UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
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 1-8353
NUI Corporation
(Exact name of registrant as specified in its charter)
New Jersey 22-1869941
(State of incorporation) (IRS employer identification no.)
550 Route 202-206, PO Box 760, Bedminster, New Jersey 07921-0760
(Address of principal executive offices, including zip code)
(908) 781-0500
(Registrant's telephone number, including area code)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the registrant's
classes of common stock, as of January 31, 1999: Common Stock,
No Par Value: 12,730,580 shares outstanding.
<TABLE>
NUI Corporation and Subsidiaries
Consolidated Statement of Income (Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Margins
Operating revenues $229,598 $235,938 $821,696 $693,072
2
Less - Purchased gas and fuel 174,921 175,663 628,479 483,490
Energy taxes 4,028 10,082 12,798 33,220
------- ------- ------- -------
50,649 50,193 180,419 176,362
------- ------- ------- -------
Other Operating Expenses
Operations and maintenance 24,422 25,755 95,173 96,020
Depreciation and amortization 6,915 6,554 25,313 23,806
Restructuring and other non- - - 9,686 -
recurring charges
Other taxes 1,973 2,261 9,445 9,253
Income taxes 4,923 3,755 9,475 9,897
------- ------- ------- -------
38,233 38,325 149,092 138,976
------- ------- ------- -------
Operating Income 12,416 11,868 31,327 37,386
Other Income and Expense, Net
Equity in earnings (losses) of (158) 137 (351) 1,471
TIC Enterprises, LLC, net
Other 67 846 428 2,204
Income taxes 32 (344) (27) (1,286)
------- ------- ------- -------
(59) 639 50 2,389
------- ------- ------- -------
Interest Expense 5,439 5,086 19,566 19,478
------- ------- ------- -------
Net Income $6,918 $ 7,421 $11,811 $20,297
======= ======= ======= =======
Net Income Per Share of Common
Stock $0.55 $0.60 $0.93 $1.76
===== ===== ===== =====
Dividends Per Share of Common
Stock $0.245 $0.245 $0.98 $0.95
====== ====== ===== =====
Weighted Average Number of
Shares of Common Stock
Outstanding 12,673,187 12,438,460 12,635,228 11,558,664
========== ========== ========== ==========
</TABLE>
See the notes to the consolidated financial statements<PAGE>
NUI Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
December 31, September 30,
1998 1998
(Unaudited) (*)
ASSETS
Utility Plant
Utility plant, at original cost $745,964 $737,323
Accumulated depreciation and (241,963) (234,484)
amortization
Unamortized plant acquisition 31,402 30,904
adjustments
------- -------
535,403 533,743
------- -------
Funds for Construction Held by Trustee 46,972 12,254
------- -------
Investment in TIC Enterprises, LLC,
net 23,717 23,874
------- -------
Other Investments 1,687 1,687
------- -------
Current Assets
Cash and cash equivalents 1,079 929
Accounts receivable (less
allowance for doubtful accounts of
$2,004 and $1,714, respectively) 115,899 62,673
Fuel inventories, at average cost 28,613 34,937
Unrecovered purchased gas costs 7,118 8,061
Prepayments and other 40,817 37,790
------- -------
193,526 144,390
------- -------
Other Assets
Regulatory assets 50,442 50,475
Deferred charges 10,408 10,424
------- -------
60,850 60,899
------- -------
$862,155 $776,847
======= =======
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity $227,261 $222,992
Preferred stock - -
Long-term debt 268,884 229,098
------- -------
496,145 452,090
------- -------
Capital Lease Obligations 8,126 8,566
------- -------
Current Liabilities
Notes payable to banks 106,380 87,630
Current portion of capital lease 1,805 1,810
obligations
Accounts payable, customer deposits 105,863 87,158
and accrued liabilities
Federal income and other taxes 8,275 5,635
------- -------
222,323 182,233
------- -------
Deferred Credits and Other Liabilities
Deferred Federal income taxes 63,791 62,519
Unamortized investment tax credits 5,595 5,710
Environmental remediation reserve 33,981 33,981
Regulatory and other liabilities 32,194 31,748
------- -------
135,561 133,958
------- -------
$862,155 $776,847
======= =======
*Derived from audited financial statements
See the notes to the consolidated financial statements
<TABLE>
NUI Corporation and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Twelve Months
Ended Ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Activities
Net income $6,918 $7,421 $11,811 $20,297
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 6,915 6,812 26,153 24,181
Deferred Federal income taxes 1,272 637 992 3,412
Non-cash portion of restructuring
and other non-recurring
charges - - 7,301 -
Amortization of deferred
investment tax credits (115) (105) (471) (453)
Other 693 (221) 2,505 (476)
Effect of changes in:
Accounts receivable, net (53,226) (50,279) (1,121) (31,061)
Fuel inventories 6,324 3,524 (1,069) (872)
Accounts payable, deposits
and accruals 18,705 5,915 5,443 22,012
Over recovered purchased
gas costs 943 29 2,455 4,212
Other 863 1,443 (19,129) (14,347)
------ ------ ------ ------
Net cash (used in) provided
by operating activities (10,708) (24,824) 34,870 26,905
------ ------ ------ ------
Financing Activities
Proceeds from sales of common
stock, new of treasury 105 1,400 2,363 28,721
stock purchased
Dividends to shareholders (3,106) (3,070) (12,347) (11,025)
Proceeds from issuance of
long-term debt 40,000 - 40,000 53,569
Funds for construction held by (35,881) 3,784 (22,995) 18,492
trustee, net
Repayments of long-term debt - (54,600) - (55,550)
Principal payments under capital
lease obligations (445) (441) (1,796) (1,680)
Net short-term borrowings 18,750 32,537 19,415 10,640
------ ------ ------ ------
Net cash provided by (used in) 19,423 (20,390) 24,640 43,167
------ ------ ------ ------
Investing Activities
Cash expenditures for utility plant (8,447) (11,548) (56,868) (52,637)
Investment in TIC Enterprises, LLC - - - (22,584)
Other (118) (1,578) (2,016) 257
------ ------ ----- ------
Net cash used in investing
activities (8,565) (13,126) (58,884) (74,964)
------ ------ ------ ------
Net increase (decrease) in cash
and cash equivalents $150 $(58,340) $626 $(4,892)
===== ====== ===== =====
Cash and Cash Equivalents
At beginning of period $929 $58,793 $453 $5,345
At end of period $1,079 $453 $1,079 $453
Supplemental Disclosures of
Cash Flows
Income taxes paid (refunds
received), net $(805) $2,300 $1,768 $7,855
Interest paid $5,994 $7,429 $12,923 $21,671
</TABLE>
See the notes to the consolidated financial statements<PAGE>
NUI Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include all operating divisions
and subsidiaries of NUI Corporation (collectively referred to as the
Company). The Company is a multi-state energy sales, services and
distribution company. Its utility operations distribute natural gas and
related services in six states along the eastern seaboard and comprise
Elizabethtown Gas (New Jersey), City Gas Company of Florida, North
Carolina Gas, Elkton Gas (Maryland), Valley Cities Gas (Pennsylvania)
and Waverly Gas (New York). The Company also provides retail gas sales
and related services through its NUI Energy, Inc. subsidiary; wholesale
energy brokerage and related services through its NUI Energy Brokers,
Inc. subsidiary; energy project development and consulting through its
NUI Energy Solutions, Inc. subsidiary; environmental project development
services through its NUI Environmental Group, Inc. subsidiary; customer
account management and field operations systems and services through its
Utility Business Services, Inc. subsidiary; and sales and marketing
outsourcing through its 49% equity interest in TIC Enterprises, LLC
(TIC). All intercompany accounts and transactions have been eliminated
in consolidation.
The consolidated financial statements contained herein have been
prepared without audit in accordance with the rules and regulations of
the Securities and Exchange Commission and reflect all adjustments
which, in the opinion of management, are necessary for a fair statement
of the results for interim periods. All adjustments made were of a
normal recurring nature. The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto that are included in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
The Company is subject to regulation as an operating utility by the
public utility commissions of the states in which it operates. Because
of the seasonal nature of gas utility operations, the results for
interim periods are not necessarily indicative of the results for an
entire year.
2.Common Shareholders' Equity
The components of common shareholders' equity were as follows (dollars
in thousands):
December 31, September 30,
1998 1998
Common stock, no par value $209,370 $207,356
Shares held in treasury (1,932) (1,932)
Retained earnings 23,075 19,263
Unearned employee compensation (3,252) (1,695)
------- -------
Total common shareholders' equity $227,261 $222,992
======= =======
3. Restructuring
In January 1999, the Company announced an early retirement program being
offered to 35 bargaining unit employees in New Jersey. The eligible
employees have until March 19, 1999 to accept the proposal. In
accordance with Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", the Company will
record a special termination charge associated with these retirements in
fiscal 1999. The cost of this early retirement program has not yet been
quantified by the Company.
4.Contingencies
Environmental Matters. The Company is subject to federal and state laws
with respect to water, air quality, solid waste disposal and employee
health and safety matters, and to environmental regulations issued by
the United States Environmental Protection Agency (EPA), the New Jersey
Department of Environmental Protection (NJDEP) and other federal and
state agencies.
The Company owns, or previously owned, certain properties on which
manufactured gas plants (MGP) were operated by the Company or by other
parties in the past. In New Jersey, the Company has reported the
presence of the six MGP sites to the EPA, the NJDEP and the New Jersey
Board of Public Utilities (NJBPU). In 1991, the NJDEP issued an
Administrative Consent Order for the MGP site located at South Street in
Elizabeth, New Jersey, wherein the Company agreed to conduct a remedial
investigation and to design and implement a remediation plan. In 1992
and 1993, the Company entered into a Memorandum of Agreement with the
NJDEP for each of the other five New Jersey MGP sites. Pursuant to the
terms and conditions of the Administrative Consent Order and the
Memoranda of Agreement, the Company is conducting remedial activities at
all six sites with oversight from the NJDEP.
The Company also owns, or previously owned, ten former MGP facilities
located in the states of North Carolina, South Carolina, Pennsylvania,
New York and Maryland. The Company has joined with other North Carolina
utilities to form the North Carolina Manufactured Gas Plant Group (the
MGP Group). The MGP Group has entered into a Memorandum of Understanding
with the North Carolina Department of Environment, Health and Natural
Resources (NCDEHNR) to develop a uniform program and framework for the
investigation and remediation of MGP sites in North Carolina. The
Memorandum of Understanding contemplates that the actual investigation
and remediation of specific sites will be addressed pursuant to
Administrative Consent Orders between the NCDEHNR and the responsible
parties. The NCDEHNR has recently sought the investigation and
remediation of sites owned by members of the MGP Group and has entered
into Administrative Consent Orders with respect to four such sites.
None of these four sites are currently or were previously owned by the
Company.
Based on the most recent assessment, the Company has recorded a total
reserve for environmental investigation and remediation costs of
approximately $34 million, which the Company expects to expend during
the next 20 years. The reserve is net of approximately $4 million which
will be borne by a prior owner and operator of two of the New Jersey
sites in accordance with a cost sharing agreement. Of this reserve,
approximately $30 million relates to the six New Jersey MGP sites and
approximately $4 million relates to the ten sites located outside New
Jersey. However, the Company believes that it is possible that costs
associated with conducting investigative activities and implementing
remedial activities, if necessary, with respect to all of its MGP sites
may exceed this reserve by an amount that could range up to an
additional $24 million and be incurred during a future period of time
that may range up to 50 years. Of this additional $24 million in
possible future expenditures, approximately $12 million relates to the
New Jersey MGP sites and approximately $12 million relates to the sites
located outside New Jersey. As compared with the $34 million reserve
currently recorded on the Company's books as discussed above, the
Company believes that it is less likely that this additional $24 million
will be incurred and therefore has not recorded it on its books.
The Company's prudently incurred remediation costs for the New Jersey
MGP sites have been authorized by the NJBPU to be recoverable in rates.
The most recent NJBPU base rate order permits the Company to utilize
full deferred accounting for expenditures related to its New Jersey
sites and provides for the recovery of $130,000 annually. As of July
1996, the Company is also able to recover MGP expenditures over a
rolling seven-year period through its NJBPU approved MGP Remediation
Adjustment Clause. As a result, the Company has begun rate recovery of
approximately $4.4 million of environmental costs incurred through June
30, 1997. Recovery of an additional $0.9 million in environmental costs
incurred between July 1, 1997 and June 30, 1998 is currently pending
NJBPU approval. Accordingly, the Company has recorded a regulatory asset
of approximately $34 million as of December 31, 1998, reflecting the
future recovery of environmental remediation liabilities related to New
Jersey MGP sites. The Company has also been successful in recovering a
portion of MGP remediation costs incurred for the New Jersey sites from
the Company's insurance carriers and continues to pursue additional
recovery. With respect to costs associated with the remaining MGP sites
located outside New Jersey, the Company intends to pursue recovery from
ratepayers, former owners and operators, and insurance carriers,
although the Company is not able to express a belief as to whether any
or all of these recovery efforts will be successful. The Company is
working with the regulatory agencies to prudently manage its MGP costs
so as to mitigate the impact of such costs on both ratepayers and
shareholders.
Other. The Company is involved in various claims and litigation
incidental to its business. In the opinion of management, none of these
claims and litigation will have a material adverse effect on the
Company's results of operations or its financial condition.
NUI Corporation and Subsidiaries
Summary Consolidated Operating Data
Three Months Twelve Months
Ended Ended
December 31, December 31,
1998 1997 1998 1997
Operating Revenues (Dollars
in thousands)
Firm Sales:
Residential $56,594 $63,512 $191,154 $206,899
Commercial 25,768 30,884 86,854 105,720
Industrial 3,153 6,458 16,379 23,776
Interruptible Sales 10,797 15,573 40,818 56,578
Unregulated Sales 119,427 107,034 434,144 254,471
Transportation Services 9,458 8,272 34,524 30,127
Customer Service, Appliance
Leasing and Other 4,401 4,205 17,823 15,501
------- ------ ------- -------
$229,598 $235,938 $821,696 $693,072
======= ======= ======= =======
Gas Sold or Transported
(MMcf)
Firm Sales:
Residential 6,254 7,446 20,579 23,269
Commercial 3,315 4,249 11,142 14,070
Industrial 632 1,268 3,827 4,717
Interruptible Sales 3,549 3,725 13,007 15,091
Unregulated Sales 53,157 36,986 179,589 89,309
Transportation Services 7,235 7,845 30,221 29,638
------- ------ ------ -------
74,142 61,519 258,365 176,094
======= ====== ======= =======
Average Utility Customers
Served
Firm Sales:
Residential 342,553 336,038 340,587 336,032
Commercial 23,216 24,366 23,120 24,344
Industrial 277 308 267 305
Interruptible Sales 62 121 96 121
Transportation 3,418 1,467 3,436 1,533
------- ------ ------- -------
369,526 362,300 367,506 362,335
======= ======= ======= =======
Degree Days in New Jersey
Actual 1,466 1,778 4,044 4,804
Normal 1,806 1,725 5,193 4,978
Percentage variance from
normal 19% 3% 22% 3%
warmer colder warmer warmer
Employees (period end) 1,056 1,147
Ratio of Earnings to Fixed
Charges (Twelve months 1.87 2.15
only)
NUI Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis refers to NUI Corporation and all
of its operating divisions and subsidiaries (collectively referred to as
the Company). The Company is a multi-state energy sales, services and
distribution company. It's utility operations distribute natural gas and
related services in six states along the eastern seaboard and comprise
Elizabethtown Gas (New Jersey), City Gas Company of Florida, North
Carolina Gas, Elkton Gas (Maryland), Valley Cities Gas (Pennsylvania)
and Waverly Gas (New York). The Company also provides retail gas sales
and related services through its NUI Energy, Inc. subsidiary (NUI
Energy); wholesale energy brokerage and related services through its NUI
Energy Brokers, Inc. subsidiary (NUI Energy Brokers); energy project
development and consulting through its NUI Energy Solutions, Inc.
subsidiary; environmental project development services through its NUI
Environmental Group, Inc. subsidiary; customer account management and
field operations systems and services through its Utility Business
Services, Inc. subsidiary (UBS); and sales and marketing outsourcing
through its 49% equity interest in TIC Enterprises, LLC (TIC).
Results of Operations
The results for the three and twelve-month periods ending December 31,
1998 as compared to the three and twelve-month periods ending December
31, 1997 reflect changes in the New Jersey tax law, which resulted in
variations in certain line items on the consolidated statement of income
(see Regulatory Matters). Effective January 1, 1998, New Jersey Gross
Receipts and Franchise Taxes (GRAFT) were replaced by a combination of a
New Jersey Sales and Use Tax (Sales Tax), a New Jersey Corporate
Business Tax (CBT) and a temporary Transitional Energy Facilities
Assessment (TEFA). In prior periods, GRAFT was recorded as a single
line item as a reduction of operating margins. Effective January 1,
1998, TEFA is recorded in the energy taxes line item as a reduction of
operating margins, CBT is recorded in the income taxes line item and
Sales Tax is recorded as a reduction of operating revenues. The
legislation was designed to be net income neutral over a twelve-month
period. However, for the three and twelve-month periods ending December
31, 1998, the effect of the three new taxes as compared to the periods
ended December 31, 1997 had the effect of reducing operating revenues by
approximately $3.4 and $13.3 million, reducing energy taxes by
approximately $4.1 and $16.0 million and increasing income tax expense
by approximately $1.2 and $3.0 million, respectively.
Three-Month Periods Ended December 31, 1998 and 1997
Net Income. Net income for the three-month period ended December 31,
1998 was $6.9 million, or $0.55 per share, as compared with net income
of $7.4 million, or $0.60 per share, for the three-month period ended
December 31, 1997. The decrease in the current year was primarily due
to lower other income, higher income taxes, depreciation and interest
expenses, partially offset by lower operations and maintenance expenses
and higher margins.
Net income per share in the current period was also affected by the
increased number of outstanding shares of common stock over the prior
year period, issued through various stock plans.
Operating Revenues and Operating Margins. The Company's operating
revenues include amounts billed for the cost of purchased gas pursuant
to purchased gas adjustment clauses. Such clauses enable the Company to
pass through to its customers, via periodic adjustments to customers'
bills, increased or decreased costs incurred by the Company for
purchased gas without affecting operating margins. Since the Company's
utility operations do not earn a profit on the sale of the gas
commodity, the Company's level of regulated operating revenues is not
necessarily indicative of financial performance. The Company's operating
revenues decreased by $6.3 million, or 3%, for the three-month period
ended December 31, 1998 as compared with the three-month period ended
December 31, 1997. This decrease was primarily due to a decrease of
approximately $19.3 million in revenues from the Company's utility
operations, as a result of warmer weather in all of the Company's
service territories, as well as the effect of the change in the New
Jersey tax law described above. This decrease was partially offset by
an increase of $12.8 million or 12% in revenues from the Company's
unregulated operations, primarily NUI Energy Brokers, as a result of
increased activity in these operations.
The Company's operating margins increased by $0.5 million, or 1%, for
the three-month period ended December 31, 1998 as compared with the
three-month period ended December 31, 1997. The increase is principally
due to an increase in margins of $0.7 million from the Company's
unregulated operations, as a result of improved performance in both the
Company's retail and wholesale energy subsidiaries. Operating margins
from the Company's customer service operations had a slight increase in
margins of $0.1 million. This increase was the result of customer
additions by UBS, partially offset by less customer service activity in
New Jersey as a result of a work stoppage by New Jersey bargaining unit
employees during parts of November and December. The Company's utility
distribution operations experienced a decrease in margins of
approximately $0.4 million, primarily due to the effect of warmer
weather in all of the Company's service territories. This decrease was
partially offset by the change in the New Jersey tax law described
above. The Company has weather normalization clauses in its New Jersey
and North Carolina tariffs which are designed to help stabilize the
Company's results by increasing amounts charged to customers when
weather has been warmer than normal and by decreasing amounts charged
when weather has been colder than normal. As a result of weather
normalization clauses, operating margins were approximately $2.5 million
and $0.3 million higher in the fiscal 1999 and 1998 periods,
respectively, than they otherwise would have been without such clauses.
Other Operating Expenses. Operations and maintenance expenses decreased
approximately $1.3 million, or 5%, for the three-month period ended
December 31, 1998 as compared with the three-month period ended December
31, 1997. The decrease was primarily the result of savings associated
with the Company's reorganization in the fourth quarter of fiscal 1998,
as well as lower costs in the current period associated with the growth
in the Company's unregulated operations. These decreases were partially
offset by previously deferred post-retirement benefit expenses which are
being expensed and recovered through rates effective October 1, 1998.
Depreciation and amortization expenses increased approximately $0.4
million in the current period primarily due to additional plant in
service.
Income tax expense increased by approximately $1.2 million in the
current period as a result of the change in the New Jersey tax law
described above.
Other Income and (Expense), Net. Other income and expense, net,
decreased approximately $0.7 million for the three-month period ended
December 31, 1998 as compared with the three-month period ended December
31, 1997. The decrease was primarily due to a gain on marketable
securities of approximately $0.6 million in the prior year period.
Additionally, TIC experienced lower earnings in the current period as a
result of additional investments made to grow its sales programs and
expand product lines.
Interest Expense. Interest expense increased by approximately $0.4
million for the three-month period ended December 31, 1998 as compared
with the three-month period ended December 31, 1997. The increase
principally reflects higher average short-term borrowings, as well as
the effect of interest on the Company's $40 million bond issuance in
December 1998 ( see "Financing Activities and Resources").
Twelve-Month Periods Ended December 31, 1998 and 1997
Net Income. Net income for the twelve-month period ended December 31,
1998 was $11.8 million, or $0.93 per share, as compared with $20.3
million, or $1.76 per share, for the twelve-month period ended December
31, 1997. The decrease in the current period was primarily due to after-
tax non-recurring charges of approximately $5.9 million, or $0.47 per
share, associated with the restructuring of operations, an early
retirement program and other workforce reductions in the fourth quarter
of fiscal 1998. Absent these non-recurring charges, net income would
have been $17.7 million or $1.40 per share. The decrease in recurring
earnings was mainly attributed to lower other income and higher
depreciation, partially offset by lower operations and maintenance
expenses and higher margins.
Net income per share for the twelve-month period ended December 31, 1998
was also affected by the increased average number of outstanding shares
of NUI common stock as compared with the prior twelve-month period,
principally reflecting the Company's issuance of 1.0 million shares in
September 1997 and the effect of issuances through various stock plans.
Operating Revenues and Operating Margins. The Company's operating
revenues for the twelve-month period ended December 31, 1998 increased
approximately $128.6 million, or 18.6%, as compared with the twelve-
month period ended December 31, 1997. The increase was principally due
to an increase in unregulated sales of approximately $188.3 million
resulting from increased activity by NUI Energy Brokers and NUI Energy,
customer growth and increased customer service and appliance leasing
revenues. These increases were partially offset by the effect of warmer
weather, primarily in New Jersey, where it was 16% warmer than the prior
twelve-month period and 22% warmer than normal.
The Company's operating margins increased by approximately $4.1 million,
or 2%, for the twelve-month period ended December 31, 1998 as compared
with the twelve-month period ended December 31, 1997. The increase
reflects approximately $1.9 million of additional margins generated by
the Company's utility distribution operations, approximately $2.1
million of additional customer service and appliance leasing margins and
approximately $0.1 million of additional margins related to the
Company's unregulated operations. The increase in utility distribution
margins was primarily due to the change in the New Jersey tax law and
customer growth, partially offset by the effect of warmer weather in the
current twelve-month period in all of the Company's service territories,
part of which was not fully recovered from customers under weather
normalization clauses. As a result of weather normalization clauses,
operating margins were approximately $7.8 million higher in the current
twelve-month period, than they otherwise would have been without such
clauses. In the prior twelve-month period, operating margins were
approximately $2.5 million higher than they otherwise would have been
without such clauses. The increase in margins from the customer service
operations was primarily due to customer additions by UBS, an increase
in the appliance leasing rates in Florida and increased customer service
in New Jersey.
Other Operating Expenses. Operations and maintenance expenses decreased
approximately $0.8 million, or 1%, for the twelve-month period ended
December 31, 1998 as compared with the twelve-month period ended
December 31, 1997. The decrease was primarily due to savings associated
with the Company's reorganization in the fourth quarter of fiscal 1998,
as well as a higher pension credit in the current period. These
decreases were partially offset by an increase in expenses associated
with the continued growth in the Company's unregulated operations.
The Company incurred approximately $9.7 million of pre-tax non-recurring
charges in the fourth quarter of fiscal 1998 associated with the
restructuring of the Company's operations, an early retirement program
for non-bargaining unit personnel and other workforce reductions.
The increase in depreciation and amortization expenses of approximately
$1.5 million for the twelve-month period ended December 31, 1998 as
compared to the twelve-month period ended December 31, 1997 was
primarily due to additional plant in service.
The decrease in income tax expense of approximately $0.4 million for the
twelve-month period ended December 31, 1998 was due to lower pre-tax
income, partially offset by the change in the New Jersey tax law
described above.
Other Income and Expense, Net. Other income and expense, net, decreased
approximately $2.3 million for the twelve-month period ended December
31, 1998 as compared with the 1997 period. The decrease was primarily
due to lower results from TIC in the current period as a result of
additional investments made by TIC to grow its sales programs and
increase product lines. Additionally, the prior year reflects a gain on
marketable securities of approximately $0.6 million, as well as a gain
of approximately $0.7 million from the sale of certain property in
Florida.
Regulatory Matters
On February 9, 1999 the "Electric Discount and Energy Competition
Act" was signed into law in New Jersey. The legislation has several
provisions that affect gas utilities. It provides all gas customers
with the ability to choose an alternate natural gas supplier by
December 31, 1999. At the same time, the utility will continue to
provide basic gas service through December 2002 when the New Jersey
Board of Public Utilities ("NJBPU") will decide if the gas supply
function should be made competitive. The NJBPU will also conduct
proceedings to determine whether customers should be afforded the option
of contracting with an alternative provider of billing, collection,
meter reading and other services that may be deemed competitive by
December 31, 2000.
On August 20, 1998, the NJBPU approved the Company's petition to
increase its annual purchased gas revenues in New Jersey by $9 million.
Additionally, the Company was authorized to retain 15% of margins from
utility off-system sales and capacity release credits. The Company
previously retained 20% of margins from these items.
The Company recently filed a proposed residential transportation program
to allow customers to contract with third-party suppliers by September
2001. Action on this proposal is anticipated in early 1999.
In July 1997, the State of New Jersey enacted legislation which
eliminated the current Gross Receipts and Franchise Taxes effective
January 1, 1998. These taxes were replaced with a 6% sales tax on sales
of electricity and natural gas, a corporate business tax currently paid
by all non-utility corporations in the State, and a third tax called the
Transitional Energy Facilities Assessment tax (TEFA). The legislation
was intended, in part, to provide comparability between utilities that
pay Gross Receipts and Franchise Taxes and non-utility energy companies
that do not. The TEFA tax is scheduled to be phased out over five years.
Effective January 1, 1999, a 13% reduction of TEFA was approved. These
tax changes are designed to have no effect on the Company's net income,
and will not have a material effect on working capital (See _Results of
Operations_ for the effect on the Company's operations). The Company
paid approximately $27 million to the State for these taxes in 1998.
Financing Activities and Resources
The Company had a net use of cash from operating activities of $10.7
million and $24.8 million for the three-month periods ended December 31,
1998 and 1997, respectively. The decrease in the three-month period
ended December 31, 1998 was primarily due to the timing of payments to
gas suppliers. For the twelve-month period ended December 31, 1998, the
Company's net cash provided by operating activities was $34.9 million as
compared with $26.9 million in the prior year period. This increase was
primarily due to improved collections on receivables.
Because the Company's business is highly seasonal, short-term debt is
used to meet seasonal working capital requirements. The Company also
borrows under its bank lines of credit to finance portions of its
capital expenditures, pending refinancing through the issuance of equity
or long-term indebtedness at a later date depending upon prevailing
market conditions.
Short-Term Debt. The weighted average daily amounts outstanding of notes
payable to banks and the weighted average interest rates on those
amounts were $98.5 million at 5.73% for the three-month period ended
December 31, 1998 and $79.4 million at 5.95% for the three-month period
ended December 31, 1997. The weighted average daily amounts of notes
payable to banks increased primarily to finance capital spending pending
long-term financing. At December 31, 1998, the Company had outstanding
notes payable to banks amounting to $106.4 million and available unused
lines of credit amounting to $29.6 million. Notes payable to banks
increased as of December 31, 1998 as compared to the balance outstanding
at September 30, 1998, due to seasonal borrowing requirements.
Long-Term Debt and Funds for Construction Held by Trustee. On December
8, 1998, the Company issued $40 million of tax-exempt Gas Facilities
Revenue Bonds at an interest rate of 5.25%. These bonds will mature in
November, 2033 and the proceeds will be used to finance a portion of the
Company's capital expenditure program in New Jersey.
In November 1994, the Company filed a shelf registration statement with
the Securities and Exchange Commission for an aggregate of up to $100
million of debt and equity securities. As of December 31, 1998, the
Company has issued $70 million of Medium-Term Notes subject to the shelf
registration statement. The Company currently anticipates issuing
additional securities subject to the shelf registration during 1999.
The Company deposits in trust the unexpended portion of the net proceeds
from its Gas Facilities Revenue Bonds until drawn upon for eligible
expenditures. As of December 31, 1998, the total unexpended portions of
all of the Company's Gas Facilities Revenue Bonds were $43 million and
are classified on the Company's consolidated balance sheet, including
interest earned thereon, as funds for construction held by trustee.
Common Stock. The Company periodically issues shares of common stock in
connection with NUI Direct, the Company's dividend reinvestment plan and
certain employee benefit plans. The proceeds from such issuances
amounted to approximately $0.1 million and $1.5 million for the three-
month periods ended December 31, 1998 and 1997, respectively, and were
used primarily to reduce outstanding short-term debt. The decrease in
proceeds received in the three-month period ended December 31, 1998 as
compared to the three-month period ended December 31, 1997 reflects that
several of these plans commenced purchasing shares on the open market
during 1998 to fulfill the plans' requirements. Under the terms of
these plans, the Company may periodically change the method of
purchasing shares from open market purchases to purchases directly from
the Company, or vice versa.
Dividends. The Company's long-term debt agreements include, among other
things, restrictions as to the payment of cash dividends. Under the
most restrictive of these provisions, the Company is permitted to pay
approximately $42.2 million of cash dividends at December 31, 1998.
Capital Expenditures and Commitments
Capital expenditures, which consist primarily of expenditures to expand
and upgrade the Company's gas distribution systems, were $8.4 million
for the three-month period ended December 31, 1998 as compared with
$11.5 million for the three-month period ended December 31, 1997.
Capital expenditures are expected to be approximately $59.0 million for
all of fiscal 1999, as compared with a total of $60.9 million in fiscal
1998.
The Company owns or previously owned six former manufactures gas plant
(MGP) sites in the state of New Jersey and ten former MGP sites in the
states of North Carolina, South Carolina, Pennsylvania, New York and
Maryland. Based on the Company's most recent assessment, the Company
has recorded a total reserve for environmental investigation and
remediation costs of approximately $34 million, which the Company
expects it will expend in the next twenty years to remediate the
Company's MGP sites. Of this reserve, approximately $30 million relates
to New Jersey MGP sites and approximately $4 million relates to the MGP
sites located outside New Jersey. However, the Company believes that it
is possible that costs associated with conducting investigative
activities and implementing remedial actions, if necessary, with respect
to all of its MGP sites may exceed this reserve by an amount that could
range up to an additional $24 million and be incurred during a future
period of time that may range up to 50 years. Of this $24 million in
possible additional expenditures, approximately $12 million relates to
the New Jersey sites and approximately $12 million relates to the
remaining MGP sites. As compared with the $34 million reserve currently
recorded on the Company's books as discussed above, the Company believes
that it is less likely that this additional $24 million will be incurred
and therefore has not recorded it on its books. The Company believes
that all costs associated with the New Jersey MGP sites will be
recoverable in rates or from insurance carriers. In New Jersey, the
Company is currently recovering environmental costs on an annual basis
through base rates and over a rolling seven-year period through its MGP
Remediation Adjustment Clause. As a result, the Company has begun rate
recovery of approximately $4.4 million of environmental costs incurred
through June 30, 1997. Recovery of an additional $0.9 million in
environmental costs incurred between July 1, 1997 and June 30, 1998 is
currently pending NJBPU approval. With respect to costs which may be
associated with the MGP sites located outside the state of New Jersey,
the Company intends to pursue recovery from ratepayers, former owners
and operators of the sites and from insurance carriers. However, the
Company is not able, at this time, to express a belief as to whether any
or all of these recovery efforts will ultimately be successful.
Certain of the Company's long-term contracts for the supply, storage and
delivery of natural gas include fixed charges that amount to
approximately $72.2 million annually. The Company currently recovers,
and expects to continue to recover, such fixed charges through its
purchased gas adjustment clauses. The Company also is committed to
purchase, at market-related prices, minimum quantities of gas that, in
the aggregate, are approximately 7.6 billion cubic feet per year or to
pay certain costs in the event the minimum quantities are not taken. The
Company expects that minimum demand on its systems for the duration of
these contracts will continue to exceed these minimum purchase
obligations.
The Company is scheduled to repay $20 million of Medium-Term Notes in
August 2002.
Market Risk Exposure
The Company's wholesale trading subsidiary, NUI Energy Brokers, uses
derivatives for multiple purposes: 1) to hedge price commitments and
minimize the risk of fluctuating gas prices, 2) to take advantage of
market information and opportunities in the marketplace, and 3) to
fulfill its trading strategies and, therefore, ensure favorable prices
and margins. These derivative instruments include forwards, futures,
options, and swaps.
The risk associated with uncovered derivative positions is closely
monitored on a daily basis, and controlled in accordance with NUI Energy
Brokers' Risk Management Policy. This policy has been approved by the
Company's Board of Directors and dictates policies and procedures for
all trading activities. The policy defines both value-at-risk (VaR) and
loss limits, and all traders are required to sign and follow this
policy. At the end of each day, all trading positions are marked to
market and a VaR is calculated. This information, as well as the status
of all limits, is disseminated to senior management daily.
NUI Energy Brokers utilizes the variance/covariance VaR methodology.
Using a 95% confidence interval and a one day time horizon, as of
December 31, 1998, NUI Energy Brokers' VaR was $200,000.
Year 2000
Many existing computer programs and systems with embedded digital
microcontrollers, use only two digits to identify a year in the date
field, or were not designed in other ways to provide for the upcoming
change in the century. If not corrected, many systems that use digital
technology could fail or create errors that may result in a significant
adverse impact on NUI's ability to provide service, its regulatory
relations and financial condition.
NUI has developed a Risk Mitigation Plan (the Plan) as an internal guide
to its systems readiness program. The purpose of the program is to
mitigate the risks associated with Year 2000 technology issues. The Plan
includes the following phases: (i) development of a detailed inventory
of all information technology (IT) and non-IT systems that incorporate
any technology component including embedded microprocessors and
microcontrollers (Inventory Phase); (ii) assessment of those systems for
Year 2000 vulnerability (Assessment Phase); (iii) remediation of the
affected systems (Remediation Phase); and (iv) testing of sub-systems,
hardware, operating and application software running as integrated
systems (Testing Phase). In addition, the Plan requires (v) an analysis
of the risk of system failure and the consequences of failure in order
to focus testing resources and prioritization of resources under
contingency plans (Risk Analysis). The Inventory, Assessment and the
Risk Analysis Phases include material direct third-party suppliers and
vendors. The final phase is (vi) contingency planning, which is
described below.
Under the Plan, NUI has established an executive level Year 2000
Committee (the Committee) to monitor the Company's Year 2000 progress.
This Committee is chaired by NUI's Chief Operating Officer and includes
the senior managers of all NUI's business units, the Chief
Administrative Officer, General Counsel and Secretary and the Vice
President of Corporate Development and Treasurer. The Committee receives
monthly reports from a project coordinator and team. Members of the team
are responsible for NUI gas distribution system controls, computer
hardware, operating and communication systems, and for critical
suppliers. The Chairman of the Committee is scheduled to report to NUI's
Board of Directors on Year 2000 issues on a periodic basis.
All major billing, field service, networked information technology and
gas distribution control and monitoring systems have been inventoried.
Substantial completion of detailed inventorying of known material
systems with embedded microcontrollers comprising environmental and
support systems, such as telephone systems, heating and air
conditioning, and backup electric generating systems are currently
scheduled for completion by the end of February 1999.
Assessment of financial and field service systems and natural gas
distribution control and monitoring systems is substantially complete.
The entire Assessment Phase is currently scheduled for substantial
completion by April 1999.
Other than the hand-held meter reading units, which are scheduled to be
replaced starting in April 1999, all known hardware and operating
systems that handle billing and field service, and which required
remediation, have been replaced. NUI's billing system in Pennsylvania is
currently scheduled to be replaced by August and North Carolina is
currently scheduled to be replaced by March 1999. NUI's financial
systems will be upgraded to a new version of third-party supplied
software, which is currently scheduled for completion in September 1999.
Certain telephone systems may require remediation that is scheduled for
completion by the end of March 1999. Any other remediation will be
reviewed as and when the need arises.
Individual programs are generally being tested on a stand-alone basis as
they are remediated. However, suites of programs must be tested as
entire systems, running on remediated hardware and operating systems.
Completion of such integrated testing for natural gas distribution and
control and monitoring systems is scheduled for April 1999. Billing and
field service software is currently planned for the end of June 1999.
Integrated testing of other systems is scheduled for completion by the
end of September 1999.
The Risk Analysis Phase involved NUI assigning priority ratings to each
of its major systems, based on both the risk of the systems' failure and
the potential consequences to the underlying business. This was without
taking into account alternatives available under contingency planning.
Systems supporting business processes which might affect human safety
were assigned the highest rating.
NUI's systems and customers are vulnerable to systems operated by third-
parties that may not be Year 2000 ready. NUI has identified its critical
direct suppliers and vendors. These include, at the very highest level
of importance, interstate pipeline suppliers, telecommunications
carriers, and electric suppliers. Interstate pipeline suppliers must
appropriately schedule and control gas supplies to NUI's own
distribution systems. Telecommunications carriers' digital circuits are
used to control and monitor NUI's gas distribution system with voice
circuits as emergency backup and for customers' reporting of
emergencies. Electricity supplies are critical to NUI's customers for
natural gas heating equipment and industrial process control.
NUI is assessing the Year 2000 readiness of its critical suppliers and
the substantial portion of the assessment work will occur throughout
1999. Assessment of third party systems is currently scheduled to be
substantially complete by June 1999. NUI will continue to work with
these suppliers through 1999 to gain greater assurance that appropriate
steps are being taken to ensure security of supply and the continued
accurate exchange of critical data. Any remediation and contingency
planning will be reviewed and determined based on the results of such
third-party assessment.
The total estimated costs of assessing, remediating and testing NUI's
systems for Year 2000 compliance is approximately $3.3 million, of which
approximately $2.0 million has been incurred through December 31, 1998.
Approximately 50% of these costs will relate to capital projects. The
Company has, and will continue, to fund these costs from the operations
of the Company. These estimated costs do not include any third-party
remediation that may be required, or any resulting contingency planning.
Customers are dependent on NUI's reliable and secure gas supply,
emergency response and billing services. Each of these services relies
on the Company's computer systems. A failure in these systems could
materially interrupt the normal flow of these services and significantly
impact human safety and physical property and have a significant adverse
financial impact on NUI, its customers and suppliers. NUI and third-
party critical suppliers are also interdependent, and failure of third-
party suppliers to be Year 2000 ready could significantly impact the
Company's ability to serve its customers. Third-party systems are being
reviewed however NUI has not ascertained a reasonably likely worst case
scenario. Due to the general uncertainty of the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of
third-parties, the Company is unable to determine at this time whether
the consequences of year 2000 failures will have a material impact on
the Company's results of operations or financial condition. The Plan is
expected to significantly reduce the Company's level of uncertainty
about the Year 2000 problem and the readiness of third-parties. The
Company believes that due to its Plan, the likelihood of major
consequences should be reduced.
Contingency plans are being developed as necessary for the Company's own
systems and its third-party relationships, in response to its
assessments, remediation and testing activities. Contingency planning is
currently scheduled to be completed by June 1999.
Forward-Looking Statements
This document contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The
Company cautions that, while it believes such statements to be
reasonable and are made in good faith, such forward-looking statements
almost always vary from actual results, and the differences between
assumptions made in making such statements and actual results can be
material, depending upon the circumstances. Factors, which may make the
actual results differ from anticipated results include, but are not
limited to, economic conditions; unforeseen competition; weather
conditions; fluctuations in the price of natural gas and other forms of
energy; the outcome of certain assumptions made in regard to Year 2000
issues; and other uncertainties, all of which are difficult to predict
and many of which are beyond the control of the Company. Accordingly,
investors should not rely upon these forward-looking statements in
making investment decisions.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
No. Description of Exhibit Reference
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
None
SIGNATURES<PAGE>
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.
NUI CORPORATION
JOHN KEAN, JR.
February 12, 1999 President and Chief
Executive Officer
A. MARK ABRAMOVIC
February 12 , 1999 Sr. Vice President, Chief
Operating & Chief
Financial Officer
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