1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 Commission file number 1-8359 NEW JERSEY RESOURCES CORPORATION (Exact name of registrant as specified in its charter) <TABLE> <S> <C> NEW JERSEY 22-2376465 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 1415 WYCKOFF ROAD, WALL, NEW JERSEY - 07719 732-938-1480 (Address of principal executive offices) (Registrant's telephone number, including area code) </TABLE> Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: X NO: The number of shares outstanding of $2.50 par value Common Stock as of May 8, 2000 was 17,654,389.
2 PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2000 1999 2000 1999 -------- -------- -------- -------- (Thousands, except per share data) <S> <C> <C> <C> <C> OPERATING REVENUES ........................ $368,988 $327,315 $632,426 $571,905 -------- -------- -------- -------- OPERATING EXPENSES Gas purchases ........................... 268,179 229,419 462,160 405,756 Operation and maintenance ............... 22,719 20,770 43,326 41,849 Depreciation and amortization ........... 7,808 7,401 15,789 14,800 Energy and other taxes .................. 14,797 16,032 24,841 26,512 -------- -------- -------- -------- Total operating expenses ................. 313,503 273,622 546,116 488,917 -------- -------- -------- -------- OPERATING INCOME .......................... 55,485 53,693 86,310 82,988 Other income, net ......................... 119 346 564 898 Interest charges, net ..................... 4,843 5,403 10,019 10,741 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES ................ 50,761 48,636 76,855 73,145 Income tax provision ...................... 18,913 18,289 28,828 27,555 -------- -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS ... 31,848 30,347 48,027 45,590 Preferred stock dividends ................. 7 10 15 101 -------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS ......... 31,841 30,337 48,012 45,489 Income from discontinued operations ....... 828 -- 828 -- -------- -------- -------- -------- NET INCOME ................................ $ 32,669 $ 30,337 $ 48,840 $ 45,489 ======== ======== ======== ======== EARNINGS PER COMMON SHARE-BASIC INCOME FROM CONTINUING OPERATIONS .... $ 1.80 $ 1.70 $ 2.71 $ 2.55 ======== ======== ======== ======== NET INCOME ........................... $ 1.85 $ 1.70 $ 2.75 $ 2.55 ======== ======== ======== ======== EARNINGS PER COMMON SHARE-DILUTED INCOME FROM CONTINUING OPERATIONS .... $ 1.79 $ 1.69 $ 2.69 $ 2.53 ======== ======== ======== ======== NET INCOME ........................... $ 1.84 $ 1.69 $ 2.74 $ 2.53 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE ................ $ .43 $ .42 $ .86 $ .84 ======== ======== ======== ======== AVERAGE SHARES OUTSTANDING BASIC ................................ 17,684 17,869 17,732 17,856 ======== ======== ======== ======== DILUTED .............................. 17,787 17,976 17,850 17,972 ======== ======== ======== ======== </TABLE> See Notes to Consolidated Financial Statements 1
3 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED MARCH 31, 2000 1999 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income .......................................... $ 48,840 $ 45,489 Adjustments to reconcile net income to cash flows Depreciation and amortization ...................... 15,789 14,800 Amortization of deferred charges ................... 3,722 1,653 Deferred income taxes .............................. (1,510) 2,049 Change in working capital .......................... 31,812 9,041 Other, net ......................................... (8,645) (2,314) -------- -------- Net cash flows from operating activities ............. 90,008 70,718 -------- -------- CASH FLOWS USED IN FINANCING ACTIVITIES Proceeds from common stock .......................... 4,058 4,576 Payments of long-term debt .......................... (2,582) (7,377) Repurchase of treasury stock ........................ (9,634) (1,989) Payments of common stock dividends .................. (15,114) (14,811) Payments of preferred stock ......................... -- (20,000) Net change in short-term debt ....................... (36,400) (6,600) -------- -------- Net cash flows used in financing activities .......... (59,672) (46,201) -------- -------- CASH FLOWS USED IN INVESTING ACTIVITIES Expenditures for Utility plant ...................................... (24,940) (22,951) Real estate properties ............................. (281) (89) Equity investments and other ....................... (250) -- Cost of removal .................................... (2,579) (2,008) Proceeds from asset sales ........................... 556 -- -------- -------- Net cash flows used in investing activities .......... (27,494) (25,048) -------- -------- Net change in cash and temporary investments ......... 2,842 (531) Cash and temporary investments at September 30 ....... 2,123 2,476 -------- -------- Cash and temporary investments at March 31 ........... $ 4,965 $ 1,945 ======== ======== CHANGES IN COMPONENTS OF WORKING CAPITAL Receivables ......................................... $(54,070) $(94,438) Inventories ......................................... 29,109 43,144 Deferred gas costs .................................. 17,812 42,493 Purchased gas ....................................... 19,055 19,610 Prepaid and accrued taxes, net ...................... 33,193 26,608 Customers' credit balances and deposits ............. (8,966) (8,042) Accounts payable .................................... 974 (7,692) Other, net .......................................... (5,295) (12,642) -------- -------- Total ................................................ $ 31,812 $ 9,041 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid for Interest (net of amounts capitalized) ............... $ 9,536 $ 10,102 Income taxes ........................................ $ 7,676 $ 10,292 </TABLE> See Notes to Consolidated Financial Statements 2
4 CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, MARCH 31, 2000 1999 1999 (unaudited) (unaudited) ----------- ----------- ----------- (Thousands) <S> <C> <C> <C> PROPERTY, PLANT AND EQUIPMENT Utility plant, at cost ...................... $ 965,789 $ 941,490 $ 917,713 Real estate properties and other, at cost ... 26,600 26,326 26,148 ----------- ----------- ----------- 992,389 967,816 943,861 Accumulated depreciation and amortization ... (274,297) (262,372) (252,739) ----------- ----------- ----------- Property, plant and equipment, net ......... 718,092 705,444 691,122 ----------- ----------- ----------- CURRENT ASSETS Cash and temporary investments .............. 4,965 2,123 1,945 Construction fund ........................... 12,100 12,100 16,000 Customer accounts receivable ................ 123,598 80,974 129,815 Unbilled revenues ........................... 15,753 2,950 17,540 Allowance for doubtful accounts ............. (3,010) (1,684) (2,189) Gas in storage, at average cost ............. 6,717 35,718 9,579 Materials and supplies, at average cost ..... 3,609 3,717 3,920 Prepaid state taxes ......................... -- 4,749 -- Deferred gas costs .......................... -- -- 6,129 Other ....................................... 12,183 8,598 16,980 ----------- ----------- ----------- Total current assets ....................... 175,915 149,245 199,719 ----------- ----------- ----------- DEFERRED CHARGES AND OTHER Equity investments .......................... 9,276 8,813 9,009 Regulatory assets ........................... 72,721 64,063 40,726 Long-term deferred gas costs ................ -- 9,744 -- Other ....................................... 24,462 22,703 30,813 ----------- ----------- ----------- Total deferred charges and other ........... 106,459 105,323 80,548 ----------- ----------- ----------- Total assets ......................... $ 1,000,466 $ 960,012 $ 971,389 =========== =========== =========== </TABLE> See Notes to Consolidated Financial Statements 3
5 CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, MARCH 31, 2000 1999 1999 (unaudited) (unaudited) ---------- ---------- ---------- (Thousands) <S> <C> <C> <C> CAPITALIZATION Common stock equity ........................ $ 331,126 $ 302,169 $ 322,067 Redeemable preferred stock ................. 520 520 640 Long-term debt ............................. 284,980 287,723 319,364 ---------- ---------- ---------- Total capitalization ...................... 616,626 590,412 642,071 ---------- ---------- ---------- CURRENT LIABILITIES Current maturities of long-term debt ....... 20,479 20,318 1,957 Short-term debt ............................ 25,300 61,700 54,100 Purchased gas .............................. 97,884 78,829 67,071 Accounts payable and other ................. 29,473 28,499 22,014 Dividends payable .......................... 7,611 7,465 7,510 Accrued taxes .............................. 31,816 2,138 6,995 Overrecovered gas costs .................... 4,739 3,369 -- Customers' credit balances and deposits .... 6,504 15,470 5,610 ---------- ---------- ---------- Total current liabilities ................. 223,806 217,788 165,257 ---------- ---------- ---------- DEFERRED CREDITS Deferred income taxes ...................... 62,957 65,559 90,698 Deferred investment tax credits ............ 10,019 10,293 10,532 Deferred revenue ........................... 22,013 23,020 18,810 Long-term overrecovered gas costs .......... 6,698 -- 10,200 Other ...................................... 58,347 52,940 33,821 ---------- ---------- ---------- Total deferred credits .................... 160,034 151,812 164,061 ---------- ---------- ---------- Total capitalization and liabilities ... $1,000,466 $ 960,012 $ 971,389 ========== ========== ========== </TABLE> See Notes to Consolidated Financial Statements 4
6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General The preceding financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The September 30, 1999 balance sheet data is derived from the audited financial statements of New Jersey Resources Corporation (the Company). Although management believes that the disclosures are adequate to make the information presented not misleading, it is recommended that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 1999 Annual Report on Form 10-K. In the opinion of management, the information furnished reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results of the interim periods. Because of the seasonal nature of the Company's utility operations and other factors, the results of operations for the interim periods presented are not indicative of the results to be expected for the entire year. 2. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries -- New Jersey Natural Gas Company (NJNG), NJR Energy Holdings Corporation (Energy Holdings) and NJR Development Company (NJR Development). NJR Energy Services Company (Energy Services), New Jersey Natural Energy Company (Natural Energy) and NJR Energy Corporation (NJR Energy) are wholly-owned subsidiaries of Energy Holdings and Commercial Realty & Resources Corp. (CR&R), is a wholly-owned subsidiary of NJR Development. Significant intercompany accounts and transactions have been eliminated. 3. New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Investments and Hedging Activities," which must be adopted by the quarter ending December 31, 2000. The Company has created a project team to perform a detailed evaluation of the effects of SFAS No. 133 on its financial condition and results of operations. The impact of SFAS No. 133 on the Company's future results will vary based on the use of derivative instruments during any given reporting period following the time of adoption. The Company has adopted Emerging Issues Task Force 98-10 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," the impact of which was immaterial to the Company's financial condition and results of operations. 5
7 4. Capitalized Interest The Company's capitalized interest totaled $287,000 and $179,000 for the three months ended March 31, 2000 and 1999, respectively, and $541,000 and $361,000 for the six months ended March 31, 2000 and 1999, respectively. 5. Legal and Regulatory Proceedings a. Energy Deregulation Legislation In February 1999, the Electric Discount and Energy Competition Act (the Act), which provides the framework for the restructuring of New Jersey's energy markets, became law. In January 2000, the New Jersey Board of Public Utilities (the BPU), verbally approved a stipulation agreement among various parties to fully open NJNG's residential markets to competition, restructure its rates to segregate its Basic Gas Supply (BGS) Service and Delivery service prices as required by the Act, and expand an incentive for residential and small commercial customers to switch to transportation service. The stipulation agreement also extends incentives for NJNG's off-system sales and capacity management programs through December 31, 2002. Additionally, NJNG received approval to recover carrying costs on its expenditures associated with remediating its former manufactured gas plants. These expenditures are recovered over rolling seven-year periods and are subject to annual BPU review and approval. The Act also allows continuation of each utility's role as a gas supplier at least until December 31, 2002. The BPU must determine the ongoing role of each utility in providing gas supply services by January 1, 2002. The Act allows natural gas utilities to provide competitive services (e.g., appliance services). By December 31, 2000 the BPU is expected to decide whether certain customer account services (i.e., meter reading, billing and collections) should be competitive. b. Levelized Gas Adjustment (LGA) and Other Adjustment Clauses In September 1999, NJNG filed to reduce its LGA by less than 1%, reflecting a proposal to decrease the Prior Gas Cost Adjustment (PGCA) and Transportation Education and Implementation (TEI), partially offset by a minor increase to its Remediation Adjustment (RA) factor. No change was proposed for the Gas Cost Recovery (GCR), Demand Side Management (DSM) and Weather Normalization Clause (WNC) factors. The rate restructuring mandated by the Act discussed in Note 5a Energy Deregulation Legislation above, did not impact the rates of any of the individual clauses. In August 1999, NJNG filed a Comprehensive Resource Analysis (CRA) plan pursuant to a BPU order. The CRA, which will replace NJNG's current DSM program, includes funding for class I renewables (e.g., fuel cells), and has a program cost of $2.9 million recoverable through rates. The BPU is currently evaluating two separate stipulations filed in this proceeding. c. Gas Remediation NJNG has identified eleven former manufactured gas plant (MGP) sites, dating back to the late 1800's and early 1900's, which contain contaminated residues from the former gas manufacturing operations. Ten of the eleven sites in question were acquired by NJNG in 1952. All of the gas manufacturing operations ceased at these sites at least by the mid-1950's and in some cases had been discontinued many 6
8 years earlier, and all of the old gas manufacturing facilities were subsequently dismantled by NJNG or the former owners. NJNG is currently involved in administrative proceedings with the New Jersey Department of Environmental Protection (NJDEP) and local government authorities with respect to the plant sites in question, and is participating in various studies and investigations by outside consultants to determine the nature and extent of any such contaminated residues and to develop appropriate programs of remedial action, where warranted. Since October 1989, NJNG has entered into Administrative Consent Orders or Memoranda of Agreement with the NJDEP covering all eleven sites. These documents establish the procedures to be followed by NJNG in developing a final remedial clean-up plan for each site. Most of the cost of such studies and investigations is being shared under an agreement with the former owner and operator of ten of the MGP sites. Through a Remediation Rider approved by the BPU, NJNG is recovering its expenditures incurred through June 30, 1998 over a seven-year period. Costs incurred subsequent to June 30, 1998, including carrying costs on the deferred expenditures, as noted above, will be reviewed annually and recovered over rolling seven-year periods, subject to BPU approval. In March 1995, NJNG filed a complaint in New Jersey Superior Court against various insurance carriers for declaratory judgment and for damages arising from such defendants' breach of their contractual obligations to defend and/or indemnify NJNG against liability for claims and losses (including defense costs) alleged against NJNG relating to environmental contamination at the former MGP sites and other sites. NJNG is seeking (i) a declaration of the rights, duties and liabilities of the parties under various primary and excess liability insurance policies purchased from the defendants by NJNG from 1951 through 1985, and (ii) compensatory and other damages, including costs and fees arising out of defendants' obligations under such insurance policies. The complaint was amended in July 1996 to name Kaiser-Nelson Steel & Salvage Company (Kaiser-Nelson) and its successors as additional defendants. The Company is seeking (a) a declaration of the rights, duties and liabilities of the parties under agreements with respect to claims against the Company that allege property damage caused by various substances used, handled or generated by NJNG or the predecessor in title that were removed from several of the MGP sites by Kaiser-Nelson, and (b) money damages or compensatory relief for the harm caused by Kaiser-Nelson's aforementioned actions. Discovery is proceeding in this matter. There can be no assurance as to the outcome of these proceedings. d. South Brunswick Asphalt, L.P. NJNG has been named as a defendant in a civil action commenced in New Jersey Superior Court by South Brunswick Asphalt, L.P. (SBA) and its affiliated companies seeking damages arising from alleged environmental contamination at three sites owned or occupied by SBA and its affiliated companies. Specifically, the suit charges that tar emulsion removed from 1979 to 1983 by an affiliate of SBA (Seal Tite Corp.) from NJNG's former gas manufacturing plant sites has been alleged by the NJDEP to constitute a hazardous waste and that the tar emulsion has contaminated the soil and ground water at the three sites in question. In February 1991, the NJDEP issued letters classifying the tar emulsion/sand and gravel mixture at each site as dry industrial waste, a non-hazardous classification. In April 1996, in a meeting with all parties to the litigation and the judge assigned to the case, the NJDEP confirmed the non-hazardous classification, which will allow for conventional disposal. In May 1997, SBA submitted applications to NJDEP for permits to allow SBA to recycle the tar emulsion/sand and gravel mixture at each site into asphalt, to be used as a paving materials. In July 1998, SBA filed an amended complaint adding NJDEP to the proceedings to facilitate the resolution of these applications. Following service of 7
9 SBA's amended complaint, NJDEP filed a motion for dismissal of the amended complaint, but has not formally granted or denied SBA's permit applications. In March 1999, the court granted NJDEP's motion in part and denied NJDEP's motion in part, and directed SBA to file a more definite statement of its claims for equitable relief against NJDEP, including its request that a mandatory injunction be imposed compelling NJDEP to issue the subject permits. SBA has filed a more definite statement of its claims, and NJDEP has renewed its motion to dismiss the amended complaint. In its motion, NJDEP alleges, among other things, that it has not acted upon SBA's applications for permits to recycle the tar emulsion/sand and gravel mixture because SBA has not submitted completed applications for these permits. This allegation is denied by SBA. NJDEP's motion to dismiss is pending in the Superior Court and it is not known when the Court will issue a decision. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial condition or results of operations e. Combe Fill South Landfill NJNG has been joined as a third-party defendant in two civil actions commenced in October 1998 in the U.S. District Court for the District of New Jersey by the U.S. Environmental Protection Agency and NJDEP. These two actions seek recovery of costs expended in connection with, and for continuation of the cleanup of, the Combe Fill South Landfill, a Superfund site in Chester, New Jersey. The plaintiffs claim that hazardous waste NJNG is alleged to have generated was sent to the site. There are approximately 180 defendants and third-party defendants in the actions thus far. Each third-party complaint seeks damages under CERCLA Section 113 and the New Jersey Spill Act, declaratory relief holding each third-party defendant strictly liable, and contribution and indemnification under the common law of the United States and New Jersey. No specific monetary demands or scope of cleanup work have been set forth to date. NJNG is in the process of investigating the allegations, formulating its position with respect thereto and has agreed to participate in an alternate dispute resolution process encouraged by the Court. Its insurance carriers have been notified and one has agreed to assume responsibility for the legal expenses, while reserving its rights with regard to liability. NJNG is currently unable to predict the extent, if any, to which it may have cleanup or other liability with respect to these civil actions, but would seek recovery of any such costs through the ratemaking process. No assurance can be given as to the timing or extent of the ultimate recovery of any such costs. f. Various The Company is party to various other claims, legal actions and complaints arising in the ordinary course of business. In management's opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition or results of operations. 6. Earnings Per Share The Company has adopted SFAS No. 128 "Earnings per Share" which establishes standards for computing and presenting basic and diluted earnings per share (EPS). The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 102,588 and 107,617 for the three months ended March 31, 2000 and 1999, respectively, and 118,098 and 116,348 for the six months ended March 31, 2000 and 1999, respectively. These shares relate to stock options and restricted stock and were calculated using the treasury stock method. The numerator for each applicable basic and diluted calculation was income from continuing operations and net income, respectively. 8
10 7. Long-Term Debt In April 1998, NJNG entered into a loan agreement whereby the New Jersey Economic Development Authority loaned NJNG the proceeds from its $18 million Natural Gas Facilities Revenue Bonds, Series 1998C, which were deposited into a construction fund. NJNG may draw down on these funds in reimbursement for certain qualified expenditures. In April 1999 and 2000, NJNG drew down $3.9 million and $4.5 million, respectively, from the construction fund and issued a like amount of its Series GG Bonds. 8. Discontinued Operations In May 1995, the Company adopted a plan to exit the oil and natural gas production business and pursue the sale of the reserves and related assets of NJR Energy and its subsidiary, New Jersey Natural Resources Company (NJNR). The Company accounted for this segment as a discontinued operation and in fiscal 1995 recorded an after-tax charge of $8.7 million, or $.49 per share. This charge was based on estimates of the anticipated loss from operations until the assets were sold, the estimated loss on the sale of the remaining reserves and other costs related to the closing of its offices in Dallas and Tulsa. Based upon actual proceeds received from the sale of the assets and costs incurred, net of insurance recoveries received in January 2000, the Company closed out its reserve balance and reported income from discontinued operations of $828,000, or $.05 per share, in the quarter ended March 31, 2000. 9. Segment Reporting <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands) <S> <C> <C> <C> <C> Operating Revenues Natural gas distribution $ 269,817 $ 256,371 $ 470,343 $ 434,969 Energy holdings 99,179 73,743 162,466 141,862 Real estate 278 233 555 484 --------- --------- --------- --------- Subtotal 369,274 330,347 633,364 577,315 Intersegment revenues (286) (3,032) (938) (5,410) --------- --------- --------- --------- Total $ 368,988 $ 327,315 $ 632,426 $ 571,905 ========= ========= ========= ========= Operating Income Natural gas distribution $ 52,480 $ 51,919 $ 81,685 $ 78,880 Energy holdings 2,060 1,278 2,886 2,087 Real estate (222) (154) (526) (227) Other 1,167 288 2,265 1,828 --------- --------- --------- --------- Total $ 55,485 $ 53,331 $ 86,310 $ 82,568 ========= ========= ========= ========= </TABLE> 9
11 <TABLE> <CAPTION> As of As of As of March 31, 2000 September 30, 1999 March 31, 1999 -------------- ------------------ -------------- (Thousands) <S> <C> <C> <C> Assets Natural gas distribution $ 928,870 $ 883,072 $ 886,793 Energy holdings 37,303 46,371 44,821 Real estate 22,407 22,396 22,140 Other 11,886 8,173 17,635 ---------- ---------- ---------- Total $1,000,466 $ 960,012 $ 971,389 ========== ========== ========== </TABLE> 10. Other At March 31, 2000 there were 17,622,669 shares of common stock outstanding and the book value per share was $18.79. Certain reclassifications have been made of previously reported amounts to conform with current year classifications. 10
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED MARCH 31, 2000 A. RESULTS OF OPERATIONS Consolidated income from continuing operations for the quarter ended March 31, 2000 increased 5% to $31.8 million, compared with $30.3 million for the same period last year. Basic EPS from continuing operations increased 5.9% to $1.80, compared with $1.70 last year. Diluted EPS from continuing operations also increased 5.9% to $1.79, compared with $1.69 last year. Consolidated income from continuing operations for the six months ended March 31, 2000 increased 5.5% to $48 million, compared with $45.5 million for the same period last year. Basic EPS from continuing operations increased 6.3% to $2.71, compared with $2.55 last year. Diluted EPS from continuing operations also increased 6.3% to $2.69, compared with $2.53 last year. The increase in consolidated earnings from continuing operations in both the three and six months ended March 31, 2000 was attributed primarily to continued profitable customer growth and higher average customer usage at the Company's principal subsidiary, NJNG, and improved overall unregulated operating results. Consolidated net income for the three and six months ended March 31, 2000 includes $828,000, or $.05 per share, of income from discontinued operations representing the final true-up of the Company's reserve established in 1995 in conjunction with exiting the gas exploration and production business. This income represents the excess of proceeds received from the sale of the assets and the costs incurred, net of insurance recoveries received in January 2000, compared with the estimates made in 1995. NJNG OPERATIONS NJNG's financial results are summarized as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, 2000 1999 2000 1999 -------- -------- -------- -------- (Thousands) <S> <C> <C> <C> <C> Gross margin Residential and commercial $ 66,589 $ 64,665 $110,889 $108,344 Firm transportation 12,337 11,240 21,586 18,399 -------- -------- -------- -------- Total firm margin 78,926 75,905 132,475 126,743 Interruptible 198 150 418 298 Off-system and capacity management 1,278 1,694 2,842 3,015 -------- -------- -------- -------- Total gross margin $ 80,402 $ 77,749 $135,735 $130,056 ======== ======== ======== ======== Appliance service revenues $ 3,044 $ 2,862 $ 6,130 $ 5,919 ======== ======== ======== ======== Operating income $ 52,480 $ 51,919 $ 81,685 $ 78,880 ======== ======== ======== ======== Net income $ 30,476 $ 29,932 $ 45,976 $ 44,050 ======== ======== ======== ======== </TABLE> 11
13 Gross Margin Gross margin is defined as gas revenues less gas costs, sales tax and a Transitional Energy Facilities Assessment (TEFA). Gross margin provides a more meaningful basis for evaluating utility operations, since gas costs, sales tax and TEFA are passed through to customers and, therefore, have no effect on earnings. Gas costs are charged to operating expenses on the basis of therm sales at the rates included in NJNG's tariff. The LGA clause allows NJNG to recover gas costs that exceed the level reflected in its base rates. Sales tax is calculated at 6% of revenue and excludes off-system sales, sales to other utilities and federal accounts. TEFA is calculated on a per therm basis and excludes sales to other utilities, off-system sales and federal accounts. Firm Margin Residential and commercial (i.e., firm) gross margin is subject to the WNC, which provides for a revenue adjustment if the weather varies by more than one-half of 1% from normal, or 20-year average, weather. The WNC does not fully protect NJNG from factors such as unusually warm weather and declines in customer usage patterns, which were set at the conclusion of NJNG's last base rate case in January 1994. The accumulated adjustment from one heating season (i.e., October-May) is billed or credited to customers in subsequent periods. This mechanism reduces the variability of both customer bills and NJNG's earnings due to weather fluctuations. The components of gross margin from firm customers are being impacted by customers switching from sales service to firm transportation service. NJNG's total gross margin is not negatively impacted by customers who utilize its firm transportation service and purchase their gas from another supplier. This is due to NJNG's tariff which is designed such that no profit is earned on the commodity portion of sales to firm customers, and all customers who purchase gas from another supplier continue to utilize NJNG for transportation. Total firm margin increased by 4% and 5% for the three and six months ended March 31, 2000, respectively, compared with the same periods last year, reflecting customer growth and higher average customer usage. The weather for the six months ended March 31, 2000 was 8% warmer than normal, which, in accordance with the WNC, resulted in $7.5 million of gross margin being accrued for future recovery from customers. At March 31, 2000, NJNG had $18.9 million in accrued WNC margins to be collected from its customers in fiscal 2001 and 2002. Gross margin from sales to firm customers increased $1.9 million, or 2.9%, and $2.5 million, or 2.3%, for the three and six months ended March 31, 2000, respectively, compared with the same periods last year. The increase in gross margin for both periods was due primarily to the impact of 11,734 customer additions during the twelve months ended March 31, 2000, and the impact of the WNC. Sales to firm customers were 20.5 billion cubic feet (Bcf) and 33.1 Bcf for the three and six months ended March 31, 2000, compared with 20.4 Bcf and 32.7 Bcf for the same period last year. The increase in sales was due to continued customer growth. 12
14 Gross margin from firm transportation increased $1.1 million, or 9.8%, and $3.2 million, or 17.3%, for the three and six months ended March 31, 2000, respectively, compared with the same periods last year as more customers chose this service. NJNG transported 4.7 Bcf and 7.9 Bcf for the three and six months ended March 31, 2000, respectively, compared with 4.2 Bcf and 6.7 Bcf, in the same periods last year. The growth in the number of firm transportation customers is due primarily to NJNG's participation in an open, competitive market which allows residential customers to change natural gas suppliers. Under this program 30,120 and 27,051 residential customers and 4,176 and 4,283 commercial customers were using this service at March 31, 2000 and 1999, respectively. Interruptible NJNG services 51 customers through interruptible sales and/or transportation tariffs. Sales made under the interruptible sales tariff are priced on market-sensitive oil and gas parity rates. Although therms sold and transported to interruptible customers represented 3.5% and 3% of total therm throughput in the six months ended March 31, 2000 and 1999, respectively, they accounted for less than 1% of the total gross margin in each period due to the regulated margin-sharing formulas that govern these sales. Under these formulas, NJNG retains 10% of the gross margin from the interruptible sales and 5% of the gross margin from transportation sales, with the balance credited to firm sales customers through the LGA clause. Off-System and Capacity Management In order to reduce the overall cost of its gas supply commitments, NJNG has entered into contracts to sell gas to customers outside its franchise territory when the gas is not needed for system requirements. These sales enable NJNG to spread its fixed demand costs, which are charged by pipelines to access their supplies year round, over a larger and more diverse customer base. NJNG also participates in the capacity release market on the interstate pipeline network when the capacity is not needed for its own system requirements. Effective October 1, 1998 through December 31, 2002, NJNG will retain 15% of the gross margin from these sales with the balance credited to firm sales customers through the LGA clause. In order to reduce the fixed cost of NJNG's gas supply portfolio, savings achieved through the permanent reduction or replacement of capacity or other services will be shared between customers and shareholders. Under this program, NJNG retains 40% of the savings for the first 12 months following any transaction and retains 15% of the savings for the remaining period through December 31, 2002, with the balances credited to firm sales customers through the LGA clause. NJNG's off-system and capacity management sales totaled 32.4 Bcf and generated $1.3 million of gross margin, and 68.4 Bcf and $2.8 million of gross margin, for the three and six months ended March 31, 2000, respectively, compared with 41.7 Bcf and $1.7 million of gross margin, and 80.3 Bcf and $3 million of gross margin, in the respective periods last year. The decrease was due primarily to the warmer-than-normal weather, which increased the availability of supply and capacity and resulted in lower margins per therm. 13
15 Operating Income Operating income increased $561,000, or 1%, and $2.8 million or 3.6% for the three and six months ended March 31, 2000, respectively, compared with the same periods last year, primarily due to the increase in gross margin discussed above and increased appliance service revenues, which more than offset an increase in operation and maintenance and depreciation expenses. Net Income Net income increased $544,000, or 1.8%, and $1.9 million, or 4.4%, for the three and six months ended March 31, 2000, respectively, compared with the same periods last year, primarily due to the higher operating income discussed above and lower financing costs primarily due to lower debt levels. ENERGY HOLDINGS OPERATIONS Energy Holdings' consolidated financial results, which include Energy Services and Natural Energy, the Company's unregulated fuel and capacity management and retail marketing subsidiaries, respectively, and the continuing operations of NJR Energy, which consist primarily of its equity investment in the Iroquois Gas Transmission System, L.P., are summarized as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, 2000 1999 2000 1999 -------- -------- -------- -------- (Thousands) <S> <C> <C> <C> <C> Revenues $107,054 $ 84,217 $170,341 $159,623 ======== ======== ======== ======== Operating income $ 2,060 $ 1,278 $ 2,886 $ 2,087 ======== ======== ======== ======== Net income $ 2,168 $ 433 $ 2,866 $ 1,346 ======== ======== ======== ======== </TABLE> Energy Holdings revenues and income increased for the three and six months ended March 31, 2000, compared to the same periods last year, reflecting primarily increased storage management activity and higher daily gas sales which more than offset the expiration of a fuel management contract at Energy Services. Energy Holdings gas sales and managed gas totaled 29.9 Bcf and 55.4 Bcf, and retail gas sales totaled 1.2 Bcf and 2.4 Bcf for the three and six months ended March 31, 2000, respectively, compared with gas sales and managed gas of 37.8 Bcf and 68.3 Bcf, and retail gas sales of 3.1 Bcf and 5 Bcf in the comparable periods last year. The decline in gas under management was primarily due to the expiration of a fuel management contract. In November 1999, Natural Energy sold its commercial customer contracts and currently serves over 14,500 residential customers. 14
16 NJR DEVELOPMENT OPERATIONS NJR Development's consolidated financial results, which consist solely of CR&R's operations, are summarized as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended March 31, March 31, 2000 1999 2000 1999 ----- ----- ----- ----- (Thousands) <S> <C> <C> <C> <C> Revenues $ 278 $ 233 $ 555 $ 484 ===== ===== ===== ===== Other income, net $ 103 $ 103 $ 161 $ 205 ===== ===== ===== ===== Net income (loss) $ (42) $ (10) $(192) $ 17 ===== ===== ===== ===== </TABLE> In 1996, CR&R entered into a sale-leaseback transaction which generated a pre-tax gain of $17.8 million, which is included in Deferred revenue and is being amortized to Other income, net over 25 years in accordance with generally accepted accounting principles. The primary tenant of the facility, NJNG, is leasing the building under a long-term master lease agreement and continues to occupy a majority of the space in the building. The decrease in net income for the three and six months ended March 31, 2000 compared with the same periods last year is due primarily to marketing costs associated with CR&R's remaining undeveloped land portfolio. THE YEAR 2000 ISSUE The Company developed and implemented a plan to address Year 2000 issues facing the Company. The Company has not experienced any material incidents during the transition to Year 2000. All computers, infrastructure and business systems have been running smoothly following the transition to Year 2000. The Company will continue to closely monitor the Year 2000 issue and does not believe that there will be any future incidents. B. LIQUIDITY AND CAPITAL RESOURCES In order to meet the working capital and external debt financing requirements of its unregulated subsidiaries, as well as its own working capital needs, the Company maintains committed credit facilities with a number of banks totaling $90 million. At March 31, 2000, $56.3 million was outstanding under these agreements. NJNG satisfies its debt needs by issuing short-term and long-term debt based upon its own financial profile. The Company meets the common equity requirements of each subsidiary, if any, through new issuances of the Company's common stock, including the proceeds from its Automatic Dividend Reinvestment Plan (DRP). The DRP also allows for the purchase of shares in the open market to satisfy the plan's needs. The Company can switch funding options every 90 days. 15
17 NJNG The seasonal nature of NJNG's operations creates large short-term cash requirements, primarily to finance gas purchases and customer accounts receivable. NJNG obtains working capital for these requirements, as well as for the temporary financing of construction expenditures, sinking fund needs and energy tax payments, through the issuance of commercial paper and short-term bank loans. To support the issuance of commercial paper, NJNG maintains committed credit facilities totaling $100 million. Remaining fiscal 2000 construction expenditures are estimated at $27.5 million. These expenditures will be incurred for services, mains and meters to support NJNG's continued customer growth, and general system renewals and improvements. Through March 31, 2000, NJNG has incurred $11.1 million in remediating its former manufactured gas plants. NJNG estimates additional remediation expenditures of approximately $14 million for the remaining six months of fiscal 2000. NJNG expects to finance these expenditures through internal generation, the issuance of short-term and long-term debt and equity contributions from NJR. The timing and mix of these issuances will be geared toward maintaining a common equity ratio of approximately 50%, which is consistent with maintaining its current short-term and long-term credit ratings. ENERGY HOLDINGS Energy Holdings does not currently expect any significant capital expenditures or external financing requirements in fiscal 2000. NJR DEVELOPMENT CR&R's capital expenditures are projected to be $600,000 in 2000 and $2.9 million in 2001 in connection with the construction of a 35,000 square-foot build-to-suit office building. CR&R is simultaneously negotiating the sale of the building and adjacent undeveloped acreage, the terms of which would at least recover the construction costs and land investment. 16
18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FINANCIAL RISK MANAGEMENT Commodity Market Risks The regulated and unregulated natural gas businesses of the Company and its subsidiaries are subject to market risk due to fluctuations in the price of natural gas. To hedge against such fluctuations, the Company and its subsidiaries have entered into futures contracts, options agreements and over-the-counter swap agreements. The Company's natural gas businesses are conducted through three of its operating subsidiaries. First, NJNG is a regulated utility whose recovery of gas costs is protected by the LGA, but to further hedge against price fluctuations, utilizes futures and options through its financial risk management program. Second, Energy Services has also hedged its commitments to purchase natural gas for sale to retail marketers and hedged purchases and sales of storage gas and fixed price sales to wholesale customers. Finally, NJR Energy has entered into a long-term, fixed-price contract to sell approximately 23.8 Bcf of natural gas to a gas marketing company at prices ranging from $2.73 to $4.41 per Mmbtu. Natural gas is a nationally traded commodity, and its prices are effectively determined by the New York Mercantile Exchange (NYMEX) and over-the-counter markets. The prices on the NYMEX and over-the-counter markets generally reflect the notional balance of natural gas supply and demand, but are also influenced significantly from time to time by other events. Summary of NJNG & NJRES commodity derivatives: <TABLE> <CAPTION> Deferred Unrealized Volume Price per Gain in Bcf Mmbtu in Thousands ------ ----- ------------ <S> <C> <C> <C> <C> NJNG Futures 9.4 $2.27-$3.01 $3,895 Swaps 3.7 $ 61 Options 1.4 $2.45-$4.25 $ 578 Energy Services Futures 4.2 $2.10-$2.91 $5,438 Swaps 36.9 $1,673 Options 0.3 $2.25-$2.95 $ 5 </TABLE> NJR Energy has hedged both its price and physical delivery risks associated with its long-term, fixed-price sales contract with a gas marketing company (the "Gas Sale Contract"). To hedge its price risk, NJR Energy entered into two swap agreements. Under the terms of these two swap agreements, NJR Energy will pay to the counterparties the identical fixed price it receives from the gas marketing company in exchange for the payment by the counterparties of an index price plus a spread per Mmbtu for the total 17
19 volumes under the Gas Sale Contract. The swap agreements were effective as of November 1995. In order to hedge its physical delivery risk, NJR Energy entered into a purchase contract with a second gas marketing company for the identical volumes it is obligated to sell under the Gas Sale Contract. NJR Energy has agreed to pay this second gas marketing company the identical floating price it receives under the swap agreements mentioned above. To manage these instruments, the Company has well-defined risk management policies and procedures, which include volumetric limits and monetary guidelines. All of the futures contracts, options and swap agreements described above are held for hedging rather than trading purposes except for 150,000 Mmbtu of options held by Energy Services. With respect to futures contracts, options and swap agreements, the Company has performed a sensitivity analysis to estimate its exposure to market risk arising from natural gas price fluctuations using the net futures positions and the net swaps positions. Futures contracts, options and swap agreements are substantially all settled at the NYMEX settlement date and the related natural gas quantity is purchased or sold in the physical market and, therefore, their notional values, which represent the absolute sum of all outstanding natural gas futures contracts or swap agreements, as the case may be, are not accurate measurements of risk to the Company from those futures contracts or swap agreements. Summary of effects of theoretical 10% change in market value: <TABLE> <CAPTION> March 31, 2000 1999 ------ ------ (Thousands) <S> <C> <C> Futures $2,603 $5,000 Swaps $2,259 $ 404 Options $ 405 $ 25 </TABLE> However, any such additional changes in value under the futures contracts and the swap agreements would be substantially offset by a corresponding change on the related underlying contracts that are being hedged. Interest Rate Risk NJNG has total variable rate debt of $97 million, of which $56 million has been hedged by the purchase of a 6.5% interest rate cap through the year 2003. According to the Company's sensitivity analysis, NJNG's annual interest rate exposure on the $56 million, based on the difference between current average rates and the 6.5% interest rate cap, is limited to $1.1 million, net of tax. If interest rates were to change by 100 basis points on the remaining $41 million of variable rate debt, NJNG's interest expense, net of tax, would change by $242,000. The Company also has variable rate debt of $56 million, if interest rates were to change by 100 basis points, annual interest expense, net of tax, would change by $332,000. 18
20 INFORMATION CONCERNING FORWARD LOOKING STATEMENTS Certain of the statements contained in this report (other than the financial statements and other statements of historical fact), including, without limitation, expected disposition of legal and regulatory proceedings, effect of new accounting standards, impact of the Year 2000 computer issue, and expected sale of the office building are forward-looking statements. Forward-looking statements can also be identified by the use of forward-looking terminology such as "may", "intend", "expect", or "continue" or comparable terminology and are made based upon management's expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management. The Company wishes to caution readers that the assumptions which form the basis for forward-looking statements with respect to or that may impact earnings for fiscal 2000 and thereafter include many factors that are beyond the Company's ability to control or estimate precisely, such as estimates of future market conditions and the behavior of other market participants. Among the factors that could cause actual results to differ materially from estimates reflected in such forward-looking statements are weather conditions, economic conditions in NJNG's service territory, fluctuations in energy-related commodity prices, conversion activity and other marketing efforts, the conservation efforts of NJNG's customers, the pace of deregulation of retail gas markets, competition for the acquisition of gas, the regulatory and pricing policies of federal and state regulatory agencies, changes due to legislation at the federal and state levels, the availability of Canada's reserves for export to the United States and other regulatory changes. While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Company does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. 19
21 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings Information required by this Item is incorporated herein by reference to Part I, Item 1, Note 5 - Legal and Regulatory Proceedings. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 4-1 Revolving Credit and Term Loan agreement between New Jersey Resources Corporation and PNC Bank, amended January 31, 2000 4-2 Committed Line of Credit Agreement between New Jersey Resources Corporation and PNC Bank, dated January 31, 2000 10-1 Long-Term Incentive Compensation Plan, as amended 27-1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended March 31, 2000. 20
22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW JERSEY RESOURCES CORPORATION Date: May 12, 2000 /s/Glenn C. Lockwood --------------------------- Glenn C. Lockwood Senior Vice President and Chief Financial Officer 21