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 June 30, 1999
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
(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 July 31, 1999: Common Stock, No
Par Value: 12,748,967 shares outstanding.
<TABLE>
NUI Corporation and Subsidiaries
Consolidated Statement of Income (Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Nine Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
---------------- ---------------
<S> <C> <C> <C> <C>
Operating Margins
Operating revenues $160,678 $169,004 $644,838 $663,740
Less - Purchased gas and fuel 117,118 130,430 472,047 497,974
Energy taxes 2,664 2,551 12,187 17,075
------- ------- ------- -------
40,896 36,023 160,604 148,691
------- ------- ------- -------
Other Operating Expenses
Operations and maintenance 25,271 23,320 76,397 71,867
Depreciation and amortization 6,919 6,326 20,703 19,401
Restructuring and other non-
recurring items (1,840) - (3,954) -
Other taxes 2,211 2,568 6,897 7,515
Income taxes 1,760 (200) 19,014 14,318
------- ------- ------- -------
34,321 32,014 119,057 113,101
------- ------- ------- -------
Operating Income 6,575 4,009 41,547 35,590
Other Income and Expense, Net
Equity in earnings of TIC
Enterprises, LLC, net 460 42 716 150
Other 12 72 121 873
Income taxes (165) (40) (293) (358)
------- ------- ------- -------
307 74 544 665
------- ------- ------- -------
Interest Expense 4,458 4,515 14,987 14,203
------- ------- ------- -------
Net Income (Loss) $2,424 $(432) $27,104 $22,052
======= ======= ======= =======
Net Income (Loss) Per Share of
Common Stock $0.19 $(0.03) $2.13 $1.76
======= ======= ======= =======
Dividends Per Share of Common
Stock $0.245 $0.245 $0.735 $0.735
======= ======= ======= =======
Weighted Average Number of Shares
of Common Stock Outstanding 12,733,055 12,654,101 12,708,265 12,556,940
========== ========== ========== ==========
</TABLE>
See the notes to the consolidated financial statements
NUI Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
June 30, September 30,
1999 1998
(Unaudited) (*)
ASSETS
Utility Plant
Utility plant, at original cost $765,842 $737,323
Accumulated depreciation and
amortization (254,094) (234,484)
Unamortized plant acquisition
adjustments 30,613 30,904
-------- --------
542,361 533,743
-------- --------
Funds for Construction Held by
Trustee 41,588 12,254
-------- --------
Investment in TIC Enterprises, LLC,
net 24,397 23,874
-------- --------
Other Investments 1,324 1,687
-------- --------
Current Assets
Cash and cash equivalents 2,356 929
Accounts receivable (less
allowance for doubtful accounts
of $2,278 and $1,714, respectively) 76,900 62,673
Fuel inventories, at average cost 15,471 34,937
Unrecovered purchased gas costs - 8,061
Prepayments and other 56,454 37,790
-------- --------
151,181 144,390
-------- --------
Other Assets
Regulatory assets 49,500 50,475
Deferred charges 10,716 10,424
-------- --------
60,216 60,899
-------- --------
$821,067 $776,847
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity $242,154 $222,992
Preferred stock - -
Long-term debt 268,902 229,098
-------- --------
511,056 452,090
-------- --------
Capital Lease Obligations 1,788 8,566
-------- --------
Current Liabilities
Notes payable to banks 42,055 87,630
Current portion of capital lease
obligations 7,664 1,810
Accounts payable, customer
deposits and accrued liabilities 88,034 87,158
Overrecovered purchased gas costs 17,795 -
Federal income and other taxes 14,465 5,635
-------- --------
170,013 182,233
-------- --------
Deferred Credits and Other
Liabilities
Deferred Federal income taxes 66,336 62,519
Unamortized investment tax
credits 5,365 5,710
Environmental remediation reserve 33,981 33,981
Regulatory and other liabilities 32,528 31,748
-------- --------
138,210 133,958
-------- --------
$821,067 $776,847
======== ========
*Derived from audited financial statements
See the notes to the consolidated financial statements
NUI Corporation and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
(Dollars in thousands)
Nine Months
Ended
June 30,
1999 1998
Operating Activities
Net income $27,104 $22,052
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 21,298 20,154
Deferred Federal income taxes 3,817 1,911
Non-cash portion of restructuring and
other non-recurring items (4,726) -
Amortization of deferred investment tax
credits (345) (336)
Other 1,282 480
Effect of changes in:
Accounts receivable, net (14,227) (9,216)
Fuel inventories 19,466 8,831
Accounts payable, deposits and
accruals 876 (8,082)
Over (under) recovered purchased gas
costs 25,856 4,935
Other (4,285) (10,472)
--------- --------
Net cash provided by operating
activities 76,116 30,257
--------- --------
Financing Activities
Proceeds from sales of common stock, net of
treasury stock purchased 332 3,782
Dividends to shareholders (9,330) (9,252)
Proceeds from issuance of long-term debt 39,804 -
Funds for construction held by trustee, net (29,515) 13,115
Repayments of long-term debt - (54,600)
Principal payments under capital lease
obligations (1,238) (1,339)
Net short-term (repayments) borrowings (45,575) 5,038
--------- --------
Net cash used in financing activities (45,522) (43,256)
--------- --------
Investing Activities
Cash expenditures for utility plant (25,831) (43,408)
Other (3,336) (1,979)
--------- --------
Net cash used in investing activities (29,167) (45,387)
--------- --------
Net increase (decrease) in cash and cash
equivalents $1,427 $(58,386)
======== ========
Cash and Cash Equivalents
At beginning of period $ 929 $58,793
At end of period $ 2,356 $ 407
Supplemental Disclosures of Cash Flows
Income taxes paid, net $ 4,109 $ 5,262
Interest paid $16,356 $17,433
See the notes to the consolidated financial statements
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. Certain
reclassifications have been made to the prior year financial
statements to conform with current year presentation.
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):
June 30, September 30,
1999 1998
Common stock, no par value $209,976 $207,356
Shares held in treasury (2,311) (1,932)
Retained earnings 37,037 19,263
Unearned employee compensation (2,548) (1,695)
------- -------
Total common shareholders' equity $242,154 $222,992
======= =======
3. Restructuring and Other Non-Recurring Items
The Company recognized approximately $4.0 million of pre-tax, non-
recurring items in fiscal 1999 relating primarily to the recognition
of pension settlement gains as a result of the Company's restructuring
efforts over the past year. These gains were partially offset by a
special termination charge related to the New Jersey bargaining unit
early retirement program, the write-off of certain non-recoverable
regulatory assets, and other charges deemed to be separate from
recurring operations.
In June 1998, the Company offered an early retirement program to its
non-bargaining unit personnel. The program was accepted by 74 of the
eligible 77 employees. 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" (SFAS 88), the Company recorded a special termination charge
during fiscal 1998 when the cost was recognizable. In March 1999, the
Company recorded a settlement gain of approximately $6.8 million as a
result of satisfaction of all future liabilities associated with these
employees.
In January 1999, the Company offered an early retirement program to
its bargaining unit employees in New Jersey. The program was accepted
by 32 of the eligible 35 employees. In accordance with SFAS 88, the
Company recorded a special termination charge of approximately $1.8
million in the second quarter of fiscal 1999 associated with these
retirements. In June 1999, the Company recorded a settlement gain of
approximately $3.2 million as the result of satisfaction of all future
liabilities associated with these employees. Also in June 1999, the
Company recorded an additional $0.6 million of other benefit expenses
associated with these employees.
The Company recorded approximately $1.8 million of charges relating to
the write-off of certain regulatory assets which will not be recovered
through rates. The Company also recorded $1.8 million of charges
relating to other items which were deemed to be separate from
recurring earnings.
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 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 $5.5 million of environmental costs incurred through
June 30, 1998. Recovery of an additional $2.0 million in environmental
costs incurred between July 1, 1998 and June 30, 1999 is currently
pending NJBPU approval. Accordingly, the Company has recorded a
regulatory asset of approximately $34 million as of June 30, 1999,
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 Nine Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
Operating Revenues (Dollars in
thousands)
Firm Sales:
Residential $35,843 $34,553 $177,298 $174,977
Commercial 13,794 14,399 73,980 81,097
Industrial 1,578 4,253 7,401 15,751
Interruptible Sales 11,644 9,983 34,153 36,023
Unregulated Sales 84,420 93,078 308,668 316,281
Transportation Services 8,665 8,177 29,504 26,502
Customer Service, Appliance
Leasing and Other 4,734 4,561 13,834 13,109
------ ------ ------ ------
$160,678 $169,004 $644,838 $663,740
======= ======= ======= =======
Gas Sold or Transported (MMcf)
Firm Sales:
Residential 3,359 3,377 19,859 19,848
Commercial 1,668 1,828 9,636 10,686
Industrial 144 1,007 1,197 3,450
Interruptible Sales 3,929 3,090 11,694 9,944
Unregulated Sales 43,179 38,836 150,123 120,695
Transportation Services 7,331 6,716 23,760 23,702
------- ------ ------- -------
59,610 54,854 216,269 188,325
======= ======= ======= =======
Average Utility Customers
Served
Firm:
Residential 345,556 339,146 344,384 338,848
Commercial 23,461 23,257 23,393 23,525
Industrial 222 276 256 278
Interruptible 50 105 58 111
Transportation 3,565 3,373 3,507 2,909
------- ------- ------- -------
372,854 366,157 371,598 365,671
======= ======= ======= =======
Degree Days in New Jersey
Actual 464 476 4,347 4,339
Normal 574 575 5,151 5,207
Percentage variance from
normal 19% 17% 16% 17%
warmer warmer warmer warmer
Employees (period end) 995 1,166
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 nine-month period ending June 30, 1999 as compared
to the nine-month period ending June 30, 1998 reflect changes in the
New Jersey tax law which resulted in variations in certain line items
on the consolidated statement of income. These changes had no effect
on the quarter ended June 30, 1999 as compared to the quarter ended
June 30, 1998. 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 nine-month period ending June 30, 1999 as compared to the
nine-month period ended June 30, 1998 the tax changes had the effect
of reducing operating revenues by approximately $3.4 million, reducing
energy taxes by approximately $4.1 million and increasing income tax
expense by approximately $1.2 million.
Three-Month Periods Ended June 30, 1999 and 1998
Net Income (Loss). Net income for the three-month period ended June
30, 1999 was $2.4 million, or $0.19 per share, as compared with a net
loss of $0.4 million, or $0.03 per share, for the three-month period
ended June 30, 1998. The increase in the current period was partially
due to the effect of non-recurring items which contributed
approximately $1.1 million, or $0.08 per share, to net income. These
items were primarily associated with the Company's early retirement
programs (see Note 3 of the Notes to the Consolidated Financial
Statements). Absent these non-recurring items, net income would have
been $1.4 million, or $0.11 per share. The increase in recurring
earnings was attributable to higher margins and other income,
partially offset by higher operations and maintenance expenses, other
taxes and depreciation and amortization.
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 $8.3 million, or 5%, for the three-
month period ended June 30, 1999 as compared with the three-month
period ended June 30, 1998, principally due lower gas prices in the
current period.
The Company's operating margins increased by $4.9 million, or 14%, for
the three-month period ended June 30, 1999 as compared with the three-
month period ended June 30, 1998. Margins from the Company's
unregulated operations increased by approximately $3.7 million over
the prior year period due to favorable results from the Company's
wholesale trading and retail marketing businesses. The Company's
utility distribution margins increased approximately $1.2 million over
the prior year period mainly due to customer growth and the effect of
previously deferred post-retirement benefit expenses which are now
being expensed and recovered through rates.
Other Operating Expenses. Operations and maintenance expenses
increased by approximately $2.0 million, or 8%, for the three-month
period ended June 30, 1999 as compared with the three-month period
ended June 30, 1998. The increase was primarily the result of
previously deferred post-retirement benefit expenses which are being
expensed and recovered through rates, higher levels of accrued
commissions associated with the improved performance of the Company's
unregulated trading and retail marketing businesses and a lower
pension credit in the current period. These increases were partially
offset by labor and benefits reductions resulting from the Company's
reorganization efforts over the past year.
The Company recognized approximately $1.8 million of non-recurring
income in the third quarter of fiscal 1999 as a result of a $3.2
million pension settlement gain realized on the 1999 New Jersey
bargaining unit early retirement program, offset by other benefit
expenses associated with these employees, as well as other items which
were deemed to be separate from recurring earnings (see Note 3 of the
Notes to the Consolidated Financial Statements).
Depreciation and amortization expenses increased by $0.6 million
primarily due to additional plant in service.
Other taxes decreased by $0.4 million primarily as a result of lower
payroll taxes due to a decrease in the number of employees.
Income tax expense increased by approximately $2.0 million for the
three-month period ended June 30, 1999 as compared to the three-month
period ended June 30, 1998 as a result of higher pre-tax income.
Other Income and (Expense), Net. Other income and expense, net,
increased by approximately $0.2 million for the three-month period
ended June 30, 1999 as compared with the three-month period ended June
30, 1998 due to improved results generated by TIC.
Nine-Month Periods Ended June 30, 1999 and 1998
Net Income. Net income for the nine-month period ended June 30, 1999
was $27.1 million, or $2.13 per share, as compared with net income of
$22.1 million, or $1.76 per share, for the nine-month period ended
June 30, 1998. The increase in the current period was partially due to
the effect of non-recurring items which contributed $2.3 million, or
$0.18 per share, to net income (see Note 3 of the Notes to the
Consolidated Financial Statements). Absent these non-recurring items,
net income would have been $24.8 million, or $1.95 per share. The
increase in recurring earnings was attributable to higher margins,
partially offset by higher operations and maintenance expenses,
depreciation and amortization, and interest.
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 decreased by $18.9 million, or 3%, for the nine-month period
ended June 30, 1999 as compared with the nine-month period ended
June 30, 1998. The decrease was principally due to a decrease of
approximately $12.0 million in the Company's utility operations
primarily resulting from changes in the New Jersey tax law noted above
and weather that was warmer in the current year in several of the
Company's service territories. In addition, there was a decrease of
$7.6 million in the Company's unregulated operations primarily due to
lower gas prices in the current period.
The Company's operating margins increased by $11.9 million, or 8%, for
the nine-month period ended June 30, 1999 as compared with the nine-
month period ended June 30, 1998. The increase was primarily
attributable to an increase of $7.9 million in the Company's
unregulated operations as a result of an increase in the Company's
wholesale trading, energy portfolio management, and retail marketing
businesses. Utility distribution operations increased by $3.7 million
as a result of customer growth, the effect of the changes in the New
Jersey tax law described above, and an additional $1.9 million due to
the recovery of previously deferred post-retirement benefit expenses
through rates. The Company's customer service operations contributed
approximately $0.3 million to the increase in margins as a result of
continued growth by UBS and the Company's appliance sales and leasing
business. As a result of weather normalization clauses, operating
margins were approximately $5.4 million higher in the 1999 period than
they would have been without such clauses. In the 1998 period,
operating margins were approximately $5.6 million higher than they
otherwise would have been without such clauses.
Other Operating Expenses. Operation and maintenance expenses
increased by approximately $4.5 million, or 6%, for the nine-month
period ended June 30, 1999 as compared with the nine-month period
ended June 30, 1998. The increase was primarily the result of
previously deferred post-retirement benefit expenses which are being
expensed and recovered through rates, higher levels of accrued
incentives associated with the improved performance of the Company's
unregulated trading and retail marketing businesses and a lower
pension credit in the current period. These increases were partially
offset by labor and benefit savings from the Company's reorganization
efforts over the past year, as well as lower outside contract work.
The Company recognized approximately $4.0 million of pre-tax non-
recurring income during the nine-month period ended June 30, 1999.
See Note 3 of the _Notes to the Consolidated Financial Statements_ for
a description of these items.
Depreciation and amortization expenses increased by $1.3 million
primarily due to additional plant in service.
Income tax expense increased by approximately $4.7 million due to
higher pre-tax income, as well as the changes in the New Jersey tax
law described above.
Interest Expense. Interest expense increased by approximately $0.8
million for the nine-month period ended June 30, 1999 as compared with
the nine-month period ended June 30, 1998. This increase was
primarily due to interest on the Company's $40 million bond issuance
in December 1998, as well as higher average short-term borrowings.
These increases were partially offset by an increase in interest
income on funds held by trustee as a result of the $40 million
issuance noted above being put into trust for use on qualified
expenditures (see "Financing Activities and Resources - Long-Term Debt
and Funds for Construction Held by Trustee").
Regulatory Matters
On April 30, 1999, the Company made a filing with the New Jersey Board
of Public Utilities (NJBPU) which will enable all customers to choose
an alternative supplier. This filing was a result of the "Electric
Discount and Energy Competition Act" legislation which was signed into
law in New Jersey on February 9, 1999. 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 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 July 7, 1999, the NJBPU approved a final stipulation on the
Company's New Jersey's Purchased Gas Adjustment Clause filing in which
the Company would continue to charge rates approved in an interim
stipulation and approved by the NJBPU on March 3, 1999. In addition,
the stipulation provided that the Company would refund to customers
$10 million of over-recovered gas costs. Of this amount, $5.6 million
would be applied against a Weather Normalization Clause (WNC) under-
recovery and the balance will be credited to customer bills in late
fiscal 1999. The stipulation also allows the Company to defer the
costs of its undepreciated propane-air plant, presently not in use,
until its next base rate case.
Financing Activities and Resources
The Company had net cash provided by operating activities of $76.1
million and $30.3 million for the nine-month periods ended June 30,
1999 and 1998, respectively. The increase in the nine-month period
ended June 30, 1999 was primarily due to a significantly higher over-
collection of gas costs through the Company's purchased gas adjustment
clauses and a lower cost paid for the gas in the Company's inventory.
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 $70.9 million at 5.4% for the nine-month period
ended June 30, 1999 and $63.4 million at 5.8% for the nine-month period
ended June 30, 1998. The weighted average daily amounts of notes
payable to banks increased principally due to additional borrowings to
finance portions of the Company's capital expenditures earlier in the
year. At June 30, 1999, the Company had outstanding notes payable to
banks amounting to $42.1 million and available unused lines of credit
amounting to $108.9 million. Notes payable to banks decreased as of
June 30, 1999, 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.
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 June 30, 1999, the total unexpended
portions of all of the Company's Gas Facilities Revenue Bonds were $37
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 other employee benefit plans. The proceeds from such
issuances amounted to approximately $0.7 million and $3.9 million for
the nine-month periods ended June 30, 1999 and 1998, respectively, and
were used primarily to reduce outstanding short-term debt. The
decrease in proceeds received in the nine-month period ended June 30,
1999, as compared to the nine-month period ended June 30, 1998,
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 $56.6 million of cash dividends at June 30, 1999.
Capital Expenditures and Commitments
Capital expenditures, which consist primarily of expenditures to
expand and upgrade the Company's gas distribution systems, were $26.2
million for the nine-month period ended June 30, 1999 as compared with
$43.8 million for the nine-month period ended June 30, 1998. Capital
expenditures are expected to be approximately $52.0 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 manufactured 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 $5.5 million of environmental costs incurred
through June 30, 1998. Recovery of an additional $2.0 million in
environmental costs incurred between July 1, 1998 and June 30, 1999 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 $68.9 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 3.4 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
June 30, 1999, NUI Energy Brokers' VaR was $99,000.
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 (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 (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 reports 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.
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, has been substantially completed.
The entire Assessment Phase, including the assessment of financial and
field service systems and natural gas distribution control and
monitoring systems, has been substantially completed at this time.
Other than the hand-held meter reading units, which are currently in
the process of being replaced, all known hardware and operating
systems that handle billing and field service, and which required
remediation, have been replaced. Replacement of NUI's billing system
in North Carolina is complete. Replacement of NUI's billing system in
Pennsylvania is in progress and is currently scheduled for completion
in August 1999. NUI's financial systems have been upgraded to a new
version of third-party supplied software. Certain telephone systems
are in the process of being remediated and are currently scheduled for
substantial completion by the end of August 1999. Any other
remediation will be reviewed 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.
Integrated testing for natural gas distribution and control and
monitoring systems, and billing and field service software has been
substantially completed. 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.
Assessment of third party systems is substantially complete. 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 assessments.
The total estimated costs of assessing, remediating and testing NUI's
systems for Year 2000 compliance is approximately $3.5 million, of
which approximately $2.8 million has been incurred through June 30,
1999. 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 substantially complete.
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
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.
August 13, 1999 President and Chief
Executive Officer
A. MARK ABRAMOVIC
August 13, 1999 Senior Vice President and
Chief Financial Officer
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