Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NJR > SEC Filings for NJR > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for NEW JERSEY RESOURCES CORP

Form 10-Q for NEW JERSEY RESOURCES CORP


7-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Management's Overview

New Jersey Resources Corporation (NJR or the Company) is an energy services holding company providing retail natural gas service in New Jersey and wholesale natural gas and related energy services to customers in states from the Gulf Coast and Mid-Continent regions to the Appalachian and Northeast regions, the West Coast and Canada through two of its subsidiaries, New Jersey Natural Gas (NJNG) and NJR Energy Services (NJRES).

Comprising our Natural Gas Distribution segment, NJNG is a natural gas utility that provides regulated retail natural gas service in central and northern New Jersey and also participates in the off-system sales and capacity release markets. NJNG is regulated by the New Jersey Board of Public Utilities (BPU).

NJR Clean Energy Ventures (NJRCEV) invests in renewable energy projects consisting primarily of residential and commercial rooftop and ground mount solar systems. In addition, NJRCEV has an ownership interest in OwnEnergy that will allow NJRCEV to participate in on-shore wind projects. NJRCEV comprises our Clean Energy Ventures segment.

NJRES comprises our Energy Services segment. NJRES maintains and transacts around a portfolio of physical assets consisting of natural gas storage and transportation contracts. In addition, NJRES provides wholesale energy services to non-affiliated utility and energy companies.

Our Midstream Investments segment (formerly Energy Holdings segment) includes NJR Energy Holdings Corporation (NJREH), which primarily invests in energy-related ventures through its subsidiaries, NJNR Pipeline Company, which holds the Company's 5.53 percent ownership interest in Iroquois Gas Transmission 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), a natural gas storage facility in Pennsylvania.

Page 24

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)

The retail and other business operations (Retail and Other) includes: NJR Home Services (NJRHS), which provides service, sales and installation of appliances, as well as solar installation projects; NJR Energy Corporation (NJR Energy), a company that invests in energy-related ventures; NJR Plumbing Services (NJRPS), which provides plumbing repair and installation services; Commercial Realty and Resources (CR&R), which holds and develops commercial real estate; and NJR Service Corporation, which provides support services to the various NJR businesses.

Assets by business segment and operations are as follows:

                               June 30,            September 30,
(Thousands)                      2013                   2012
Assets
Natural Gas Distribution $ 2,062,913    69  %   $ 2,005,520    72  %
Clean Energy Ventures        253,680     8          223,247     8
Energy Services              497,941    17          347,406    12
Midstream Investments        156,135     5          157,779     6
Retail and Other              86,920     3           73,298     3
Eliminations (1)             (66,394 )  (2 )        (37,245 )  (1 )
Total                    $ 2,991,195   100  %   $ 2,770,005   100  %

(1) Consists of transactions between subsidiaries that are eliminated in consolidation.

The increase in assets during the nine months ended June 30, 2013, was due primarily to higher gas in storage and receivable balances at Energy Services, along with increases in accounts receivable and unbilled revenue in Natural Gas Distribution due to the seasonality of the business along with an increase in property, plant & equipment.

Net income (loss) by business segment and operations are as follows:

                                    Three Months Ended                         Nine Months Ended
                                         June 30,                                   June 30,
(Thousands)                     2013                  2012                 2013                 2012
Net Income (Loss)
Natural Gas Distribution $   5,528     19  %   $   7,545   (73 )%   $  76,937     57 %   $  78,455     77  %
Clean Energy Ventures       (1,381 )   (5 )       (1,157 )  11          9,078      7        20,802     20
Energy Services             22,222     76        (19,895 ) 193         42,812     32        (3,754 )   (4 )
Midstream Investments        1,541      5          1,634   (16 )        5,600      4         5,438      5
Retail and Other             1,944      7          1,549   (15 )          813      -           860      2
Eliminations (1)              (699 )   (2 )            4     -           (410 )    -          (229 )    -
Total                    $  29,155    100  %   $ (10,320 ) 100  %   $ 134,830    100 %   $ 101,572    100  %

(1) Consists of transactions between subsidiaries that are eliminated in consolidation.

Included in net income are unrealized gains (losses) in the Energy Services segment of $28.6 million and $(20.9) million, after taxes, for the three months ended June 30, 2013 and 2012, respectively and realized (losses) gains of $(8.5) million and $6.4 million, after taxes, for the three months ended June 30, 2013 and 2012, respectively, which are related to financial derivative instruments that have settled and are designed to economically hedge natural gas still in inventory. During the nine months ended June 30, 2013 and 2012, unrealized gains (losses) were $15.4 million and $(10.9) million, after taxes, respectively, and realized gains (losses) were $6 million and $(10.9) million, after taxes, respectively.

NJRES accounts for its physical commodity contracts and its financial derivative instruments used to economically hedge the forecasted purchase, sale and transportation of natural gas at fair value on the Unaudited Condensed Consolidated Balance Sheets. Changes in the fair value of these contracts are included in earnings as a component of operating revenues and gas purchases, as appropriate, on the Unaudited Condensed Consolidated Statements of Operations. All physical commodity contracts at NJNG are accounted for under accrual accounting. Accordingly, gains and losses are recognized in earnings when the contract settles and the natural gas is delivered.

Unrealized gains and losses at NJRES are the result of changes in the fair value of derivative instruments. The change in fair value of these derivative instruments at NJRES over periods of time can result in substantial volatility in reported net income.

Page 25

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)

When a financial instrument settles, the result is the realization of these gains or losses. NJRES utilizes certain financial instruments to economically hedge natural gas inventory placed into storage that will be sold at a later date, all of which were contemplated as part of an entire forecasted transaction. Volatility in earnings also occurs as a result of timing differences between the settlement of the financial derivative and the sale of the corresponding natural gas that was hedged with the financial instrument. When the financial instrument settles and the natural gas is placed in inventory, the realized gains and losses associated with the financial instrument are recognized in earnings. However, the gains and losses associated with the economically hedged natural gas are not recognized in earnings until the natural gas inventory is sold.

Management of the Company uses a non-Generally Accepted Accounting Principles (non-GAAP) measure, noted as "net financial earnings," when evaluating the operating results of NJRES. Net financial earnings (NFE) is a measure of the earnings based on eliminating timing differences surrounding the recognition of certain gains or losses as described above, to effectively match the earnings effects of the economic hedges with the physical sale of gas and, therefore, eliminates the impact of volatility to Generally Accepted Accounting Principles (GAAP) earnings associated with the derivative instruments.

Net financial earnings by business segment and operations are as follows:

                                  Three Months Ended                          Nine Months Ended
                                       June 30,                                   June 30,
($ in Thousands)              2013                  2012                  2013                 2012
Net Financial Earnings
(Loss)
Natural Gas
Distribution           $   5,528     57  %   $   7,545    183  %   $  76,937     67 %   $  78,455     63 %
Clean Energy Ventures     (1,381 )  (14 )       (1,157 )  (28 )        9,078      8        20,802     17
Energy Services            2,097     21         (5,425 ) (131 )       21,479     19        18,061     15
Midstream Investments      1,541     16          1,634     39          5,600      5         5,438      4
Retail and Other           1,944     20          1,549     37            813      1           860      1
Eliminations (1)               9      -            (16 )    -            (12 )    -           (52 )    -
Total                  $   9,738    100  %   $   4,130    100  %   $ 113,895    100 %   $ 123,564    100 %

(1) Consists of transactions between subsidiaries that are eliminated in consolidation.

Natural Gas Distribution Segment

Our Natural Gas Distribution segment has approximately 497,400 residential and commercial customers in its service territory. The business is subject to various risks, such as those associated with adverse economic conditions that can negatively impact customer growth, operating and financing costs, fluctuations in commodity prices and customer conservation efforts, which can impact customer usage, certain regulatory actions, environmental remediation and severe weather conditions. It is often difficult to predict the impact of events or trends associated with these risks. NJNG employs certain strategies to mitigate the challenges it faces, including managing the integrity of its infrastructure, pursuing customer conversions from other fuel sources and monitoring new construction markets through contact with developers, utilizing Basic Gas Supply Service (BGSS) incentive programs through BPU-approved mechanisms to reduce gas costs, pursuing rate and other regulatory strategies designed to stabilize and decouple margin, and working actively with consultants and the New Jersey Department of Environmental Protection (NJDEP) to manage expectations related to its obligations associated with NJNG's manufactured gas plant (MGP) sites.

In October 2012, high winds, heavy rainfall and the related flooding associated with Post Tropical Cyclone Sandy, commonly referred to as Superstorm Sandy (Superstorm Sandy) caused significant damage to portions of NJNG's distribution system. As a result, NJNG shut off the natural gas infrastructure in certain areas of its service territory that were most heavily damaged, affecting approximately 30,100 of NJNG's customers. As of June 30, 2013, total capital expenditures associated with the restoration of the affected portions of distribution main are estimated to be between $30 million to $40 million. NJNG expects to spend between $26 million to $30 million during fiscal 2013, with the remainder being spent over the following three fiscal years. As with normal operations, capital costs will be treated as additions to NJNG's rate base on which recovery will be sought in a future base rate case. In addition, on November 19, 2012, NJNG filed a petition with the BPU requesting deferral accounting for uninsured incremental operating and maintenance (O&M) costs associated with Superstorm Sandy restoration efforts. NJNG requested that the review of and the appropriate recovery period for such deferred expenses be addressed in NJNG's next base rate case. On May 29, 2013, NJNG received approval from the BPU regarding the deferral of Superstorm Sandy O&M costs. As of June 30, 2013, NJNG has approximately $14.9 million of deferred costs in regulatory assets on the Unaudited Condensed Consolidated Balance Sheets related to the restoration of its infrastructure and expects that total incremental O&M costs during fiscal 2013 will approximate between $15 million to $17 million.

Page 26

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)

On March 20, 2013, the BPU issued an Order establishing a generic proceeding to review the prudency of costs incurred by New Jersey utility companies in response to major storm events in 2011 and 2012. On July 1, 2013, NJNG filed its detailed report to include unreimbursed, uninsured incremental storm restoration costs and capital expenditures related to Superstorm Sandy.

Conservation Incentive Program (CIP)

The CIP allows NJNG to recover utility gross margin variations related to both weather and customer usage subject to certain conditions. In June 2012, NJNG filed for a decrease in the CIP rate for residential non-heating customers and an increase in the CIP rates for residential heating and commercial customers, which was approved on a provisional basis and went into effect October 12, 2012. On May 29, 2013, NJNG submitted its fiscal 2014 BGSS/CIP petition with the BPU, which proposes a 1 percent reduction to an average residential heat customer's bill related to the CIP factor for fiscal 2014. See the Results of Operations section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact to utility gross margin.

On March 1, 2013, NJNG and South Jersey Gas Company filed a joint petition with the BPU requesting the continuation of the CIP with certain modifications. The discovery phase has commenced and, if no Board Order on that petition is issued as of September 30, 2013, the CIP program may continue for up to one additional year or until such an Order is issued, whichever is earlier.

As of June 30, 2013, NJNG has $19 million in regulatory assets on the Unaudited Condensed Consolidated Balance Sheets related to CIP accrued to be recovered in future periods from customers.

Customer growth

In conducting NJNG's business, management focuses on factors it believes may have significant influence on its future financial results. NJNG's policy is to work with all stakeholders, including customers, regulators and policymakers, to achieve favorable results. These factors include the rate of NJNG's customer growth in its service territory, which can be influenced by political and regulatory policies, the delivered cost of natural gas compared with competing fuels, interest rates and general economic conditions.

NJNG added 5,301 and 4,891 new customers and converted 497 and 395 existing customers to natural gas heat and other services during the nine months ended June 30, 2013 and 2012, respectively. This customer growth represents an estimated annual increase of approximately .6 billion cubic feet (Bcf) in sales to firm customers, which would contribute approximately $2.6 million annually to utility gross margin assuming normal weather and usage. NJNG currently expects to add approximately 13,000 to 15,000 new customers during the two-year period of fiscal 2013 and 2014. This growth rate would increase utility gross margin under NJNG's base rates by approximately $3.7 million annually, as calculated under NJNG's CIP tariff. See the Natural Gas Distribution Results of Operations section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for a definition and further discussion of utility gross margin.

Commodity prices

Our Natural Gas Distribution segment is affected by the price of natural gas, which can have a significant impact on our cash flows, short-term financing costs, gas costs recovered from customers, NJNG's ability to collect accounts receivable, which impacts our bad debt expense, and our ability to maintain a competitive advantage over other fuel sources. Natural gas commodity prices may experience high volatility as indicated by New York Mercantile Exchange (NYMEX) settlement prices, which ranged from $3.02 per MMBtu (Million Metric British thermal unit) to $4.15 per MMBtu and from $2.04 per MMBtu to $3.76 per MMBtu during the nine months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, forward natural gas prices for the next twelve months on the NYMEX, which serve as a market indicator, averaged $3.76 per MMBtu, 4.2 percent higher than the average settlement price of $3.61 per MMBtu during the nine months ended June 30, 2013.

NJNG occasionally adjusts its periodic BGSS rates for its residential and small commercial customers to reflect changes in the cost of natural gas and can extend credits or refunds to its customers when the commodity cost is trending lower than the current BGSS rate. Accordingly, during the nine months ended June 30, 2012, NJNG issued credits of $85.9 million, to residential and small commercial customers. BGSS rates for its large commercial customers are changed monthly based on NYMEX prices. There were no bill credits issued during the nine months ended June 30, 2013.

Page 27

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)

On May 20, 2013, the BPU approved NJNG's fiscal 2013 BGSS/CIP rate on a final basis. On May 24, 2013, NJNG notified the BPU that it was going to reduce its then current BGSS rate by 5.2 percent, effective June 1, 2013. On May 29, 2013, NJNG submitted its fiscal 2014 BGSS/CIP filing with the BPU. The BGSS/CIP filing includes the reduced BGSS rate that went into effect on June 1, 2013.

A more detailed discussion of the impacts of the price of natural gas to operating revenues, gas purchases and cash flows can be found in the Results of Operations and Cash Flow sections of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

BGSS incentive programs

NJNG is eligible to receive financial incentives for reducing BGSS costs through a series of utility gross margin-sharing programs that include Off-System Sales, Capacity Release, Storage Incentive and Financial Risk Management (FRM) programs. Effective August 18, 2011, the BPU approved an extension of NJNG's BGSS incentive programs for four years through October 31, 2015, maintaining the existing margin-sharing percentages. This agreement also permits the Company to annually propose a process to evaluate and discuss alternative incentive programs, should performance of the existing incentives or market conditions warrant re-evaluation.

Utility gross margin from incentive programs was $6 million and $7.9 million during the nine months ended June 30, 2013 and 2012, respectively. A more detailed discussion of the impacts to margin can be found in the Results of Operations section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Environmental remediation

NJNG reviews the costs associated with its MGP remediation annually, at the end of each fiscal year, and adjusts its liability and corresponding regulatory asset as necessary to reflect its expected obligation. As of June 30, 2013, NJNG has recognized a regulatory asset and an obligation of $182 million, a decrease of $900,000, or .5 percent, compared with the prior period.

NJNG is currently authorized to recover remediation costs of approximately $20 million annually. If there are changes in the regulatory position on the recovery of these costs as determined by the BPU, such costs would be charged to income in the period of such determination. On March 20, 2013, the BPU approved a February 2012 filing that requested approval of NJNG's MGP expenditures incurred through June 30, 2011, maintaining the existing overall social benefit clause (SBC) rate and recovery. On July 23, 2013, NJNG filed an SBC petition with the BPU requesting an overall increase of 1.7 percent to the SBC as a result of a reduction to the Remediation Adjustment factor and approval of the related MGP expenditures for the period from July 1, 2011 through June 30, 2013, along with an increase to the NJCEP factor.

Infrastructure projects

NJNG has significant annual capital expenditures associated with the management of its natural gas distribution and transmission system and its associated pipeline integrity.

NJNG implemented its Accelerated Infrastructure Program (AIP), as approved by the BPU in 2009, to enhance the reliability of NJNG's gas distribution system and to support economic development and job growth in New Jersey. Since inception of the program, the BPU has approved total infrastructure investments of $131 million as of May 29, 2013. The approved projects included $70.8 million related to the initial phase of construction projects (AIP I) and $60.2 million related to the second phase of construction projects (AIP II), exclusive of AFUDC.

On October 23, 2012, NJNG received BPU approval to implement a Safety Acceleration and Facility Enhancement (SAFE) program, whereby NJNG would invest up to $130 million over a four-year period to replace portions of NJNG's gas distribution bare steel and cast iron infrastructure, exclusive of allowance for funds used during construction (AFUDC) accruals.

Other

NJNG administers The SAVEGREEN Project® (SAVEGREEN), a BPU-approved program, which facilitates home energy audits and provides financing alternatives including rebates and other incentives designed to encourage the installation of high

Page 28

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)

efficiency heating and cooling equipment. Depending on the specific initiative, NJNG recovers costs associated with the programs over a two to ten-year period.

On January 18, 2012, the BPU approved the extension of the program through January 18, 2013, with an additional $10.4 million of investments in customer incentives and rebates, earning a weighted average return of 7.1 percent, including a cost of equity of 10.3 percent. On January 23, 2013, the BPU approved a stipulation to extend NJNG's current SAVEGREEN through June 30, 2013. On June 21, 2013, the BPU approved an extension of the program through June 2015, with an additional $17.3 million of investments, earning a weighted average return of 6.9 percent. The approved SAVEGREEN projects include residential grants and incentives as well as on-bill financing options for both residential and commercial customers. The BPU also approved a rate increase of 1.7 percent related to the NJNG Energy Efficiency (EE) Tariff Rider. As of June 30, 2013, the BPU approved total EE expenditures of $56.4 million, of which NJNG has spent $37.6 million.

On June 18, 2012, the BPU approved a pilot program for NJNG to invest up to $10 million to build compressed natural gas (CNG) vehicle refueling stations in Monmouth, Ocean and Morris counties. During fiscal 2013, NJNG entered into agreements to build the infrastructure for three CNG stations at host facilities. NJNG expects to invest between $6 million to $8 million to construct these three CNG stations starting in the summer of 2013 and submit a cost recovery filing to the BPU in the spring of 2014, requesting a base rate change to be effective in the fall of 2014, earning an overall weighted average cost of capital of 7.1 percent, including a cost of equity of 10.3 percent. A portion of the proceeds from the utilization of the CNG equipment, along with any available federal and state incentives, will be credited back to customers to help offset the cost of this investment.

On March 6, 2013, the BPU directed its Staff to convene a generic proceeding for all interested parties to review issues associated with consolidated tax adjustments (CTA) as applied in utility base rate proceedings. NJNG responded to the initial data request on May 3, 2013.

Interest Rate Risk

Due to the capital-intensive nature of NJNG's operations and the seasonal nature of its working capital requirements, significant changes in interest rates can also impact NJNG's results. A more detailed discussion can be found in the Liquidity and Capital Resources and Cash Flow sections of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Clean Energy Ventures Segment

Our Clean Energy Ventures segment actively pursues opportunities in the solar renewable energy markets and has entered into various agreements to install solar equipment involving both residential and commercial projects. Projects that are placed in service qualify for a 30 percent federal investment tax credit (ITC) and once the projects commence operations, for each Megawatt hour (MWh) of electricity produced, a Solar Renewable Energy Certificate (SREC) is created.

In October 2012, certain NJRCEV solar assets sustained damage as a result of Superstorm Sandy, including a minor portion of a 1.5 Megawatts (MW) rooftop commercial solar array. To the extent that any of the assets were deemed irreparable, the Company disposed of the damaged equipment. Accordingly, NJRCEV recognized a pre-tax loss of $766,000 in the first quarter of fiscal 2013, which is included in other income on the Unaudited Condensed Consolidated Statements of Operations. During the third quarter of fiscal 2013, the Company received $954,000 from an insurance claim, representing replacement value of the disposed assets.

NJRCEV's investments are subject to a variety of factors, including logistics associated with the start-up of residential and commercial solar projects, such as timing of construction schedules, the permitting and regulatory process, any delays related to electric grid interconnection, which may affect our ability to commence operations at these projects on a timely basis or, at all, economic trends, unforeseen events and the ability to access capital or allocation of capital to other investments or business opportunities. Projects not placed in service prior to a period end, would result in a failure to qualify for ITCs and SRECs and could have a significant adverse impact on earnings. In addition, since the primary contributors toward the value of qualifying renewable energy projects are the ITC and SRECs, changes in the federal statutes related to the ITC or in the markets surrounding SRECs, which can be traded or sold to load serving entities that need to comply with state renewable energy standards, could also significantly affect earnings.

Page 29

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)

Energy Services Segment

Our Energy Services segment provides unregulated wholesale energy services and engages in the business of optimizing natural gas storage and transportation . . .

  Add NJR to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NJR - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.