x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 1-8359
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey
22-2376465
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
1415 Wyckoff Road, Wall, New Jersey 07719
732-938-1480
(Address of principal
executive offices)
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock - $2.50 Par Value
New York Stock Exchange
(Title of each class)
(Name of each exchange on which registered)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes: x No: o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes: x No: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer: x
Accelerated filer: o
Non-accelerated filer: o
Smaller reporting company: o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes: o No: x
The number of shares outstanding of $2.50 par value Common Stock as of January 31, 2011 was 41,417,148.
Certain statements contained in this report, including, without limitation, statements as to management expectations and beliefs presented in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures about Market Risk,” Part II, Item I. “Legal Proceedings” and in the notes to the financial statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can also be identified by the use of forward-looking terminology such as “may,” “intend,” “expect,” “believe” or “continue” or comparable terminology and are made based upon management's current expectations and beliefs as of this date concerning future developments and their potential effect upon New Jersey Resources Corporation (NJR or the Company). There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management.
The Company cautions readers that the assumptions that form the basis for forward-looking statements regarding customer growth, customer usage, financial condition, results of operations, cash flows, capital requirements, market risk and other matters for fiscal 2011 and thereafter include many factors that are beyond the Company's ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes in the debt and equity capital markets. The factors that could cause actual results to differ materially from NJR's expectations include, but are not limited to, those discussed in Risk Factors in Item 1A of NJR's 2010 Annual Report on Form 10-K and Part II, Item 1A of this Form 10-Q, as well as the following:
•
weather and economic conditions;
•
NJR's dependence on operating subsidiaries;
•
demographic changes in the New Jersey Natural Gas (NJNG) service territory;
•
the rate of NJNG customer growth;
•
volatility of natural gas and other commodity prices and their impact on customer usage, NJNG's incentive programs, NJR Energy Services' (NJRES) operations and on the Company's risk management efforts;
•
changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to the Company;
•
the impact of volatility in the credit markets that would result in the increased cost and/or limit the availability of credit at NJR to fund and support physical gas inventory purchases and other working capital needs at NJRES, and all other non-regulated subsidiaries, as well as negatively affect cost and access to the commercial paper market and other short-term financing markets by NJNG to allow it to fund its commodity purchases, capital expenditures and meet its short-term obligations as they come due;
•
the ability to comply with debt covenants;
•
continued failures in the market for auction rate securities;
•
the impact to the asset values and resulting higher costs and funding obligations of NJR's pension and postemployment benefit plans as a result of downturns in the financial markets, and impacts associated with the Patient Protection and Affordable Care Act;
•
accounting effects and other risks associated with hedging activities and use of derivatives contracts;
•
commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties and liquidity in the wholesale energy trading market;
•
the ability to obtain governmental approvals and/or financing for the construction, development and operation of certain non-regulated energy investments, including our solar energy projects;
•
risks associated with the management of the Company's joint ventures and partnerships;
•
risks associated with our investments in solar energy projects, including the availability of regulatory and tax incentives, the development of the market for solar renewable energy certificates, construction and regulatory risks and the availability of viable projects;
•
the level and rate at which costs and expenses are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process in connection with constructing, operating and maintaining NJNG's natural gas transmission and distribution system;
•
dependence on third-party storage and transportation facilities for natural gas supply;
•
operating risks incidental to handling, storing, transporting and providing customers with natural gas;
•
access to adequate supplies of natural gas;
•
the regulatory and pricing policies of federal and state regulatory agencies;
•
the costs of compliance with present and future environmental laws, including potential climate change-related legislation;
•
the ultimate outcome of pending regulatory proceedings;
•
the disallowance of recovery of environmental-related expenditures and other regulatory changes; and
•
environmental-related and other litigation and other uncertainties.
While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its Quarterly and Annual Reports, the Company does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.
Page 1
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
December 31,
(Thousands, except per share data)
2010
2009
OPERATING REVENUES
Utility
$
290,676
$
258,475
Nonutility
422,476
351,071
Total operating revenues
713,152
609,546
OPERATING EXPENSES
Gas purchases:
Utility
160,449
154,950
Nonutility
429,247
294,443
Operation and maintenance
37,416
36,291
Regulatory rider expenses
16,698
13,673
Depreciation and amortization
8,454
7,869
Energy and other taxes
20,625
16,935
Total operating expenses
672,889
524,161
OPERATING INCOME
40,263
85,385
Other income
445
1,119
Interest expense, net of capitalized interest
5,263
5,417
INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
35,445
81,087
Income tax provision
13,853
32,136
Equity in earnings of affiliates
2,917
2,951
NET INCOME
$
24,509
$
51,902
EARNINGS PER COMMON SHARE
BASIC
$0.59
$1.25
DILUTED
$0.59
$1.24
DIVIDENDS PER COMMON SHARE
$0.36
$0.34
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC
41,280
41,615
DILUTED
41,510
42,001
See Notes to Unaudited Condensed Consolidated Financial Statements
Page 2
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
December 31,
(Thousands)
2010
2009
CASH FLOWS (USED IN) OPERATING ACTIVITIES
Net income
$
24,509
$
51,902
Adjustments to reconcile net income to cash flows from operating activities:
Unrealized loss (gain) on derivative instruments
54,403
(6,633
)
Depreciation and amortization
8,454
8,103
Allowance for equity used during construction
(18
)
(384
)
Allowance for bad debt expense
1,363
847
Deferred income taxes
357
28,656
Manufactured gas plant remediation costs
(897
)
(1,479
)
Equity in earnings of affiliates, net of distributions received
1,098
(960
)
Cost of removal - asset retirement obligations
(291
)
(38
)
Contributions to postemployment benefit plans
(6,408
)
(4,550
)
Changes in:
Components of working capital
(220,930
)
(136,542
)
Other noncurrent assets
5,651
4,302
Other noncurrent liabilities
854
4,577
Cash flows (used in) operating activities
(131,855
)
(52,199
)
CASH FLOWS (USED IN) INVESTING ACTIVITIES
Expenditures for
Utility plant
(26,692
)
(10,326
)
Solar equipment
(1,060
)
—
Real estate properties and other
(85
)
(17
)
Cost of removal
(1,506
)
(1,097
)
Investments in equity investees
—
(4,300
)
Withdrawal from restricted cash construction fund
10
—
Cash flows (used in) investing activities
(29,333
)
(15,740
)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock
3,014
3,109
Tax benefit from stock options exercised
68
224
Proceeds from sale-leaseback transaction
5,901
4,925
Payments of long-term debt
(21,573
)
(1,346
)
Purchases of treasury stock
—
(8,994
)
Payments of common stock dividends
(14,023
)
(13,249
)
Net proceeds of short-term debt
193,525
57,400
Cash flows from financing activities
166,912
42,069
Change in cash and temporary investments
5,724
(25,870
)
Cash and temporary investments at beginning of period
943
36,186
Cash and temporary investments at end of period
$
6,667
$
10,316
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables
$
(159,291
)
$
(153,756
)
Inventories
(29,360
)
(34,096
)
Recovery of gas costs
11,734
(22,351
)
Gas purchases payable
35,809
99,141
Prepaid and accrued taxes
33,515
18,777
Accounts payable and other
(3,271
)
(11,159
)
Restricted broker margin accounts
(52,957
)
14,496
Customers' credit balances and deposits
(56,495
)
(31,574
)
Other current assets
(614
)
(16,020
)
Total
$
(220,930
)
$
(136,542
)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized)
$
1,383
$
1,285
Income taxes
$
93
$
—
See Notes to Unaudited Condensed Consolidated Financial Statements
Page 3
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS
(Thousands)
December 31, 2010
September 30, 2010
PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost
$
1,548,088
$
1,525,348
Real estate properties and other, at cost
32,972
33,497
Total property, plant and equipment
1,581,060
1,558,845
Accumulated depreciation and amortization
(427,911
)
(423,126
)
Property, plant and equipment, net
1,153,149
1,135,719
CURRENT ASSETS
Cash and temporary investments
6,667
943
Customer accounts receivable
Billed
249,095
162,961
Unbilled revenues
79,726
7,411
Allowance for doubtful accounts
(3,514
)
(2,993
)
Regulatory assets
35,830
51,466
Gas in storage, at average cost
366,173
336,163
Materials and supplies, at average cost
5,420
6,070
Prepaid state taxes
11,982
55,880
Assets held for sale
1,579
—
Derivatives, at fair value
103,373
135,186
Restricted broker margin accounts
43,739
19,241
Other
17,541
12,680
Total current assets
917,611
785,008
NONCURRENT ASSETS
Investments in equity investees
169,499
169,234
Regulatory assets
450,938
454,601
Derivatives, at fair value
9,043
7,957
Other
10,452
10,614
Total noncurrent assets
639,932
642,406
Total assets
$
2,710,692
$
2,563,133
See Notes to Unaudited Condensed Consolidated Financial Statements
Page 4
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS (Continued)
CAPITALIZATION AND LIABILITIES
(Thousands)
December 31, 2010
September 30, 2010
CAPITALIZATION
Common stock equity
$
737,514
$
725,483
Long-term debt
432,450
428,925
Total capitalization
1,169,964
1,154,408
CURRENT LIABILITIES
Current maturities of long-term debt
12,060
31,257
Short-term debt
341,125
147,600
Gas purchases payable
266,211
230,402
Accounts payable and other
45,260
47,297
Dividends payable
14,867
13,998
Deferred and accrued taxes
12,031
23,737
New Jersey clean energy program
12,888
12,644
Derivatives, at fair value
101,725
78,447
Restricted broker margin accounts
—
28,459
Customers' credit balances and deposits
35,462
91,957
Total current liabilities
841,629
705,798
NONCURRENT LIABILITIES
Deferred income taxes
280,231
278,551
Deferred investment tax credits
6,468
6,549
Deferred revenue
7,126
7,656
Derivatives, at fair value
4,467
5,640
Manufactured gas plant remediation
201,600
201,600
Postemployment employee benefit liability
91,018
93,742
Regulatory liabilities
57,747
57,648
New Jersey clean energy program
17,155
18,291
Asset retirement obligation
26,131
26,009
Other
7,156
7,241
Total noncurrent liabilities
699,099
702,927
Commitments and contingent liabilities (Note 13)
Total capitalization and liabilities
$
2,710,692
$
2,563,133
See Notes to Unaudited Condensed Consolidated Financial Statements
Page 5
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended
December 31,
(Thousands)
2010
2009
Net income
$
24,509
$
51,902
Unrealized gain on available for sale securities, net of tax of $(286) and $(264), respectively (1)
410
378
Net unrealized (loss) on derivatives, net of tax of $39 and $23, respectively
(69
)
(33
)
Other comprehensive income
341
345
Comprehensive income
$
24,850
$
52,247
(1)
Available for sale securities are included in Investments in equity investees in the Unaudited Condensed Consolidated Balance Sheets.
See Notes to Unaudited Condensed Consolidated Financial Statements
Page 6
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF THE BUSINESS
New Jersey Resources Corporation (NJR or the Company) provides regulated gas distribution services and certain non-regulated businesses primarily through the following subsidiaries:
New Jersey Natural Gas Company (NJNG) provides natural gas utility service to approximately 493,500 retail customers in central and northern New Jersey and is subject to rate regulation by the New Jersey Board of Public Utilities (BPU). NJNG comprises the Natural Gas Distribution segment;
NJR Energy Services Company (NJRES) comprises the Energy Services segment and is the Company's principal non-utility subsidiary that maintains and transacts around a portfolio of natural gas storage and transportation positions and provides wholesale energy and energy management services;
NJR Energy Holdings Corporation (NJREH) primarily invests in energy-related ventures through its subsidiaries, NJNR Pipeline Company (Pipeline), which holds the Company's 5.53 percent ownership interest in Iroquois Gas and Transmission System, L.P. (Iroquois) and NJR Steckman Ridge Storage Company, which holds the Company's 50 percent combined interest in Steckman Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge). Iroquois and Steckman Ridge comprise the Midstream Assets segment;
Effective October 1, 2010, NJR established Clean Energy Ventures (CEV) as a new segment to report the results of operations and assets related to the Company's expected capital investments in renewable energy projects. NJR Clean Energy Ventures (NJRCEV) comprises the Clean Energy Ventures segment. (See Note 14. Business Segment and Other Operations)
NJR Retail Holdings Corporation (Retail Holdings) has two principal subsidiaries, NJR Home Services Company (NJRHS) and Commercial Realty & Resources Corporation (CR&R). Retail Holdings and NJR Energy Corporation (NJR Energy) are also included in Retail and Other operations.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by NJR in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The September 30, 2010 Balance Sheet data is derived from the audited financial statements of the Company. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and the notes thereto included in NJR's 2010 Annual Report on Form 10-K.
The Unaudited Condensed Consolidated Financial Statements include the accounts of NJR and its subsidiaries. In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments necessary, for a fair presentation of the results of the interim periods presented. These adjustments are of a normal and recurring nature. Because of the seasonal nature of NJR's utility and wholesale energy services operations, in addition to other factors, the financial results for the interim periods presented are not indicative of the results that are to be expected for the fiscal year ended September 30, 2011.
Intercompany transactions and accounts have been eliminated.
Gas in Storage
The following table summarizes Gas in storage by company as of:
December 31, 2010
September 30, 2010
($ in thousands)
Gas in Storage
Bcf
Gas in Storage
Bcf
NJNG
$
138,517
18.0
$
181,098
24.7
NJRES
227,656
51.9
155,065
42.3
Total
$
366,173
69.9
$
336,163
67.0
Page 7
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capitalized and Deferred Interest
Included in the Unaudited Condensed Consolidated Balance Sheets are capitalized amounts associated with the debt and equity components of NJNG's Allowance for funds used during construction (AFUDC), which are recorded in utility plant. NJNG's base rates include the ability for NJNG to recover the cost of debt associated with AFUDC and construction work in progress (CWIP). An incremental cost of equity is also recoverable during periods when NJNG's short-term debt balances are lower than its construction work in progress. Corresponding amounts recognized in interest expense and other income, as appropriate, are included in the Unaudited Condensed Consolidated Statements of Operations are as follows:
Three Months Ended
December 31,
($ in thousands)
2010
2009
AFUDC:
Debt
$
35
$
151
Equity
18
384
Total
$
53
$
535
Weighted average rate
0.27
%
6.49
%
Pursuant to a BPU order, NJNG is permitted to recover carrying costs on uncollected balances related to Societal Benefits Clause (SBC) program costs, which include New Jersey Clean Energy Program (NJCEP), Remediation Adjustment (RA) and Universal Service Fund (USF) expenditures, see Note 3. Regulation. Accordingly, other income included $251,000 and $470,000 of deferred interest related to these SBC program costs for the three months ended December 31, 2010 and 2009, respectively.
Customer Accounts Receivable
Customer accounts receivable include outstanding billings from the following subsidiaries as of:
($ in thousands)
December 31, 2010
September 30, 2010
NJNG(1)
$
17,214
7
%
$
17,983
11
%
NJRES
222,928
89
136,064
83
NJRHS and other
8,953
4
8,914
6
Total
$
249,095
100
%
$
162,961
100
%
(1)
Does not include unbilled revenues of $79.7 million and $7.4 million as of December 31, 2010 and September 30, 2010, respectively.
Accounts receivable increased during three months ended December 31, 2010, due primarily to an increase in accounts receivable at NJRES as a result of higher average natural gas prices and an increase in sales volume.
Assets Held for Sale
As of December 31, 2010, NJR has classified approximately 4.5 acres of CR&R's undeveloped land located in Monmouth County as held for sale in the Unaudited Condensed Consolidated Balance Sheets. The land has a net book value of $1.6 million and the sale is expected to be completed during the third quarter of fiscal 2011 for $2.4 million with an estimated gain of $713,000 after closing costs.
Recent Updates to the Accounting Standards Codification (ASC)
Consolidation:
In June 2009, the FASB issued guidance requiring qualitative evaluations including an additional emphasis on identifying the party who effectively controls the entity, which replaces the quantitative assessments previously in practice, when determining whether a company has a controlling financial interest in a variable interest entity (VIE). In addition, the assessments will be required on an ongoing basis, rather than limiting the reassessments to when certain triggering events occur. Additional disclosures provide information on a company's involvement with VIE's. The Company adopted the provisions of the statement prospectively during its first quarter of fiscal 2011 and the adoption had no impact on its financial position, results of operations and cash flows.
Page 8
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. REGULATION
As a result of NJNG being subject to cost-based regulation it is permitted to recover authorized operating expenses and earn a reasonable return on their utility investment based on BPU decisions and in accordance with accounting guidance applicable to regulated operations. The impact of the ratemaking process and decisions authorized by the BPU allows NJNG to capitalize or defer certain costs that are expected to be recovered from its customers through rates as regulatory assets and recognizes certain obligations representing probable future events as regulatory liabilities.
Regulatory assets included in the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:
(Thousands)
December 31, 2010
September 30, 2010
Recovery
Regulatory assets-current
Underrecovered gas costs
$
24,751
$
36,485
(1
)
Conservation Incentive Program
11,071
14,960
(1
)
Other
8
21
(1
)
Total current
$
35,830
$
51,466
Regulatory assets-noncurrent
Environmental remediation costs (Note 13)
Expended, net of recoveries
$
74,233
$
75,707
(2
)
Liability for future expenditures
201,600
201,600
(3
)
Deferred income and other taxes
13,860
13,860
(1
)
Derivatives, net (Note 4)
15,768
16,497
(1
)
Energy Efficiency Program
6,286
3,958
(2
)
New Jersey Clean Energy Program
30,043
30,935
(2
)
Pipeline Integrity Management
1,148
1,148
(4
)
Postemployment benefit costs (Note 10)
106,149
106,225
(1
)
Other
1,851
4,671
(5
)
Total noncurrent
$
450,938
$
454,601
(1)
Recoverable, without interest.
(2)
Recoverable, with interest.
(3)
Recovery will be requested when actual expenditures are incurred (see Note 13. Commitments and Contingent Liabilities).
(4)
Recoverable, subject to BPU review and approval in the next base rate case.
(5)
Recoverable, with or without interest depending on the specific program included in the other category.
Recovery of regulatory assets is subject to BPU approval. If there should be any changes in regulatory positions that indicate recovery is not probable, the related cost would be charged to income in the period of such determination.
Regulatory liabilities included in the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:
(Thousands)
December 31, 2010
September 30, 2010
Regulatory liabilities-noncurrent
Cost of removal obligation (1)
$
57,747
$
57,648
Total noncurrent
$
57,747
$
57,648
(1)
NJNG accrues and collects for cost of removal in rates. This liability represents collections in excess of actual expenditures.
Recent regulatory filings and/or actions include the following:
•
Effective October 1, 2010, the BPU approved a 0.7 percent rate increase to facilitate recovery of $12.1 million annually related to Conservation Incentive Program (CIP).
•
On October 20, 2010, NJNG filed a petition with the BPU for approval of an extension to NJNG's Accelerated Energy Infrastructure Investment Program (AIP II) for capital investments to be made through August 31, 2012, in the amount of $52.2 million. On January 24, 2011, NJNG amended the amount of this petition to $60.2 million. NJNG is requesting approval
Page 9
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•
from the BPU for the recovery of expenditures through base rates, which would include the Company's overall weighted cost of capital.
•
Effective November 1, 2010, the BPU approved the recovery of the USF program year budget and the recovery of deferred USF administrative costs.
4. DERIVATIVE INSTRUMENTS
The Company and certain of its subsidiaries are subject to commodity price risk due to fluctuations in the market price of natural gas. To manage this risk, the Company and certain of its subsidiaries enter into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial options and swaps to economically hedge the commodity price risk associated with its existing and anticipated commitments to purchase and sell natural gas. In addition, the Company may utilize foreign currency derivatives as cash flow hedges of Canadian dollar denominated gas purchases. These contracts, with a few exceptions as described below, are accounted for as derivatives. Accordingly, all of the financial and certain of the Company's physical derivative instruments are recorded at fair value in the Unaudited Condensed Consolidated Balance Sheets. For a more detailed discussion of the Company's fair value measurement policies and level disclosures associated with the NJR's derivative instruments see Note 5. Fair Value.
Since the Company chooses not to designate its financial commodity and physical forward commodity derivatives as accounting hedges, changes in the fair value of these derivative instruments are concurrently recorded as a component of gas purchases or operating revenues, as appropriate for NJRES, in the Unaudited Condensed Consolidated Statements of Operations as unrealized gains or losses. For NJRES at settlement, realized gains and losses on all financial derivative instruments are recognized as a component of gas purchases and realized gains and losses on all physical derivatives follow the presentation of the related unrealized gains and losses as a component of either gas purchases or operating revenues. Since NJRES designates its foreign exchange contracts as cash flow hedges, changes in fair value are recorded in other comprehensive income. When the foreign exchange contracts are settled, realized gains and losses are recorded to gas purchases in the Unaudited Condensed Consolidated Statements of Operations. Realized and unrealized gains and losses related to NJR Energy's financial derivatives, which have expired, were recorded as a component of operating revenues during fiscal 2010.
Changes in fair value of NJNG's derivative instruments, however, are recorded as a component of regulatory assets or liabilities in the Unaudited Condensed Consolidated Balance Sheets, as NJNG has received regulatory approval to defer and to recover these amounts through future Basic Gas Supply Service (BGSS) rates as an increase or decrease to the cost of natural gas in NJNG's tariff.
As a result of NJRES entering into transactions to borrow gas, commonly referred to as “park and loans,” an embedded derivative is created related to potential differences between the fair value of the amount borrowed and the fair value of the amount that may ultimately be repaid, based on changes in forward natural gas prices during the contract term. This embedded derivative is accounted for as a forward sale in the month in which the repayment of the borrowed gas is expected to occur, and is considered a derivative transaction that is recorded at fair value on the balance sheet, with changes in value recognized in current period earnings.
The Company continues to elect normal treatment on all physical commodity contracts when appropriate at NJNG. These contracts are accounted for on an accrual basis. Accordingly, gains (losses) are recognized in earnings when the contract settles and the natural gas is delivered.
Page 10
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Derivatives
The following table reflects the fair value of NJR's derivative assets and liabilities recognized in the Unaudited Condensed Consolidated Balance Sheets as of:
Fair Value
December 31, 2010
September 30, 2010
(Thousands)
Balance Sheet Location
Asset
Derivatives
Liability
Derivatives
Asset
Derivatives
Liability
Derivatives
NJNG:
Financial commodity contracts
Derivatives - current
$
11,424
$
27,192
$
9,952
$
24,724
Derivatives - noncurrent
—
—
—
1,725
NJRES:
Physical forward commodity contracts
Derivatives - current
14,311
13,157
18,566
5,879
Derivatives - noncurrent
5,508
428
5,482
179
Financial commodity contracts
Derivatives - current
77,551
61,376
106,653
47,844
Derivatives - noncurrent
3,478
4,039
2,465
3,736
Total fair value of derivatives
$
112,272
$
106,192
$
143,118
$
84,087
The Company, through its unregulated wholesale energy services subsidiary, which enters into natural gas transactions in Canada and consequently NJRES, is exposed to fluctuations in the value of Canadian currency relative to the US dollar. NJRES utilizes foreign currency derivatives to lock in the currency translation rate associated with natural gas transactions denominated in Canadian currency. The derivatives may include currency forwards, futures, or swaps and are accounted for as derivatives. These derivatives are being used to hedge future forecasted cash payments associated with transportation and storage contracts. The Company has designated these foreign currency derivatives as cash flow hedges of that exposure, and expects the hedge relationship to be highly effective throughout the term.
The following table reflects the fair value of NJR's derivative assets and liabilities recognized in the Unaudited Condensed Consolidated Balance Sheets that are designated as hedging instruments as of:
Fair Value
December 31, 2010
September 30, 2010
(Thousands)
Balance Sheet Location
Asset
Derivatives
Liability
Derivatives
Asset
Derivatives
Liability
Derivatives
NJRES:
Foreign exchange contracts
Derivatives - current
$
87
$
—
$
15
$
—
Derivatives - noncurrent
57
—
10
—
Total fair value of derivatives
$
144
$
—
$
25
$
—
At December 31, 2010, the notional amount of the foreign currency transactions was approximately $4.7 million, and ineffectiveness in the hedge relationship is immaterial to the financial results of NJR.
The following table reflects the balances recorded in other comprehensive income relating to derivatives that the Company has designated as cash flow hedges as of:
(Thousands)
Amount of Gain (Loss) in OCI (effective portions)
Amount of Gain (Loss) reclassifed from OCI into income (Gas Purchases)
Gain (Loss) recognized in income on Derivative (ineffective portion)
December 31, 2010
September 30, 2010
December 31, 2010
September 30, 2010
December 31, 2010
September 30, 2010
Foreign exchange contracts
$
144
$
25
$
—
$
—
$
—
$
—
Total
$
144
$
25
$
—
$
—
$
—
$
—
NJRES utilizes financial derivatives to economically hedge the gross margin associated with the purchase of physical gas for injection into storage and the subsequent sale of physical gas at a later date. The gains (losses) on the financial transactions
Page 11
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that are economic hedges of the cost of the purchased gas are recognized prior to the gains (losses) on the physical transaction, which are recognized in earnings when the natural gas is sold. Therefore, mismatches between the timing of the recognition of realized gains or losses on the financial derivative instruments and gains (losses) associated with the actual sale of the natural gas that is being economically hedged along with fair value changes in derivative instruments creates volatility in the results of NJRES, although the Company's intended economic results relating to the entire transaction are unaffected.
Gains (losses) recognized at NJRES and NJR Energy are as follows as of:
(Thousands)
Location of Gain (Loss) recognized in income on Derivative
Amount of Gain (Loss) recognized
in income on Derivative
Three Months Ended
December 31,
Derivatives not designated as hedging instruments under ASC 815:
2010
2009
NJRES:
Physical commodity contracts
Operating revenues
$
(16,469
)
$
(354
)
Physical commodity contracts
Gas purchases
3,709
(619
)
Financial commodity contracts
Gas purchases
(28,271
)
23,939
Subtotal NJRES
(41,031
)
22,966
NJR Energy:
Financial commodity contracts
Operating revenues
—
(1,745
)
Total NJRES and NJR Energy unrealized and realized (losses) gains
$
(41,031
)
$
21,221
Not included in the table above, are (losses) associated with NJNG's financial derivatives that totaled $(2.7) million and $(7.9) million for the three months ended December 31, 2010 and 2009, respectively. These derivatives are part of its regulated risk management activities that serve to mitigate BGSS costs passed on to its customers. As these transactions are entered into pursuant to and recoverable through regulatory riders, any changes in the value of NJNG's financial derivatives are deferred in regulatory assets or liabilities and there is no impact to earnings.
NJNG and NJRES had the following outstanding long (short) derivatives as of:
Volume (Bcf)
December 31, 2010
September 30, 2010
NJNG
Futures
(2.0
)
20.8
Swaps
19.0
(8.7
)
Options
—
—
NJRES
Futures
(16.1
)
(13.0
)
Swaps
27.8
(7.3
)
Options
2.9
0.6
Physical
77.5
36.1
Broker Margin
Generally, exchange-traded futures contracts require posted collateral, referred to as margin, usually in the form of cash. The amount of margin required is comprised of a fixed initial amount based on the contract and a variable amount based on market price movements from the initial trade price. The Company maintains broker margin accounts for NJNG and NJRES. The balances by company are as follows:
(Thousands)
Balance Sheet Location
December 31, 2010
September 30, 2010
NJNG broker margin deposit
Broker margin - Current assets
$
27,322
$
19,241
NJRES broker margin deposit
Broker margin - Current asset (liabilities)
$
16,417
$
(28,459
)
Page 12
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Wholesale Credit Risk
NJNG and NJRES are exposed to credit risk as a result of their wholesale marketing activities. As a result of the inherent volatility in the prices of natural gas commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty failed to perform the obligations under its contract (for example, failed to deliver or pay for natural gas), then the Company could sustain a loss.
NJR monitors and manages the credit risk of its wholesale marketing operations through credit policies and procedures that management believes reduce overall credit risk. These policies include a review and evaluation of current and prospective counterparties' financial statements and/or credit ratings, daily monitoring of counterparties' credit limits and exposure, daily communication with traders regarding credit status and the use of credit mitigation measures, such as collateral requirements and netting agreements. Examples of collateral include letters of credit and cash received for either prepayment or margin deposit. Collateral may be requested due to NJR's election not to extend credit or because exposure exceeds defined thresholds. Most of NJR's wholesale marketing contracts contain standard netting provisions. These contracts include those governed by the International Swaps and Derivatives Association (ISDA) and the North American Energy Standards Board (NAESB). The netting provisions refer to payment netting, whereby receivables and payables with the same counterparty are offset and the resulting net amount is paid to the party to which it is due.
The following is a summary of gross credit exposures grouped by investment and noninvestment grade counterparties, as of December 31, 2010. Internally-rated exposure applies to counterparties that are not rated by Standard & Poor's (S&P) or Moody's Investors Service, Inc. (Moody's). In these cases, the company's or guarantor's financial statements are reviewed, and similar methodologies and ratios used by S&P and/or Moody's are applied to arrive at a substitute rating. Gross credit exposure is defined as the unrealized fair value of physical and financial derivative commodity contracts plus any outstanding wholesale receivable for the value of natural gas delivered for which payment has not yet been received. The amounts presented below have not been reduced by any collateral received or netting and exclude accounts receivable for NJNG retail natural gas sales and services.
(Thousands)
Gross Credit
Exposure
Investment grade
$
236,371
Noninvestment grade
7,340
Internally rated investment grade
39,547
Internally rated noninvestment grade
14,564
Total
$
297,822
Conversely, certain of NJNG's and NJRES' derivative instruments are linked to agreements containing provisions that would require cash collateral payments from the Company if certain events occur. These provisions vary based upon the terms in individual counterparty agreements and can result in cash payments if NJNG's credit rating were to fall below its current level. NJNG's credit rating, with respect to S&P, reflects the overall corporate credit profile. Specifically, most, but not all, of these additional payments will be triggered if NJNG's debt is downgraded by the major credit agencies, regardless of investment grade status. As well, some of these agreements include threshold amounts that would result in additional collateral payments if the values of derivative liabilities were to exceed the maximum values provided for in relevant counterparty agreements. Other provisions include payment features that are not specifically linked to ratings, but are based on certain financial metrics.
Collateral amounts associated with any of these conditions, are determined based on a sliding scale and are contingent upon the degree to which the Company's credit rating and/or financial metrics deteriorate, and the extent to which liability amounts exceed applicable threshold limits. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on December 31, 2010 and September 30, 2010, is $2.2 million and $7.4 million, respectively, for which the Company had not posted any collateral. If all the thresholds related to the credit-risk-related contingent features underlying these agreements had been invoked on December 31, 2010 and September 30, 2010, the Company would have been required to post an additional $300,000 and $5.5 million, respectively, to its counterparties. These amounts differ from the respective net derivative liabilities reflected in the Unaudited Condensed Consolidated Balance Sheets because the credit agreements also include clauses, commonly known as “Rights of Offset,” that would permit the Company to offset its derivative assets against its derivative liabilities for determining additional collateral to be posted.
Page 13
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FAIR VALUE
Fair Value of Assets and Liabilities
The fair value of cash and temporary investments, commercial paper and borrowings under revolving credit facilities are estimated to equal their carrying amounts due to the short maturity of those instruments. The estimated fair value of long-term debt, including current maturities, is based on quoted market prices for similar issues and is as follows:
(Thousands)
December 31, 2010
September 30, 2010
Carrying value
$
444,510
$
460,182
Fair market value
$
465,915
$
495,035
Fair Value Hierarchy
NJR applies fair value measurement guidance to its financial assets and liabilities, as appropriate, which include financial derivatives and physical commodity contracts qualifying as derivatives, available for sale securities and other financial assets and liabilities. In addition, authoritative accounting literature prescribes the use of a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on the source of the data used to develop the price inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to inputs that are based on unobservable market data and include the following:
Level 1
Unadjusted quoted prices for identical assets or liabilities in active markets; NJR's Level 1 assets and liabilities include exchange traded financial derivative contracts, listed equities, and money market funds.
Level 2
Price data, which includes both commodity and basis price data other than Level 1 quotes, that is observed either directly or indirectly from publications or pricing services; NJR's Level 2 assets and liabilities include over-the-counter physical forward commodity contracts and swap contracts or derivatives that are initially valued using observable quotes and are subsequently adjusted to include time value, credit risk or estimated transport pricing components for which no basis price is available. These additional adjustments are not considered to be significant to the ultimate recognized values.
Level 3
Inputs derived from a significant amount of unobservable market data; these include NJR's best estimate of fair value and are derived primarily through the use of internal valuation methodologies.
NJNG's and NJRES' financial derivatives portfolios consist mainly of futures, options and swaps. NJR primarily uses the market approach and its policy is to use actively quoted market prices when available. The principal market for its derivative transactions is the natural gas wholesale market, therefore, the primary source for its price inputs is the New York Mercantile (NYMEX) exchange. NJRES also uses Natural Gas Exchange (NGX) for Canadian delivery points and Platts and NYMEX ClearPort for certain over-the-counter physical forward commodity contracts. However, NJRES also engages in transactions that result in transporting natural gas to delivery points for which there is no actively quoted market price. In most instances, the cost to transport to the final delivery location is not significant to the overall valuation. If required, NJRES' policy is to use the best information available to determine fair value based on internal pricing models, which would include estimates extrapolated from broker quotes or pricing services.
NJR also has available for sale securities and other financial assets that include listed equities, mutual funds and money market funds for which there are active exchange quotes available.
When NJR determines fair values, measurements are adjusted, as needed, for credit risk associated with its counterparties, as well as its own credit risk. NJR determines these adjustments by using historical default probabilities that correspond to the applicable Standard and Poor's issuer ratings, while also taking into consideration collateral and netting arrangements that serve to mitigate risk.
Page 14
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant
Unobservable
Inputs
(Thousands)
(Level 1)
(Level 2)
(Level 3)
Total
As of December 31, 2010:
Assets:
Physical forward commodity contracts
$
—
$
19,819
$
—
$
19,819
Financial derivative contracts - natural gas
30,921
61,532
—
92,453
Financial commodity contracts - foreign exchange
—
144
—
144
Available for sale equity securities - Energy industry (1)
10,986
—
—
10,986
Other
2,083
—
—
2,083
Total assets at fair value
$
43,990
$
81,495
$
—
$
125,485
Liabilities:
Physical forward commodity contracts
$
—
$
13,585
$
—
$
13,585
Financial commodity contracts - natural gas
36,237
56,370
—
92,607
Financial commodity contracts - foreign exchange
—
—
—
—
Other
825
—
—
825
Total liabilities at fair value
$
37,062
$
69,955
$
—
$
107,017
As of September 30, 2010:
Assets:
Physical forward commodity contracts
$
—
$
24,048
$
—
$
24,048
Financial derivative contracts - natural gas
58,824
60,246
—
119,070
Financial commodity contracts - foreign exchange
—
25
—
25
Available for sale equity securities - Energy industry(1)
10,290
—
—
10,290
Other
947
—
—
947
Total assets at fair value
$
70,061
$
84,319
$
—
$
154,380
Liabilities:
Physical forward commodity contracts
$
—
$
6,058
$
—
$
6,058
Financial derivative contracts - natural gas
38,497
39,532
—
78,029
Other
936
—
—
936
Total liabilities at fair value
$
39,433
$
45,590
$
—
$
85,023
(1)
Included in Investments in equity investees in the Unaudited Condensed Consolidated Balance Sheets.
6. INVESTMENTS IN EQUITY INVESTEES
NJR's Investments in equity investees include the following investments as of:
(Thousands)
December 31, 2010
September 30, 2010
Steckman Ridge
$
135,515
$
134,359
Iroquois
22,998
24,585
Other
10,986
10,290
Total
$
169,499
$
169,234
NJR uses the equity method of accounting for its investments in Steckman Ridge and Iroquois. Earnings or losses from equity method investments are included in Equity in earnings of affiliates in the Condensed Consolidated Statements of Operations.
Page 15
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other consists of an investment in equity securities of a publicly traded energy company and is accounted for as available for sale securities, with any change in the value of such investment recorded in other comprehensive income, a component of Common stock equity.
7. EARNINGS PER SHARE
The following table presents the calculation of the Company's basic and diluted earnings per share for:
Three Months Ended
December 31,
(Thousands, except per share amounts)
2010
2009
Net Income, as reported
$
24,509
$
51,902
Basic earnings per share
Weighted average shares of common stock outstanding-basic
41,280
41,615
Basic earnings per common share
$0.59
$1.25
Diluted earnings per share
Weighted average shares of common stock outstanding-basic
41,280
41,615
Incremental shares (1)
230
386
Weighted average shares of common stock outstanding-diluted
41,510
42,001
Diluted earnings per common share (2)
$0.59
$1.24
(1)
Incremental shares consist of stock options, stock awards and performance units.
(2)
There were no anti-dilutive shares excluded from the calculation of diluted earnings per share for the three months ended December 31, 2010, and 2009.
8. DEBT
A summary of NJR's and NJNG's committed credit facilities, which require commitment fees on the unused amounts, are as follows:
(Thousands)
December 31, 2010
September 30, 2010
NJR
Long-term debt
$
50,000
$
50,000
Bank credit facilities (1)
$
325,000
$
325,000
Amount outstanding at end of period
Notes payable to banks
$
284,125
$
140,600
Weighted average interest rate at end of period
Notes payable to banks
0.53
%
0.64
%
NJNG
Long-term debt
$
329,845
$
349,845
Bank credit facilities (1)
$
200,000
$
200,000
Amount outstanding at end of period
Commercial paper
$
57,000
$
7,000
Weighted average interest rate at end of period
Commercial paper
0.26
%
0.26
%
(1)
Company is subject to commitment fees on outstanding and unused amounts.
NJR
NJR has a $325 million unsecured committed credit facility expiring in December 2012. As of December 31, 2010, NJR had $284 million in borrowings outstanding under the facility.
On January 11, 2011, NJR entered into an agreement for an additional $50 million unsecured committed credit line, which will expire on May 11, 2011. The additional credit line, was put in place primarily to provide additional working capital to NJRES to meet any potential margin calls that may arise in NJRES' normal course of business. The credit line can be canceled upon two days notice by NJR. Borrowings under this credit line are conditional upon compliance with the covenants of NJR's committed credit facility described above.
Page 16
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2010, NJR has three letters of credit outstanding, totaling $8.1 million, on behalf of NJRES. Two of those letters of credit, totaling $7.1 million, are used to secure the purchase and/or sale of natural gas; one expires on December 31, 2011, and the other expires on March 19, 2011. The other letter of credit, which totals $1 million, is used for margin requirements for natural gas transactions and will expire on June 30, 2011. NJR also has a $675,000 letter of credit outstanding on behalf of CR&R, which will expire on December 3, 2011. The letter of credit is in place to support development activities. These letters of credit reduce the amount available under NJR's committed credit facility by the same amount. NJR does not anticipate that these letters of credit will be drawn upon by the counterparties, and they will be renewed as necessary.
NJNG
NJNG has a $200 million revolving unsecured committed credit facility, which expires in December 2012. The credit facility is used to support NJNG's commercial paper program and provides for the issuance of letters of credit. As of December 31, 2010, NJNG had $57 million in borrowings outstanding under the facility.
On October 1, 2010, upon maturity, NJNG redeemed its $20 million Series CC First Mortgage bonds.
NJNG received $5.9 million and $4.9 million in December 2010 and 2009, respectively, in connection with the sale-leaseback of its natural gas meters. This sale-leaseback program is expected to be continued on an annual basis.
Neither NJNG nor the results of its operations are obligated or pledged to support the NJR or NJRES credit facilities.
9.
STOCK BASED COMPENSATION
On November 17, 2010, the Company granted 56,325 performance shares, which are market condition awards that vest on September 30, 2013, subject to certain conditions. Also, on November 17, 2010, the company granted 36,614 restricted shares, which vest in three equal annual installments, the first occurring on October 15, 2011, and 25,535 restricted shares, which all vest on November 17, 2013. As of December 31, 2010, 2,038,869 and 82,762 shares remain available for future issuance to employees and directors, respectively.
During the three months ended December 31, 2010, included in operation and maintenance expense is $400,000 related to stock-based compensation compared with $630,000 during the three months ended December 31, 2009. As of December 31, 2010, there remains $2.2 million of deferred compensation related to unvested restricted and performance shares that is expected to be recognized over the next three years.
10. EMPLOYEE BENEFIT PLANS
Pension and Other Postemployment Benefit Plans (OPEB)
The components of the net periodic cost for pension benefits, including NJR's Pension Equalization Plan, and OPEB costs (principally health care and life insurance) for employees and covered dependents were as follows:
Pension
OPEB
Three Months Ended
Three Months Ended
December 31,
December 31,
(Thousands)
2010
2009
2010
2009
Service cost
$
1,194
$
992
$
836
$
704
Interest cost
2,094
2,049
1,211
1,204
Expected return on plan assets
(2,872
)
(2,577
)
(618
)
(485
)
Recognized actuarial loss
986
681
653
570
Prior service cost amortization
12
14
19
19
Recognized net initial obligation
—
—
89
89
Net periodic cost
$
1,414
$
1,159
$
2,190
$
2,101
Page 17
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company does not expect to be required to make additional contributions to fund the pension plans over the next three fiscal years based on current actuarial assumptions; however, funding requirements are uncertain and can depend significantly on changes in actuarial assumptions, returns on plan assets and changes in the demographics of eligible employees and covered dependents. In addition, as in the past, the Company may elect to make contributions in excess of the minimum required amount to the plans. NJR made a discretionary contribution of $4.9 million to the pension plans in October 2010. It is anticipated that the annual funding level to the OPEB plans will range from $5.5 million to $6.6 million annually over the next five years. Additional contributions may vary based on market conditions and various assumptions.
11. ASSET RETIREMENT OBLIGATIONS (ARO)
NJR recognizes AROs related to the costs associated with cutting and capping its main and service gas distribution pipelines of NJNG, which are required by New Jersey law when taking such gas distribution pipeline out of service.
The following is an analysis of the change in the ARO liability:
(Thousands)
December 31, 2010
September 30, 2010
Balance at October 1
$
26,009
$
25,097
Accretion
413
1,572
Additions
—
149
Retirements
(291
)
(809
)
Balance at period end
$
26,131
$
26,009
Accretion amounts are not reflected as an expense on NJR's Unaudited Condensed Consolidated Statements of Operations, but rather are deferred as a regulatory asset and netted against NJNG's regulatory liabilities, for presentation purposes, on the Unaudited Condensed Consolidated Balance Sheet.
12. INCOME TAXES
NJR evaluates its tax positions to determine the appropriate accounting and recognition of potential future obligations associated with unrecognized tax benefits. As of December 31, 2010, the Company believes, based on its analysis, that there is no need to recognize any liabilities associated with uncertain tax positions.
The effective tax rates for the periods ended December 31, 2010 and 2009, are 36.1 percent and 38.2 percent, respectively. The decrease in the rate is due primarily to a federal investment tax credit (ITC) recorded at NJRCEV and NJRHS during the three months ended December 31, 2010.
13. COMMITMENTS AND CONTINGENT LIABILITIES
Cash Commitments
NJNG has entered into long-term contracts, expiring at various dates through 2023, for the supply, storage and delivery of natural gas. These contracts include current annual fixed charges of approximately $95 million at current contract rates and volumes, which are recoverable through BGSS.
For the purpose of securing adequate storage and pipeline capacity, NJRES enters into storage and pipeline capacity contracts, which require the payment of certain demand charges by NJRES in order to maintain the ability to access such natural gas storage or pipeline capacity, during a fixed time period, which generally ranges from one to five years. Demand charges are based on established rates as regulated by the FERC. These demand charges represent commitments to pay storage providers or pipeline companies for the right to store and transport natural gas utilizing their respective assets.
Page 18
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commitments as of December 31, 2010, for natural gas purchases and future demand fees for the next five fiscal year periods are as follows:
(Thousands)
2011
2012
2013
2014
2015
Thereafter
NJRES:
Natural gas purchases
$
415,320
$
204,980
$
57,470
$
—
$
—
$
—
Storage demand fees
23,022
20,581
12,391
6,761
4,376
11,229
Pipeline demand fees
36,221
22,653
9,900
7,397
6,156
17,842
Sub-total NJRES
$
474,563
$
248,214
$
79,761
$
14,158
$
10,532
$
29,071
NJNG:
Natural gas purchases
$
23,056
$
—
$
—
$
—
$
—
$
—
Storage demand fees
19,919
23,322
21,143
16,259
11,487
44,340
Pipeline demand fees
51,123
74,550
75,664
70,785
34,545
228,695
Sub-total NJNG
$
94,098
$
97,872
$
96,807
$
87,044
$
46,032
$
273,035
Total(1)
$
568,661
$
346,086
$
176,568
$
101,202
$
56,564
$
302,106
(1) Does not include amounts related to intercompany asset management agreements between NJRES and NJNG.
Costs for storage and pipeline demand fees, included as a component of gas purchases on the Unaudited Condensed Consolidated Statements of Operations, are as follows:
Three Months Ended
December 31,
(Millions)
2010
2009
NJRES
$
29.4
$
29.3
NJNG
25.0
23.2
Total
$
54.4
$
52.5
NJNG's capital expenditures consist primarily of its construction program to support customer growth, maintenance of its distribution system and replacement needed under pipeline safety regulations. Expenditures are estimated at $93.2 million and $75.8 million for fiscal 2011 and 2012, respectively. Approximately $26.1 million has been incurred on capital expenditures in fiscal 2011. The expected expenditures for fiscal 2011 include an estimate of $23.3 million related to AIP construction costs, of which $11.1 million was incurred during the three months ended December 31, 2010.
The Company has entered into various agreements to install solar equipment involving both residential and commercial projects. As of December 31, 2010, total capital expenditures were $3.7 million. The Company currently estimates capital expenditures of between $50 - $70 million in fiscal 2011, of which $19.7 million has been committed. These investments are subject to a variety of factors, including our ability to avoid difficulties with logistics associated with the start-up of commercial solar projects, such as timing of construction schedules and the permitting and regulatory process, which may affect our ability to commence operations at these projects on a timely basis or at all.
The Company's future minimum lease payments under various operating leases are less than $2.2 million annually for the next five years and $1.3 million in the aggregate for all years thereafter.
Guarantees
As of December 31, 2010, there were NJR guarantees covering approximately $387.7 million of natural gas purchases and demand fee commitments of NJRES and NJNG not yet reflected in accounts payable on the Unaudited Condensed Consolidated Balance Sheet.
The Company enters into agreements to lease vehicles, generally over a five-year term, which qualify as operating leases. These agreements contain provisions that could require the Company to make additional cash payments at the end of the term for a portion of the residual value of the vehicles. As of December 31, 2010, the present value of the liability recognized on the Unaudited Condensed Consolidated Balance Sheets is $595,000. In the event performance under the guarantee is required, the Company's maximum future payment would be $911,000.
Page 19
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Legal Proceedings
Manufactured Gas Plant Remediation
NJNG is responsible for the remedial cleanup of five manufactured gas plant (MGP) sites, dating back to gas operations in the late 1800s and early 1900s, which contain contaminated residues from former gas manufacturing operations. NJNG is currently involved in administrative proceedings with the New Jersey Department of Environmental Protection (NJDEP), as well as participating in various studies and investigations by outside consultants to determine the nature and extent of any such contaminated residues and to develop appropriate programs of remedial action, where warranted, under Administrative Consent Orders or Memoranda of Agreement with the NJDEP.
NJNG may, subject to BPU approval, recover its remediation expenditures, including carrying costs, over rolling seven-year periods pursuant to a RA approved by the BPU. In April 2010, the BPU approved the recovery of the remediation expenditures incurred through September 30, 2008, increasing the expected annual recovery from $17.7 million to approximately $20 million. As of December 31, 2010, $74.2 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in regulatory assets on the Unaudited Condensed Consolidated Balance Sheet.
In September 2010, NJNG updated an environmental review of the MGP sites, including a review of potential liability for investigation and remedial action. NJNG estimated at the time of the review that total future expenditures to remediate and monitor the five MGP sites for which it is responsible, including potential liabilities for Natural Resource Damages that might be brought by the NJDEP for alleged injury to groundwater or other natural resources concerning these sites, will be $201.6 million. NJNG's estimate of these liabilities is based upon known facts, existing technology and enacted laws and regulations in place when the review was completed. However, NJNG expects actual costs to differ from these estimates. Where it is probable that costs will be incurred, and the information is sufficient to establish a range of possible liability, NJNG accrues the best estimated amount in the range. If no point within the range is more likely than the other, it is NJNG's policy to accrue the lower end of the range. Accordingly, NJNG has recorded an MGP remediation liability and a corresponding regulatory asset of $201.6 million on the Unaudited Condensed Consolidated Balance Sheet, based on the best estimate. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and any insurance recoveries.
NJNG will continue to seek recovery of MGP-related costs through the RA. If any future regulatory position indicates that the recovery of such costs is not probable, the related non-recoverable costs would be charged to income in the period of such determination. However, because recovery of such costs is subject to BPU approval, there can be no assurance as to the ultimate recovery through the RA or the impact on the Company's results of operations, financial position or cash flows, which could be material.
General
The Company is party to various other claims, legal actions and complaints arising in the ordinary course of business. In the Company's opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition, results of operations or cash flows.
14. BUSINESS SEGMENT AND OTHER OPERATIONS DATA
NJR organizes its businesses based on its products and services as well as regulatory environment. As a result, the Company manages the businesses through the following reportable segments and other operations: the Natural Gas Distribution segment consists of regulated energy and off-system, capacity and storage management operations; the Energy Services segment consists of unregulated wholesale energy operations; the Midstream Asset segment consists of NJR's investments in natural gas transportation and storage facilities; the Retail and Other operations consist of appliance and installation services, commercial real estate development, renewable energy and other investments and general corporate activities.
During fiscal 2010, NJR entered the solar energy markets and began planning for capital investments primarily consisting of residential and commercial rooftop and ground mount solar systems. NJR expects that both the capital expenditures and earnings contributions from these investments will be significant during fiscal 2011. In anticipation of the implementation of these planned projects, effective October 1 2010, NJR established Clean Energy Ventures as a new reportable segment.
Page 20
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information related to the Company's various business segments and other operations is detailed below:
