well as its own working capital
needs, the Company maintains committed credit facilities with a number of banks
totaling $105 million. At December 31, 1998, $66.1 million was outstanding under
these agreements. NJNG satisfies its debt needs by issuing short-term and
long-term debt based upon its own financial profile. The Company meets the
common equity requirements of each subsidiary, if any, through new issuances of
the Company's common stock, including the proceeds from its Automatic Dividend
Reinvestment Plan (DRP). The DRP also allows for the purchase of shares in the
open market to satisfy the plan's needs. The Company can switch funding options
every 90 days.
NJNG
The seasonal nature of NJNG's operations creates large short-term cash
requirements, primarily to finance gas purchases and customer accounts
receivable. NJNG obtains working capital for these requirements, as well as for
the temporary financing of construction expenditures, sinking fund needs and
energy tax payments, through the issuance of commercial paper and short-term
bank loans. To support the issuance of commercial paper, NJNG maintains
committed credit facilities totaling $120 million.
Remaining fiscal 1999 construction expenditures are estimated at $43
million. These expenditures will be incurred for services, mains and meters to
support NJNG's continued customer growth, and general system renewals and
improvements. NJNG expects to finance these expenditures through internal
generation and the issuance of short-term and long-term debt. The timing and mix
of these issuances will
15
<PAGE> 17
be geared toward maintaining a common equity ratio of approximately 50%, which
is consistent with maintaining its current short-term and long-term credit
ratings.
ENERGY HOLDINGS
Energy Holdings does not currently expect any significant capital
expenditures or external financing requirements in fiscal 1999.
NJR DEVELOPMENT
CR&R's future capital expenditures will be limited to the fit-up of
existing tenant space, developing existing acreage and additional investments to
preserve the value of its existing real estate holdings. CR&R does not currently
expect any significant capital expenditures or external financing requirements
in fiscal 1999.
16
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK MANAGEMENT
Commodity Market Risks
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 hedge against such fluctuations, the Company and its
subsidiaries have entered into futures contracts, options agreements and
over-the-counter swap agreements. The Company's natural gas businesses are
conducted through three of its operating subsidiaries. First, NJNG is a
regulated utility whose recovery of gas costs is protected by the LGA, but to
further hedge against price fluctuations, utilizes futures and options through
its financial risk management program. Second, Energy Services has entered into
fixed-price sales contracts with wholesale customers for an aggregate of
approximately 3.49 Bcf of natural gas at prices ranging from $1.75 to $2.56 per
Mmbtu. Energy Services has also hedged its commitments to purchase natural gas
for the retail customers of Natural Energy and hedged purchases and sales of
storage gas. Finally, NJR Energy has entered into a long-term, fixed-price
contract to sell approximately 30.9 Bcf of natural gas to a gas marketing
company at prices ranging from $2.43 to $4.41 per Mmbtu.
Natural gas is a nationally traded commodity, and its prices are effectively
determined 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 national balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
NJNG entered into futures contracts to buy and sell 5.1 Bcf of natural gas
through October 1999 at prices ranging from $1.900 to $2.655 per Mmbtu, and as
of December 31, 1998, NJNG had a deferred unrealized loss of approximately $1.8
million from these contracts.
As of December 31, 1998, Energy Services had entered into futures contracts
to buy 11.3 Bcf of natural gas through December 2000, at prices ranging from
$1.76 to $2.64 per Mmbtu, and had a deferred unrealized loss of $2.7 million
from these futures contracts. Energy Services also entered into natural gas swap
agreements in order to hedge its risks on 4.49 Bcf of natural gas. As of
December 31, 1998, Energy Services had a deferred unrealized loss of
approximately $813,000 from these swap agreements. Energy Services also held put
options for .4 Bcf at a strike price of $1.75 on which it had an unrealized loss
of $5,800 at December 31, 1998.
NJR Energy has hedged both its price and physical delivery risks associated
with its long-term, fixed-price sales contract with a gas marketing company (the
"Gas Sale Contract"). To hedge its price risk, NJR Energy entered into two swap
agreements. Under the terms of these two swap agreements, NJR Energy will pay to
the counterparties the identical fixed price it receives from the gas marketing
company in exchange for the payment by the counterparties of an index price plus
a spread per Mmbtu for the total volumes under the Gas Sale Contract. The swap
agreements were effective as of November 1995. In order to hedge its physical
delivery risk, NJR Energy entered into a purchase contract with a second gas
marketing company for the identical volumes it is obligated to sell under the
Gas Sale Contract. NJR
17
<PAGE> 19
Energy has agreed to pay this second gas marketing company the identical
floating price it receives under the swap agreements mentioned above.
To manage these instruments, the Company has well-defined risk management
policies and procedures, which include volumetric limits and monetary
guidelines.
All of the futures contracts, options and swap agreements described above
are held for hedging, rather than trading purposes. With respect to futures
contracts, options and swap agreements, the Company has performed a sensitivity
analysis to estimate its exposure to market risk arising from natural gas price
fluctuations using the net futures positions and the net swaps positions.
Futures contracts, options and swap agreements are substantially all settled at
the NYMEX settlement date and the related natural gas quantity is purchased or
sold in the physical market and, therefore, their notional values, which
represent the absolute sum of all outstanding natural gas futures contracts or
swap agreements, as the case may be, are not accurate measurements of risk to
the Company from those futures contracts or swap agreements. With respect to
natural gas futures contracts as of December 31, 1998, in the event of a
hypothetical 10 percent change in natural gas prices, the value of the Company's
contracts would change by approximately $2.1 million. With respect to natural
gas swap agreements as of December 31, 1998, in the event of a hypothetical 10
percent change in natural gas prices, the value of such agreements would change
by approximately $509,000 (in addition to the deferred unrealized loss of
approximately $813,000 discussed above). However, any such additional changes in
value under the futures contracts and the swap agreements would be substantially
offset by a corresponding change on the related underlying contracts that are
being hedged.
Interest Rate Risk
NJNG has total variable rate debt of $97 million, of which $56 million has
been hedged by the purchase of a 6.5% interest rate cap through the year 2003.
According to the Company's sensitivity analysis, NJNG's annual interest rate
exposure on the $56 million, based on the difference between current average
rates and the 6.5% interest rate cap, is limited to $1.1 million, net of tax. If
interest rates were to change by 100 basis points on the remaining $41 million
of variable rate debt, NJNG's interest expense, net of tax, would change by
$242,000. The Company also has variable rate debt of $59.3 million, of which $15
million is hedged through an interest rate swap agreement which fixes interest
at 9.5% through June 1999. According to the Company's sensitivity analysis, if
interest rates were to change by 100 basis points on the remaining $44.3
million, interest expense, net of tax, would change by $301,000. Subsequent to
the expiration of the interest rate swap agreement in June 1999, a 100 basis
point change would result in an additional $89,000 annual change in interest
expense, net of tax.
INFORMATION CONCERNING FORWARD LOOKING STATEMENTS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact), including, without
limitation, expected disposition of legal and regulatory proceedings, effect of
new accounting standards and impact of the Year 2000 computer issue, are
forward-looking statements. Forward-looking statements are made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon 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.
18
<PAGE> 20
The Company wishes to caution readers that the assumptions which form the
basis for forward-looking statements with respect to or that may impact earnings
for fiscal 1998 and thereafter include many factors that are beyond the
Company's ability to control or estimate precisely, such as estimates of future
market conditions and the behavior of other market participants. Among the
factors that could cause actual results to differ materially from estimates
reflected in such forward-looking statements are weather conditions, economic
conditions in NJNG's service territory, fluctuations in energy-related commodity
prices, conversion activity and other marketing efforts, the conservation
efforts of NJNG's customers, the pace of deregulation of retail gas markets,
competition for the acquisition of gas, the regulatory and pricing policies of
federal and state regulatory agencies, the availability of Canada's reserves for
export to the United States and other regulatory changes.
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.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Information required by this Item is incorporated herein by reference
to Part I, Item 1, Note 5 Legal and Regulatory Proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
On January 27, 1999, the stockholders voted upon the following
matters at the annual stockholder meeting.
(a) The election of four (4) directors, each to serve for three-year
terms expiring in 2002, and until their respective successors are duly elected
and are qualified. The results of the voting were as follows:
<TABLE>
<CAPTION>
Director For Withheld
-------- --- --------
<S> <C> <C>
Nina Aversano 14,417,769 123,720
Leonard S. Coleman 14,408,362 133,127
Lester D. Johnson 14,422,026 119,463
Dorothy K. Light 14,417,668 123,821
</TABLE>
(b) The stockholders approved the action to retain Deloitte & Touche
LLP as auditors for the fiscal year ending September 30, 1999. The votes were as
follows:
For Against Abstain
14,392,037 78,743 70,709
19
<PAGE> 21
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27-1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1998.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements 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
Date: February 12, 1999 /s/Glenn C. Lockwood
---------------------------
Glenn C. Lockwood
Senior Vice President
and Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW JERSEY
RESOURCES CORPORATION'S DECEMBER 31, 1998 FORM 10-Q, INCLUDING THE CONSOLIDATED
STATEMENTS OF INCOME, CONSOLIDATED STATEMENTS OF CASH FLOWS AND CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 662,987
<OTHER-PROPERTY-AND-INVEST> 21,829
<TOTAL-CURRENT-ASSETS> 216,690
<TOTAL-DEFERRED-CHARGES> 107,298
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,008,804
<COMMON> 45,992
<CAPITAL-SURPLUS-PAID-IN> 204,113
<RETAINED-EARNINGS> 51,124
<TOTAL-COMMON-STOCKHOLDERS-EQ> 301,229
0
640
<LONG-TERM-DEBT-NET> 302,145
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 93,000
<LONG-TERM-DEBT-CURRENT-PORT> 1,957
0
<CAPITAL-LEASE-OBLIGATIONS> 31,396
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 278,437
<TOT-CAPITALIZATION-AND-LIAB> 1,008,804
<GROSS-OPERATING-REVENUE> 244,590
<INCOME-TAX-EXPENSE> 9,266
<OTHER-OPERATING-EXPENSES> 215,353
<TOTAL-OPERATING-EXPENSES> 224,619
<OPERATING-INCOME-LOSS> 19,971
<OTHER-INCOME-NET> 552
<INCOME-BEFORE-INTEREST-EXPEN> 20,523
<TOTAL-INTEREST-EXPENSE> 5,280
<NET-INCOME> 15,243
91
<EARNINGS-AVAILABLE-FOR-COMM> 15,152
<COMMON-STOCK-DIVIDENDS> 7,304
<TOTAL-INTEREST-ON-BONDS> 12,753
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<EPS-PRIMARY> .85
<EPS-DILUTED> .84
</TABLE>
