form_10-q.htm


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 001-8359

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 (§232.405 of this chapter) 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, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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 August y, 2010, was yy,yyy,yyy.
 
 



 
 
 
New Jersey Resources Corporation


TABLE OF CONTENTS

Page
Information Concerning Forward-Looking Statements                                                                                                                                                      
1
   
PART I – FINANCIAL INFORMATION
 
Unaudited Condensed Consolidated Financial Statements                                                                                                                           
2
 
Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                        
7
 
Note 1            Nature of the Business                                                                                                         
7
 
Note 2            Summary of Significant Accounting Policies                                                                                                       
7
 
Note 3            Regulation                                                                                                         
9
 
Note 4            Derivative Instruments                                                                                                         
14
 
Note 5            Fair Value                                                                                                         
17
 
Note 6            Investments In Equity Investees                                                                                                         
19
 
Note 7            Earnings Per Share                                                                                                         
20
 
Note 8            Debt                                                                                                         
20
 
Note 9            Stock-Based Compensation                                                                                                         
21
 
22
 
22
 
22
 
23
 
25
 
27
28
Quantitative and Qualitative Disclosures About Market Risk                                                                                                                           
53
Controls and Procedures                                                                                                                           
56
   
PART II – OTHER INFORMATION
 
Legal Proceedings                                                                                                                           
57
Risk Factors                                                                                                                           
57
Unregistered Sale of Equity Securities and Use of Proceeds                                                                                                                           
57
58
 
59






i
 
 

New Jersey Resources Corporation
Part I


 

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 2010 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 2009 Annual Report on Form 10-K and Part II, Item 1A of this Form 10-Q, as well as the following:

Ÿ
weather and economic conditions;
Ÿ
NJR’s dependence on operating subsidiaries;
Ÿ
demographic changes in the New Jersey Natural Gas (NJNG) service territory;
Ÿ
the rate of NJNG customer growth;
Ÿ
volatility of natural gas and other commodity prices and their impact on customer usage, NJR Energy Services’ (NJRES) operations and on the Company’s risk management efforts;
Ÿ
changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to the Company;
Ÿ
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;
Ÿ
the ability to comply with debt covenants;
Ÿ
continued failures in the market for auction rate securities;
Ÿ
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;
Ÿ
the ability to maintain effective internal controls;
Ÿ
accounting effects and other risks associated with hedging activities and use of derivatives contracts;
Ÿ
commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties and liquidity in the wholesale energy trading market;
Ÿ
the ability to obtain governmental approvals and/or financing for the construction, development and operation of certain non-regulated energy investments;
Ÿ
risks associated with the management of the Company’s joint ventures and partnerships;
Ÿ
risks associated with our investments in solar energy projects, including the availability of regulatory and tax incentives;
Ÿ
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;
Ÿ
dependence on third-party storage and transportation facilities for natural gas supply;
Ÿ
operating risks incidental to handling, storing, transporting and providing customers with natural gas;
Ÿ
access to adequate supplies of natural gas;
Ÿ
the regulatory and pricing policies of federal and state regulatory agencies;
Ÿ
the costs of compliance with present and future environmental laws, including potential climate change-related legislation;
Ÿ
the ultimate outcome of pending regulatory proceedings;
Ÿ
the disallowance of recovery of environmental-related expenditures and other regulatory changes; and
Ÿ
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.

 
1

New Jersey Resources Corporation
Part I


ITEM 1.  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 

 
Three Months Ended
June 30,
Nine Months Ended
June 30,
(Thousands, except per share data)
2010
2009
2010
2009
OPERATING REVENUES
               
Utility
$105,130
 
$148,826
 
$    794,311
 
$   958,995
 
Nonutility
374,764
 
292,226
 
1,213,475
 
1,220,877
 
Total operating revenues
479,894
 
441,052
 
2,007,786
 
2,179,872
 
OPERATING EXPENSES
               
Gas purchases:
               
Utility
47,665
 
87,169
 
478,719
 
631,712
 
Nonutility
393,126
 
313,318
 
1,114,842
 
1,227,783
 
Operation and maintenance
37,077
 
38,436
 
110,386
 
112,209
 
Regulatory rider expenses
6,160
 
6,280
 
41,017
 
40,585
 
Depreciation and amortization
8,136
 
7,880
 
23,936
 
22,749
 
Energy and other taxes
6,516
 
11,739
 
50,275
 
67,353
 
Total operating expenses
498,680
 
464,822
 
1,819,175
 
2,102,391
 
OPERATING (LOSS) INCOME
(18,786
)
(23,770
)
188,611
 
77,481
 
Other income
1,311
 
1,179
 
3,458
 
3,095
 
Interest expense, net of capitalized interest
5,238
 
5,187
 
15,946
 
15,953
 
(LOSS) INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
(22,713
)
(27,778
)
176,123
 
64,623
 
Income tax (benefit) provision
(11,368
)
(12,146
)
64,819
 
21,296
 
Equity in earnings of affiliates, net of tax
1,168
 
1,477
 
4,638
 
2,778
 
NET (LOSS) INCOME
$ (10,177
)
$  (14,155
)
$   115,942
 
$     46,105
 
(LOSSES) EARNINGS PER COMMON SHARE
               
BASIC
$(0.25
)
$(0.34
)
$2.80
 
$1.09
 
DILUTED
$(0.25
)
$(0.34
)
$2.78
 
$1.08
 
DIVIDENDS PER COMMON SHARE
$0.34
 
$0.31
 
$1.02
 
$0.93
 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
BASIC
41,239
 
42,049
 
41,424
 
42,175
 
DILUTED
41,239
 
42,049
 
41,703
 
42,547
 


See Notes to Condensed Unaudited Consolidated Financial Statements





 
2

New Jersey Resources Corporation
Part I


ITEM 1.  FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
Nine Months Ended
 
June 30,
(Thousands)
2010
2009
CASH FLOWS FROM OPERATING ACTIVITIES
       
Net income
$115,942
 
$  46,105
 
Adjustments to reconcile net income to cash flows from operating activities:
       
Unrealized loss on derivative instruments and related transactions
6,186
 
65,160
 
Depreciation and amortization
24,628
 
23,417
 
Allowance for equity used during construction
(1,474
)
(233
)
Allowance for bad debt expense
2,277
 
5,015
 
Deferred income taxes
69,329
 
12,732
 
Manufactured gas plant remediation costs
(2,925
)
(12,280
)
Equity in earnings of affiliates, net of distributions
(2,261
)
3,858
 
Cost of removal – asset retirement obligations
(676
)
(508
)
Contributions to postemployment benefit plans
(7,866
)
(1,768
)
Changes in:
       
Components of working capital
(54,205
)
243,048
 
Other noncurrent assets
9,891
 
(23,611
)
Other noncurrent liabilities
(2,902
)
(10,251
)
Cash flows from operating activities
155,944
 
350,684
 
CASH FLOWS USED IN INVESTING ACTIVITIES
       
Expenditures for:
       
Utility plant
(49,696
)
(51,169
)
Real estate properties and other
(460
)
(356
)
Cost of removal
(6,252
)
(4,014
)
Investments in equity investees
(4,300
)
(41,343
)
Release from restricted cash construction fund
 
4,200
 
Cash flows used in investing activities
(60,708
)
(92,682
)
CASH FLOWS USED IN FINANCING ACTIVITIES
       
Proceeds from issuance of common stock
6,414
 
13,327
 
Tax benefit from stock options exercised
(96
)
993
 
Proceeds from sale-leaseback transaction
4,925
 
6,268
 
Payments of long-term debt
(4,683
)
(58,860
)
Purchases of treasury stock
(28,069
)
(17,757
)
Payments of common stock dividends
(39,160
)
(37,977
)
Net proceeds (payments) of short-term debt
20,900
 
(129,600
)
Cash flows used in financing activities
(39,769
)
(223,606
)
Change in cash and temporary investments
55,467
 
34,396
 
Cash and temporary investments at beginning of period
36,186
 
42,626
 
Cash and temporary investments at end of period
$  91,653
 
$  77,022
 
CHANGES IN COMPONENTS OF WORKING CAPITAL
       
Receivables
$(82,253
)
$  97,642
 
Inventories
18,222
 
260,883
 
Recovery of gas costs
(77,529
)
58,836
 
Gas purchases payable
90,976
 
(144,528
)
Prepaid and accrued taxes
(14,093
)
37,792
 
Accounts payable and other
330
 
2,271
 
Restricted broker margin accounts
24,172
 
(27,814
)
Customers’ credit balances and deposits
(17,137
)
(43,162
)
Other current assets
3,107
 
1,128
 
Total
$(54,205
)
$243,048
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
       
Cash paid for:
       
Interest (net of amounts capitalized)
$10,426
 
$13,498
 
Income taxes
$23,811
 
$12,685
 
 
See Notes to Condensed Unaudited Consolidated Financial Statements


 
3

New Jersey Resources Corporation
Part I


ITEM 1.  FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

ASSETS
 
June 30,
September 30,
(Thousands)
2010
2009
PROPERTY, PLANT AND EQUIPMENT
       
Utility plant, at cost
$1,488,585
 
$1,438,945
 
Real estate properties and other, at cost
30,400
 
30,195
 
 
1,518,985
 
1,469,140
 
Accumulated depreciation and amortization
(417,714
)
(404,701
)
Property, plant and equipment, net
1,101,271
 
1,064,439
 
         
CURRENT ASSETS
       
Cash and temporary investments
91,653
 
36,186
 
Customer accounts receivable
       
Billed
179,251
 
101,945
 
Unbilled revenues
8,333
 
8,616
 
Allowance for doubtful accounts
(3,110
)
(6,064
)
Regulatory assets
49,306
 
5,878
 
Gas in storage, at average cost
277,366
 
297,464
 
Materials and supplies, at average cost
7,902
 
6,026
 
Prepaid state taxes
50,383
 
37,886
 
Derivatives, at fair value
86,554
 
131,070
 
Restricted broker margin account
5,453
 
26,250
 
Deferred taxes
 
20,801
 
Other
14,992
 
18,131
 
Total current assets
768,083
 
684,189
 
         
NONCURRENT ASSETS
       
Investments in equity investees
168,682
 
160,508
 
Regulatory assets
388,253
 
391,025
 
Derivatives, at fair value
8,929
 
9,536
 
Other
10,256
 
11,333
 
Total noncurrent assets
576,120
 
572,402
 
Total assets
$2,445,474
 
$2,321,030
 


See Notes to Unaudited Condensed Consolidated Financial Statements



 
4

New Jersey Resources Corporation
Part I


ITEM 1.  FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

CAPITALIZATION AND LIABILITIES
 
June 30,
September 30,
(Thousands)
2010
2009
CAPITALIZATION
       
Common stock equity
$   741,160
 
$   689,726
 
Long-term debt
434,927
 
455,492
 
Total capitalization
1,176,087
 
1,145,218
 
         
CURRENT LIABILITIES
       
Current maturities of long-term debt
27,320
 
6,510
 
Short-term debt
164,300
 
143,400
 
Gas purchases payable
221,088
 
130,112
 
Accounts payable and other
45,768
 
44,448
 
Dividends payable
14,008
 
13,026
 
Deferred and accrued taxes
1,879
 
3,475
 
Regulatory liabilities
 
36,203
 
New Jersey clean energy program
12,402
 
10,920
 
Derivatives, at fair value
65,244
 
94,853
 
Restricted broker margin account
3,375
 
 
Customers’ credit balances and deposits
56,080
 
73,218
 
Total current liabilities
611,464
 
556,165
 
         
NONCURRENT LIABILITIES
       
Deferred income taxes
292,121
 
243,593
 
Deferred investment tax credits
6,629
 
6,870
 
Deferred revenue
7,342
 
8,203
 
Derivatives, at fair value
4,177
 
6,250
 
Manufactured gas plant remediation
146,700
 
146,700
 
Postemployment employee benefit liability
91,141
 
89,035
 
Regulatory liabilities
58,726
 
56,450
 
New Jersey clean energy program
19,393
 
28,449
 
Asset retirement obligation
25,594
 
25,097
 
Other
6,100
 
9,000
 
Total noncurrent liabilities
657,923
 
619,647
 
Commitments and contingent liabilities (Note 13)
       
Total capitalization and liabilities
$2,445,474
 
$2,321,030
 




See Notes to Unaudited Condensed Consolidated Financial Statements




 
5

New Jersey Resources Corporation
Part I


ITEM 1.  FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
(Thousands)
2010
2009
2010
2009
Net (loss) income
$(10,177
)
$(14,155
)
$115,942
 
$46,105
 
Unrealized gain (loss) on available for sale securities, net of tax of $(85), $10, $(698) and $74, respectively (1)
131
 
(14
)
1,010
 
(106
)
Net unrealized (loss) on derivatives, net of tax of $76, $16, $119 and $50,  respectively
(120
)
(23
)
(182
)
(71
)
Other comprehensive income (loss)
11
 
(37
)
828
 
(177
)
Comprehensive (loss) income
$(10,166
)
$(14,192
)
$116,770
 
$45,928
 
(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





 
6

New Jersey Resources Corporation
Part I


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NATURE OF THE BUSINESS

NJR 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 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), a natural gas storage facility that began commercial operation in April 2009. Effective October 1, 2009, Iroquois and Steckman Ridge comprise the Midstream Assets segment;

NJR Retail Holdings Corporation (Retail Holdings) has two principal subsidiaries, NJR Home Services Company (NJRHS) and Commercial Realty & Resources Corporation (CR&R). Retail Holdings, NJR Energy Corporation (NJR Energy) and NJR Clean Energy Ventures (NJRCEV) are included in Retail and Other operations.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by New Jersey Resources Corporation (NJR or the Company) in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The September 30, 2009 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 2009 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, 2010.

Intercompany transactions and accounts have been eliminated.

Change in Reportable Segments

Effective October 1, 2009, NJR established Midstream Assets as a new reportable segment to reflect the way it currently views and manages growth opportunities associated with investments in natural gas transportation and storage facilities. Consequently, the results of operations, assets and other financial information for Iroquois and Steckman Ridge, previously included in Retail and Other operations, are now reported as components of the Midstream Assets segment. As required, prior year information for both Midstream Assets and Retail and Other operations has been restated throughout this report to be consistent with current year presentation (see Note 14. Business Segment and Other Operations Data and Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations).

Gas in Storage

The following table summarizes Gas in storage by company as of:
 
 
June 30,
September 30,
 
2010
2009
($ in thousands)
Assets
Bcf
Assets
Bcf
NJNG
$100,947
14.4
$175,201
21.9
NJRES
176,419
40.0
122,263
36.3
Total
$277,366
54.4
$297,464
58.2
 
 
 
7

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Gas in storage decreased during the nine months ended June 30, 2010, due primarily to a 34.2 percent decrease in NJNG’s inventory volumes due to timing of summer injections, offset by an increase in the average cost of gas at NJRES.

Customer Accounts Receivable

Customer accounts receivable include outstanding billings from the following subsidiaries as of:

 
June 30,
September 30,
(Thousands)
2010
2009
NJNG (1)
$  11,315
 
6
%
$  21,239
 
21
%
NJRES
157,578
 
88
 
73,451
 
72
 
NJRHS and other
10,358
 
6
 
7,255
 
7
 
Total
$179,251
 
100
%
$101,945
 
100
%
(1)  
Does not include Unbilled revenues of $8.3 million and $8.6 million as of June 30, 2010 and September 30, 2009, respectively.

Accounts receivable increased during the nine months ended June 30, 2010, due primarily to the impact of higher commodity prices on NJRES’ receivables.

Capitalized Financing Costs 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, as well as capitalized interest recorded in investments in equity investees. Corresponding amounts recognized in interest expense and other income, as appropriate, in the Unaudited Condensed Consolidated Statements of Operations are as follows:

 
Three Months Ended
June 30,
Nine Months Ended
June 30,
(Thousands)
2010
2009
2010
2009
AFUDC:
               
Debt
$262
 
$169
 
$   662
 
$599
 
Equity
$557
 
$233
 
$1,474
 
$233
 
Weighted average rate
7.76
%
5.38
%
7.34
%
3.57
%
                 
Investments in equity investees:
               
Capitalized interest
$   —
 
$214
 
$     —
 
$1,884
 
Weighted average interest rates
%
4.95
%
%
5.15
%
                 
Total capitalized costs
$819
 
$616
 
$2,136
 
$2,716
 
Net weighted average rate
7.76
%
5.17
%
7.34
%
4.36
%

NJNG’s base rates include the ability for NJNG to recover the cost of debt and equity associated with AFUDC and construction work in progress (CWIP). Due to a reduction in NJNG's commercial paper borrowings relative to its CWIP, NJNG's capitalized costs included an equity portion associated with its AFUDC as noted above.

During the three and nine months ended June 30, 2009, NJR capitalized interest costs associated with its development and construction of the Steckman Ridge natural gas storage facility. The facility became operational during the third quarter of fiscal 2009, therefore NJR is no longer capitalizing any costs related to Steckman Ridge (see Note 6. Investments in Equity Investees).

Pursuant to a BPU order, NJNG is permitted to recover carrying costs on uncollected balances related to Societal Benefits Clause (SBC) program costs (see Note 3. Regulation). Accordingly, other income includes interest related to these SBC program costs in the amount of $374,000 and $482,000 for the three months ended June 30, 2010 and 2009, respectively and $1.3 million and $1.5 million for the nine months ended June 30, 2010 and 2009, respectively.





 
8

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Recent Updates to the Accounting Standards Codification (ASC)

Topic 715, Compensation—Retirement Benefits:

On December 30, 2008, the FASB issued guidance that requires additional disclosures surrounding postretirement benefit plans to provide users of financial statements information related to a company’s plan assets, investment policies and strategies and significant concentrations of risk. Disclosures will include information related to the fair value of plan assets, including inputs and valuation techniques that are used to measure plan assets and the effect of Level 3 measurements on changes in plan assets. The guidance is effective for fiscal years ending after December 15, 2009. As it is a disclosure only standard, it will have no impact on the Company’s statement of financial position, results of operations or cash flows.

Topic 810, 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 will replace the quantitative assessments currently 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 will provide information on a company’s involvement with VIE’s. The guidance is effective at the beginning of a company’s annual reporting period that begins after November 15, 2009, including interim reporting periods. The Company will adopt the provisions of the statement prospectively during its first quarter of fiscal 2011 and is evaluating the effect on its financial position, results of operations and cash flows.

Topic 820, Fair Value Measurements and Disclosures:

In August 2009, the FASB issued additional guidance for measuring the fair value of liabilities and clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is a Level 1 measurement, providing there are no adjustments to the quoted price. Alternatively, when no quoted price is available, the guidance affirms the use of other permitted valuation techniques. The guidance became effective for the Company on October 1, 2009. There was no impact to the Company’s statement of financial position, results of operations or cash flows upon adoption.

In January 2010, the FASB issued guidance expanding the requirement to disclose information about significant transfers into and out of Level 3 to all three levels of the fair value hierarchy. In addition, it requires a description of the valuation techniques and inputs used to determine Level 2 and Level 3 fair values and provides additional guidance on determining an appropriate level of disaggregation into classes of assets and liabilities in fair value disclosures. The guidance became effective for the first annual or interim period beginning after December 15, 2009. There was no impact to the Company’s statement of financial position, results of operations or cash flows upon adoption.

REGULATION

Base Rates

In October 2008, the BPU unanimously approved and made effective certain changes in the design of NJNG’s base rates. As a result, NJNG received a revenue increase in its base rates of $32.5 million, which is inclusive of an approximate $13 million impact of a change to the Conservation Incentive Program (CIP) baseline usage rate. Other changes included an allowed rate of return of 7.76 percent that incorporates a return on equity component of 10.3 percent and a reduction to NJNG’s depreciation expense component.

Conservation Incentive Program (CIP)

The CIP allows NJNG to recover utility gross margin variations related to both weather and customer usage. Recovery of such utility gross margin variations (filed for annually and recovered in the year following the end of the CIP usage year) is subject to additional conditions, including an earnings test and an evaluation of Basic Gas Supply Service (BGSS) related savings.

As of June 30, 2010, under the CIP, NJNG has accrued $13.7 million to be recovered from residential and commercial customers, which includes $9 million related to the weather component of the CIP and $4.7 million related to the usage component of the CIP.



 
9

New Jersey Resources Corporation
Part I
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following are NJNG’s BPU filings and results during fiscal 2009 and 2010 related to CIP:

Ÿ
October 2008 – The BPU provisionally approved, effective October 3, 2008, NJNG’s CIP petition filed in May 2008 requesting an additional $6.8 million and modification to its CIP recovery rates. The additional amount brought the total recovery requested to $22.4 million and included amounts accrued and estimated through September 30, 2008.
   
Ÿ
April 2009 – NJNG submitted a proposal to extend its CIP mechanism, as currently structured, until October 1, 2010. The extension was requested due to the continuing nature of energy efficiency programs at the state and federal levels in concert with the issuance of the economic stimulus programs. As a result of no action being taken by the BPU as of September 30, 2009, the CIP remained in effect for an additional year or until a final order was issued by the BPU.
   
Ÿ
June 2009 – The BPU issued their final order approving NJNG’s recovery of $6.8 million of CIP rates for fiscal 2008. In addition, NJNG filed its annual BGSS and CIP filing (2010 BGSS/CIP filing) for recoverable CIP amounts for fiscal 2009, requesting approval to modify its CIP recovery rates effective October 1, 2009, resulting in total annual recovery requested for fiscal 2009 of $6.9 million, representing amounts accrued and estimated through September 30, 2009. NJNG also included a request to reduce the WNC rate to facilitate recovery of its remaining balance in fiscal 2010. The rates included in the filing were provisionally approved on September 16, 2009.
   
Ÿ
December 2009 – NJNG submitted a petition requesting approval from the BPU for an extension of its CIP mechanism, as currently structured, through September 30, 2013. On January 20, 2010, the BPU approved an extension to NJNG’s CIP through September 30, 2013.
 
In addition, NJNG and NJRES entered into an asset management agreement that began in January 2010 and ends in March 2013. Under the terms of this agreement, NJNG released certain transportation and storage contracts to NJRES for the entire term of the agreement. NJNG also sold approximately 1 Bcf of natural gas in storage at cost to NJRES. In return, NJNG will have the option to purchase index priced gas from NJRES at NJNG’s city gate and other delivery locations to maintain operational reliability. These capacity release payments provide BGSS savings pursuant to the terms of the CIP as approved in the January 20, 2010, BPU Board Order, and reduces costs to NJNG’s BGSS customers.
   
Ÿ
June 2010 – The BPU issued their final order approving NJNG’s recovery of $6.9 million of CIP rates for fiscal year 2009. In addition, NJNG filed its annual BGSS and CIP filing (2011 BGSS/CIP/WNC filing) for recoverable CIP amounts for fiscal 2010, requesting approval to modify its CIP recovery rates effective October 1, 2010, resulting in total annual recovery requested for fiscal 2010 of $12.1 million, an increase of $5.2 million. The request represents recovery of amounts accrued and estimated through September 30, 2010. The request results in an increase of 0.7 percent for the average residential heating customer, which is offset by a BGSS decrease of 3.5 percent as discussed below. NJNG also included a request to reduce the Weather Normalization Clause (WNC) rate to facilitate recovery of its remaining balance in fiscal 2011.

Basic Gas Supply Service (BGSS)

BGSS is a BPU-approved rate mechanism designed to allow for the recovery of natural gas commodity costs. NJNG occasionally adjusts its periodic BGSS rates for its residential and small commercial customers to reflect increases or decreases in the cost of natural gas sold to customers.

The following are NJNG’s BGSS filings during fiscal 2009 and 2010 related to its requested rate adjustments and refunds to its residential and small commercial customers:

Ÿ
December 2008 – NJNG provided notice that it would implement a $30 million BGSS-related rate credit that would lower residential and small commercial sales customers’ bills in January and February 2009. This rate credit was due primarily to a decline in wholesale commodity costs subsequent to the October 2008 BGSS price change. On February 20, 2009, NJNG provided notice to the BPU that its BGSS-related rate credit would be extended through March 31, 2009, to reduce BGSS charges by an additional $15 million.
   
Ÿ
June 2009 – NJNG proposed a decrease of 17.6 percent for the average residential heating customer in its 2010 BGSS/CIP filing of which 15.7 percent was due to the reduction in commodity costs based on the continuing decline in the wholesale natural gas market. The balance of the rate change was related to changes to the CIP rate, as discussed above, and a minor reduction to the rate related to collecting the remaining balance under the WNC. In September 2009, the BPU approved on a provisional basis a stipulation in that case which included a decrease of approximately 19 percent to the average residential heating customer of which 17.2 percent was due to the reduction to the BGSS price and the balance of rate change was related to the CIP and WNC rates as discussed above.
   
Ÿ
October 2009 – NJNG provided refunds of approximately $37.4 million to residential and small commercial customers due to the decline in the wholesale price of natural gas.
 
 
 
10

New Jersey Resources Corporation
Part I
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Ÿ
January 2010 – NJNG notified the BPU that bill credits would be provided to residential and small commercial customers, based on individual customer usage, in February 2010 and March 2010. NJNG provided credits of approximately $35.3 million.
   
Ÿ
March 2010 – NJNG notified the BPU that it would extend the BGSS bill credit for residential and small business customers through April 30, 2010. NJNG provided credits of approximately $15.2 million.
   
Ÿ
May 2010 – NJNG provided refunds of approximately $22.5 million to residential and small commercial customers due to the decline in the wholesale price of natural gas.
   
Ÿ
June 2010 – The BPU approved the June 2009 provisional BGSS rate reduction of 17.2 percent on a final basis. In addition, NJNG filed its annual BGSS and CIP filing (2011 BGSS/CIP/WNC filing) requesting a decrease of 2.8 percent for the average residential heating customer of which 3.5 percent was due to the reduction in commodity costs. The balance of the rate change of 0.7 percent is related to changes to the CIP rate, as previously discussed.

Other 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. In October 2008, the BPU approved the extension of the incentive programs through October 31, 2011, along with an increase to certain annual cost and volume limitations.

Societal Benefits Clause (SBC)

The SBC is comprised of three primary riders that allow NJNG to recover costs associated with the following programs:

Universal Service Fund (USF), which is a permanent statewide program for all natural gas and electric utilities for the benefit of income-eligible customers, Manufactured Gas Plant (MGP) Remediation, and the New Jersey Clean Energy Program (NJCEP), which is a statewide program designed to promote energy efficiency and renewable energy that all state utilities are required to fund. Recovery of SBC program costs is subject to BPU approval based on annual filings that include an updated report of expenditures incurred each year.

The following is a summary of regulatory actions related to SBC:

Ÿ
October 2008 - The BPU released a final Order in the NJCEP, updating state utilities’ funding obligations for the period from January 1, 2009, to December 31, 2012. As a result, NJNG recorded an obligation and a corresponding regulatory asset at a present value of $44.3 million in the Unaudited Condensed Consolidated Balance Sheets. As of June 30, 2010, NJNG had a $31.8 million obligation remaining.
   
Ÿ
January 2009 - NJNG filed an application (January 2009 SBC filing) regarding its SBC to increase its MGP factor and its NJCEP factor while maintaining its effective rate on USF. This filing, if approved, will result in an overall increase of approximately 0.48 percent per month for an average residential bill.
   
Ÿ
June 2009 – Natural gas utilities in the State of New Jersey collectively filed with the BPU to decrease the statewide USF rate, which was approved by the BPU on a provisional basis, effective October 12, 2009. The USF change decreased the average monthly bill of a residential heating customer by 0.6 percent.
 
In addition, the BPU approved NJNG’s February 2008 SBC filing, which included recovery of MGP remediation expenditures incurred through June 30, 2007, resulting in an expected total annual recovery of $17.7 million.
   
Ÿ
March 2010 - NJNG, BPU Staff and Rate Counsel executed a Settlement for the January 2009 SBC filing to allow for an increase in the MGP and NJCEP factors, while maintaining the current statewide USF factor. The new MGP factor recovers MGP incurred costs through September 30, 2008, resulting in an expected total annual recovery of approximately $20 million. The Stipulation was approved by the BPU in a Final Decision and Order on April 28, 2010.
   
Ÿ
June 2010 – NJNG filed an application (June 2010 SBC filing) regarding its SBC to maintain the current MGP factor approved in April 2010 and to maintain the current NJCEP. In addition, natural gas utilities in the State of New Jersey collectively filed with the BPU to increase the statewide USF rate to be effective October 1, 2010. If approved, the USF change would result in an overall increase to the average monthly bill of a residential heating customer by 0.03 percent.

 
 
11

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Economic Stimulus

In January 2009, NJNG filed two petitions with the BPU seeking approval to implement programs designed to both stimulate the state and local economy through infrastructure investments and encourage energy efficiency. The Accelerated Infrastructure Program (AIP) was approved in April 2009, and allows NJNG to expedite 14 previously planned infrastructure projects, with a cost of approximately $70.8 million. The projects are designed to maintain safe and reliable service to NJNG’s customers while creating the opportunity for approximately 75 to 100 new jobs. Approved as a 2-year program, the AIP will be funded through an annual adjustment to customers’ base rates with the first adjustment expected in October 2010. The second filing, for an Energy Efficiency (EE) Program and associated cost recovery mechanism, requested BPU approval to implement various programs to encourage energy efficiency for residential and commercial customers. NJNG proposed to recover the EE Program costs of $21.1 million, if fully subscribed, over a 4-year period through a clause mechanism similar to the SBC. A true-up to actual EE Program investments and costs is to be filed with the BPU on an annual basis. The BPU approved the EE Program in July 2009. Both the AIP and EE Programs include the recovery of NJNG’s overall weighted average cost of capital on these investments.

On March 29, 2010, NJNG filed for approval of its Regional Greenhouse Gas Initiative (RGGI) Program with the BPU. The RGGI Program includes a series of energy-efficiency and solar energy programs for residential and commercial customers through which enhanced rebates and incentives are provided to eligible customers. The RGGI Programs are designed to run for three years and if fully subscribed as proposed, the investment would be approximately $102 million to be recovered through NJNG’s current Energy-Efficiency Rider. The impact on a typical residential customer will average $8.14 per year over a 15-year recovery period. Once approved by the BPU, customers will not see a change in rates until October 2011.

On June 1, 2010, NJNG filed for approval of its AIP expenditures in compliance with the April 2009 order. The request includes the recovery of capital improvement projects for the period August 2009 through August 31, 2010. The revenue request of $5.24 million will result in an increase to base rate revenue, which is allocated to customer classes in the manner approved in the October 2008 base rate order. NJNG’s AIP filing included a request to increase base rates effective October 1, 2010. In addition, NJNG filed its annual EE Program filing in compliance with the July 2009 order. The EE filing includes a request to maintain the current EE Rider rate in anticipation of the implementation of the RGGI Program.




 
12

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Regulatory Assets & Liabilities

The Company had the following regulatory assets, all related to NJNG, on the Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
June 30,
2010
September 30,
2009
Recovery
Regulatory assets–current
         
Underrecovered gas costs
$  41,326
 
$        
 
(1)
CIP
7,955
 
5,800
 
(1)
WNC
25
 
78
 
(2)
Total current
$  49,306
 
$   5,878
   
Regulatory assets–noncurrent
         
Remediation costs (Note 13)
         
Expended, net of recoveries
$  75,197
 
$  85,461
 
(3)
Liability for future expenditures
146,700
 
146,700
 
(4)
CIP
5,328
 
 
(1)
Deferred income and other taxes
11,495
 
11,560
 
(1)
Derivatives, net (Note 4)
15,363
 
8,073
 
(5)
Energy Efficiency Program
284
 
1,174
 
(6)
New Jersey Clean Energy Program
31,795
 
39,369
 
(6)
Pipeline Integrity Management (PIM)
448
 
448
 
(7)
Postemployment benefit costs (Note 10)
97,716
 
94,305
 
(8)
Other regulatory assets
3,927
 
3,935
 
(6)
Total noncurrent
$388,253
 
$391,025
   
(1)
Recoverable, subject to BPU approval, without interest.
(2)
Recoverable as a result of BPU approval in October 2008, without interest. This balance reflects the net results from winter period of fiscal 2006. No new WNC activity is being recorded since October 1, 2006 due to the existence of the CIP.
(3)
Recoverable, subject to BPU approval over rolling 7-year periods, with interest.
(4)
Estimated future expenditures. Recovery will be requested when actual expenditures are incurred (see Note 13. Commitments and Contingent Liabilities).
(5)
Recoverable, subject to BPU approval, through BGSS, without interest.
(6)
Recoverable with interest, subject to BPU approval.
(7)
Recoverable, subject to BPU review and approval in the next base rate case. NJNG is limited annually to recording a regulatory asset that does not exceed $700,000. In addition, to the extent that project costs are lower than the approved PIM annual expense of $1.4 million, NJNG will record a regulatory liability that will be refundable as a credit to customer’s gas costs when the net cumulative liability exceeds $1 million.
(8)
Recoverable, subject to BPU approval, without interest. Includes unrecognized service costs recorded, that NJNG has determined are recoverable in rates charged to customers (see Note 10. Employee Benefit Plans). Amount as of June 30, 2010, includes approximately $1.4 million related to changes in the tax treatment for Medicare Subsidy D expenses as a result of the Patient Protection and Affordable Care Act enacted in March 2010.

If there are any changes in regulatory positions that indicate the recovery of regulatory assets is not probable, the related cost would be charged to income in the period of such determination.

The Company had the following regulatory liabilities, all related to NJNG, on the Unaudited Condensed Consolidated Balance Sheets:

(Thousands)
June 30, 2010
September 30, 2009
Regulatory liabilities–current
       
Overrecovered gas costs (1)
$        
 
$36,203
 
Total current
$        
 
$36,203
 
Regulatory liabilities–noncurrent
       
Cost of removal obligation (2)
$58,381
 
$56,450
 
SBC and other regulatory liabilities (3)
345
 
 
Total noncurrent
$58,726
 
$56,450
 
(1)
Refundable, subject to BPU approval, through BGSS with interest.
(2)
NJNG accrues and collects for cost of removal in rates. This liability represents collections in excess of actual expenditures. Approximately $23.6 million, including accretion of $1.2 million for the nine months ended June 30, 2010, of regulatory assets relating to asset retirement obligations have been netted against the cost of removal obligation as of June 30, 2010 (see Note 11. Asset Retirement Obligations).
(3)
Refundable with interest, subject to BPU approval.




 
13

New Jersey Resources Corporation
Part I


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.  
DERIVATIVE INSTRUMENTS

The Company and 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 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. These contracts, with a few exceptions as described below, are accounted for as derivatives in accordance with the Derivatives and Hedging topic (ASC 815) of the ASC. 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. Since the Company chooses not to designate its derivatives as accounting hedges, changes in the fair value of the derivative instruments are concurrently recorded as a component of gas purchases or operating revenues, as appropriate for NJRES and NJR Energy, 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. For NJR Energy, realized gains and losses on all financial derivatives are recorded as a component of operating revenues.

Changes in fair value of NJNG’s derivative instruments, however, are recorded as a component of regulatory assets or liabilities in accordance with ASC 980 in the Unaudited Condensed Consolidated Balance Sheets, as NJNG has received regulatory approval to defer and to recover these amounts through future BGSS rates as an increase or decrease to the cost of natural gas in NJNG’s tariff. 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).

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 and NJR Energy. These contracts are accounted for on an accrual basis.

The following table reflects the fair value of NJR's derivative assets and liabilities recognized in the Unaudited Condensed Consolidated Balance Sheets that are not designated as hedging instruments under ASC 815:

   
Fair Value
   
June 30, 2010
 
September 30, 2009
(Thousands)
Balance Sheet Location
Asset
Derivatives
Liability
Derivatives
 
Asset
Derivatives
Liability
Derivatives
NJNG:
           
Financial commodity contracts
Derivatives - current
$13,621
$28,348
 
$  15,801
$  24,274
 
Derivatives - noncurrent
636
 
1,077
677
NJRES:
           
Physical forward commodity contracts
Derivatives - current
11,906
5,005
 
22,674
10,044
 
Derivatives - noncurrent
6,017
152
 
3,878
214
Financial commodity contracts
Derivatives - current
60,725
31,757
 
89,140
60,054
 
Derivatives - noncurrent
2,912
3,310
 
4,157
5,316
NJR Energy:
           
Financial commodity contracts
Derivatives - current
302
69
 
3,455
481
 
Derivatives - noncurrent
 
424
43
Total fair value of derivatives
 
$95,483
$69,277
 
$140,606
$101,103

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 under ASC 810. 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.
 
 
 
14

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 under ASC 815:

   
Fair Value
   
June 30, 2010
 
September 30, 2009
(Thousands)
Balance Sheet Location
Asset
Derivatives
Liability
Derivatives
 
Asset
Derivatives
Liability
Derivatives
NJRES:
           
Foreign exchange contracts
Derivatives - current
$—
$65
 
$—
$—
 
Derivatives - noncurrent
79
 
Total fair value of derivatives
 
$—
$144
 
$—
$—

At June 30, 2010, the notional amount of the foreign currency transactions was approximately $5.5 million dollars, 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:

(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)
 
June 30, 2010
September 30, 2009
June 30, 2010
September 30, 2009
June 30, 2010
September 30, 2009
Foreign exchange contracts
   $(144)
            $—
     $5
           $—
      $—
             $—
Total
   $(144)
           $—
     $5
           $—
      $—
             $—

NJRES utilizes financial derivatives to economically hedge the 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 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:

(Thousands)
Location of
Gain or (Loss)
Recognized
in Income
on Derivative
Amount of Gain or (Loss) Recognized
in Income on Derivative
Three Months Ended
June 30,
Nine Months Ended
June 30,
2010
2009
2010
2009 (1)
Derivatives not designated as hedging instruments under ASC 815:
       
NJRES:
         
Physical commodity contracts
Operating revenues
$12,890
 
$  8,301
 
$35,564
 
$ 16,340
   
Physical commodity contracts
    Gas purchases
(12,110
)
(882
)
(11,956
)
8,044
   
Financial commodity contracts
Gas purchases
(11,449
)
1,757
 
53,668
 
33,914
   
Subtotal NJRES
 
(10,669
)
9,176
 
77,276
 
58,298
   
NJR Energy:
                   
Financial commodity contracts
    Operating revenues
421
 
62
 
(6,085
)
(9,948
)
 
Total NJRES and NJR Energy unrealized and realized (losses) gains
$(10,248
)
$  9,238
 
$71,191
 
$48,350
   
(1)
Since the provisions of ASC 815-10-50 did not become effective for NJR until January 1, 2009, amounts for the nine months ended June 30, 2009 only include gains and losses for the January 1, 2009 through June 30, 2009 period, therefore, the nine months ended June 30, 2009 is not comparative to the nine months ended June 30, 2010.

Not included in the table above, are gains (losses) associated with NJNG’s financial derivatives that totaled $12.9 million and $(1.7) million for the three months ended June 30, 2010 and 2009, respectively and $(27) million and $(35.1) million for the nine months ended June 30, 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 in accordance with ASC 980 and there is no impact to earnings.
 
 
 
15

New Jersey Resources Corporation
Part I
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2010 and September 30, 2009, NJNG, NJRES and NJR Energy had the following outstanding long (short) derivatives:
 
   
Volume (Bcf)
   
June 30, 2010
September 30, 2009
NJNG
Futures
1.5
 
21.4
 
 
Swaps
2.9
 
(14.5
)
 
Options
1.5
 
8.0
 
NJRES
Futures
(19.8
)
(19.8
)
 
Swaps
16.2
 
(23.2
)
 
Options
1.2
 
4.0
 
 
Physical
66.3
 
58.6
 
NJR Energy
Swaps
0.8
 
2.6
 

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 for NJNG and NJRES. The balances are as follows:

(Thousands)
    Balance Sheet Location
June 30, 2010
September 30, 2009
NJNG broker margin deposit
Broker margin – Current assets
$  5,453
 
$16,458
 
NJRES broker margin deposit
    Broker margin – Current (liabilities) assets
$(3,375
)
$  9,792
 

Wholesale Credit Risk

NJNG, NJRES and NJR Energy 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 June 30, 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 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 retail natural gas sales and services.

(Thousands)
Gross Credit
Exposure
Investment grade
$147,080
 
Noninvestment grade
10,246
 
Internally rated investment grade
36,452
 
Internally rated noninvestment grade
7,108
 
Total
$200,886
 


 
16

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Conversely, certain of NJNG’s, NJRES’ and NJR Energy’s 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 June 30, 2010 and September 30, 2009 is $13.3 million and $22.3 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 June 30, 2010, the Company would have been required to post an additional $12.6 million to its counterparties. If all the thresholds related to the credit-risk-related contingent features underlying these agreements had been invoked on September 30, 2009, the Company would not have been required to post any additional collateral 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.

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, excluding current maturities, is based on quoted market prices for similar issues and is as follows:

 
June 30,
September 30,
(Thousands)
2010
2009
Carrying value
$462,200
$462,000
Fair market value
$488,700
$477,900

NJR applies the fair value measurement provisions of ASC 820 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, ASC 820 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, 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. 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. Certain of NJR’s physical commodity contracts that are to be delivered to inactively traded points on a pipeline are included in this category.



 
17

New Jersey Resources Corporation
Part I


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NJNG’s, NJRES’ and NJR Energy’s 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. In these cases, NJRES’ policy is to use the best information available to determine fair value based on internal pricing models, which include estimates extrapolated from broker quotes or pricing services.

NJR Energy uses NYMEX settlement prices to value its long-dated swap contracts. 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.

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 June 30, 2010:
       
Assets:
       
Physical forward commodity contracts
$        —
 
$17,923
 
$    —
$17,923
Financial derivative contracts – natural gas
35,793
 
41,767
 
77,560
Available for sale equity securities – Energy industry (1)
9,580
 
 
9,580
Other assets
1,087
 
 
1,087
Total assets at fair value
$46,460
 
$59,690
 
$    
$106,150
             
Liabilities:
           
Physical forward commodity contracts
$        —
 
$  5,157
 
$    —
$  5,157
Financial commodity contracts – natural gas
24,271
 
39,849
 
64,120
Financial commodity contracts – foreign exchange
 
144
 
144
Other liabilities
858
 
 
858
Total liabilities at fair value
$25,129
 
$45,150
 
$    —
$70,279
             
As of September 30, 2009:
           
Assets:
           
Physical forward commodity contracts
$        —
 
$26,552
 
$    —
$  26,552
Financial commodity contracts – natural gas (2)
47,065
 
66,989
 
114,054
Available for sale equity securities – Energy industry (1)
7,872
 
 
7,872
Other assets
1,467
 
 
1,467
Total assets at fair value
$56,404
 
$93,541
 
$    —
$149,945
             
Liabilities:
           
Physical forward commodity contracts
$        —
 
$10,258
 
$    —
$  10,258
Financial derivative contracts – natural gas (2)
40,313
 
50,532
 
90,845
Other liabilities
1,467
 
 
1,467
Total liabilities at fair value
$41,780
 
$60,790
 
$    —
$102,570
(1)
Included in Investments in equity investees in the Unaudited Condensed Consolidated Balance Sheets.
(2)
Subsequent to the issuance of our 2009 Form 10-K we determined that the fair value table as of September 30, 2009, improperly classified certain exchange cleared financial instruments as Level 1 financial derivative contracts assets and liabilities. Accordingly, we have corrected the classification of such amounts previously reported in our 2009 Form 10-K as of September 30, 2009 by decreasing Level 1 financial derivative contracts-assets $34.2 million with a corresponding increase in Level 2, and decreasing Level 1 financial derivative contracts-liabilities $28.1 million with a corresponding increase in Level 2. These changes in the disclosed classification of the basis of valuation had no effect on the reported fair values of the related assets and liabilities.
 
 
 
18

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In January 2010, the FASB issued guidance expanding the requirement to disclose information about transfers into and out of Level 3 to all three levels of the fair value hierarchy, There was no impact to the Company’s statement of financial position, results of operations or cash flow upon adoption. In addition, for the three and nine months ended June 30, 2010, there were no Level 3 measurements.

A reconciliation of the beginning and ending balances of NJRES’ derivatives measured at fair value based on significant unobservable inputs as of June 30, 2009 is as follows:

 
Fair Value Measurements Using
 
Significant Unobservable Inputs
 
(Level 3)
(Thousands)
Three Months Ended
Nine Months Ended
Beginning balance
$  2
 
$937
 
Total gains realized and unrealized(1)
 
320
 
Purchases, sales, issuances and settlements, net
(2
)
(774
)
Net transfers in and/or out of level 3
 
(483
)
Ending balance
$—
 
$  —
 
         
Net unrealized gains included in net income relating to
       
derivatives still held at June 30, 2009
$
 
$  
 
(1)  
Gains recognized in Operating revenues and Gas purchases for the nine months ended June 30, 2009 are $77,000 and $243,000 respectively.

6.  
INVESTMENTS IN EQUITY INVESTEES

NJR’s Investments in equity investees include the following investments:

(Thousands)
June 30,
2010
September 30,
2009
Steckman Ridge
$134,510
 
$131,555
 
Iroquois
24,592
 
21,081
 
Other
9,580
 
7,872
 
Total
$168,682
 
$160,508
 

NJR uses the equity method of accounting for its investments in Steckman Ridge and Iroquois.

NJR’s investment in Steckman Ridge, which became operational during the third quarter of fiscal 2009, increased $3 million during the nine months ended June 30, 2010, including cash investments of $4.3 million and equity in earnings of $6.7 million, less cash distributions received of $8 million.

NJR’s investment in Iroquois increased as a result of equity in earnings of $3.5 million during the nine months ended June 30, 2010.

NJRES and NJNG have entered into transportation, storage and park and loan agreements with Iroquois and Steckman Ridge. See Note 15. Related Party Transactions for more information on these intercompany transactions.

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 accumulated other comprehensive income, a component of common stock equity. Unrealized gains (losses) associated with these equity securities were approximately $1 million, net of tax of $(698,000) and $(106,000), net of tax of $74,000 for the nine months ended June 30, 2010 and 2009, respectively.





 
19

New Jersey Resources Corporation
Part I
 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EARNINGS PER SHARE

The following table sets forth the calculation of the Company’s basic and diluted earnings per share:

 
Three Months Ended
June 30,
Nine Months Ended
June 30,
(Thousands, except per share amounts)
2010
2009
2010
2009
Net (loss) income, as reported
$(10,177
)
$(14,155
)
$115,942
 
$46,105
 
Basic earnings per share
               
Weighted average shares of common stock outstanding–basic
41,239
 
42,049
 
41,424
 
42,175
 
Basic earnings per common share
$(0.25
)
$(0.34
)
$2.80
 
$1.09
 
Diluted earnings per share
               
Weighted average shares of common stock outstanding–basic
41,239
 
42,049
 
41,424
 
42,175
 
Incremental shares (1)
 
 
279
 
372
 
Weighted average shares of common stock outstanding–diluted (2)
41,239
 
42,049
 
41,703
 
42,547
 
Diluted earnings per common share
$(0.25
)
$(0.34
)
$2.78
 
$1.08
 
(1)
Incremental shares consist of stock options, stock awards and performance units.
(2)
Since there was a net loss for the three months ended June 30, 2010 and 2009, incremental shares were not included in the computation of diluted loss per common share, for both three month periods, as their effect would have been anti-dilutive. For the nine months ended June 30, 2010 and June 30, 2009, there were no anti-dilutive shares that needed to be excluded from the calculation of diluted earnings per share.

DEBT

NJR

On March 15, 2009, NJR repaid its $25 million, 3.75 percent, Unsecured Senior notes at maturity.

NJR has a $325 million unsecured committed credit facility expiring in December 2012. As of June 30, 2010, NJR had $164.3 million in borrowings outstanding under the facility.

As of June 30, 2010, NJR has three letters of credit outstanding, totaling $9.1 million, on behalf of NJRES. Two of those letters of credit, totaling $3.6 million, are used to secure the purchase and/or sale of natural gas; one expires on December 31, 2010, and the other expires on March 19, 2011. The other letter of credit, which totals $5.5 million, is used for margin requirements for natural gas transactions and will expire on December 31, 2010. NJR also has a $675,000 letter of credit outstanding on behalf of CR&R, which will expire on December 3, 2010. 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

On November 1, 2008, NJNG repaid its $30 million, 6.27 percent, Series X First Mortgage bonds at maturity.

NJNG’s agreement for standby letters of credit of up to $50 million expired on December 15, 2009 and was not renewed.

In August 2009, NJNG filed a petition with the BPU, requesting authorization over a three-year period to issue debt, renew its expiring credit facility, enter into interest rate hedging transactions and increase the size of its meter leasing program should the necessity arise. On December 1, 2009, NJNG received approval to renew its expiring credit facility, with an allowed duration of up to three years. The other three requests have authorization from the BPU through September 30, 2011.

Subsequent to the BPU’s authorization, NJNG replaced its $250 million committed credit facility with a new $200 million 3-year revolving unsecured committed credit facility on December 11, 2009, 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 June 30, 2010, NJNG had no outstanding borrowings under the credit facility.

Neither NJNG’s assets nor the results of its operations are obligated or pledged to support the NJR credit facility.

NJNG received $4.9 million and $6.3 million in December 2009 and 2008, 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.
 

 
 
20

New Jersey Resources Corporation
Part I
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NJRES

NJRES had a 3-year, $30 million committed credit facility that expired in October 2009 and was not renewed.

A summary of NJR’s and NJNG’s long-term debt, committed credit facilities, which require annual commitment fees, and NJRES’ committed facility that did not require a commitment fee, are as follows:

 
June 30,
September 30,
(Thousands)
2010
2009
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
$164,300
 
$143,400
 
Weighted average interest rate at end of period
       
Notes payable to banks
0.68
%
0.57
%
NJNG
       
Long - term debt (2)
$349,800
 
$349,800
 
Bank credit facilities (1)
$200,000
 
$250,000
 
Amount outstanding at end of period
       
Commercial paper
$   
 
$   
 
Weighted average interest rate at end of period
       
Commercial paper
%
%
NJRES
       
Bank credit facilities (3)
$   
 
$30,000
 
Amount outstanding at end of period
       
Notes payable to banks
$   
 
$   
 
Weighted average interest rate at end of period
       
Notes payable to banks
%
%
(1)  Company is subject to commitment fees on outstanding and unused amounts.
(2)      Long-term debt excludes lease obligations of $62.4 million and $62.2 million at June 30, 2010 and September 30, 2009, respectively.
(3)  Facility expired in October 2009 and was not renewed.

STOCK-BASED COMPENSATION

On November 18, 2009, the Company granted 29,865 performance shares, which are market condition awards and 24,312 performance shares, which are subject to meeting certain performance milestones. Both performance share grants vest on September 30, 2012 subject to certain conditions. Also, on November 18, 2009 the Company granted 24,312 restricted shares, which vest in three equal annual installments, the first occurring on October 15, 2010. As of June 30, 2010, 2,232,223 and 82,762 shares remain available for future issuance to employees and directors, respectively.

During the first nine months of fiscal 2010, included in operation and maintenance expense is $2 million related to stock based compensation. There is approximately $2.2 million of deferred compensation expense related to unvested shares, options and performance units that is expected to be recognized over the next three years.













 
21

New Jersey Resources Corporation
Part I
 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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
June 30,
Nine Months
Ended
June 30,
Three Months
Ended
June 30,
Nine Months
Ended
June 30,
(Thousands)
2010
2009
2010
2009
2010
2009
2010
2009
Service cost
$   992
 
$678
 
$2,976
 
$2,034
 
$   704
 
$   432
 
$2,112
 
$1,296
 
Interest cost
2,049
 
1,937
 
6,147
 
5,811
 
1,204
 
1,014
 
3,612
 
3,043
 
Expected return on plan assets
(2,577
)
(2,188
)
(7,731
)
(6,564
)
(485
)
(499
)
(1,455
)
(1,497
)
Recognized actuarial loss
681
 
138
 
2,043
 
416
 
570
 
267
 
1,710
 
801
 
Prior service cost amortization
14
 
14
 
42
 
42
 
19
 
20
 
57
 
59
 
Transition obligation amortization
 
 
 
 
89
 
89
 
267
 
268
 
Net periodic cost
$1,159
 
$579
 
$3,477
 
$1,739
 
$2,101
 
$1,323
 
$6,303
 
$3,970
 

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 $4.4 million to the pension plans on October 1, 2009. It is anticipated that the annual funding level to the OPEB plans will range from $6.1 million to $6.4 million over the next three years. Additional contributions may vary based on market conditions and various assumptions.

NJR’s OPEB plans provide prescription drug benefits that are actuarially equivalent to those provided by Medicare Part D, for which NJR qualifies for federal subsidies. As a result of the Patient Protection and Affordable Care Act, which was enacted in March 2010, beginning in fiscal year 2014 the tax deduction available to NJR will be reduced to the extent its drug expenses are reimbursed under the Medicare Part D retiree drug subsidy program. Accordingly, NJR recorded a one-time, non-cash, after-tax adjustment of approximately $2.6 million, of which, approximately $1.9 million, relates to NJNG. Since NJR believes the $1.9 million is recoverable through the regulatory process, NJNG has recognized a corresponding regulatory asset. In addition, the regulatory asset was grossed up by $1.4 million associated with the recovery of NJNG’s income taxes. The one-time, non-cash after-tax charge to NJR’s non-regulated activities was $620,000.

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 is required by New Jersey law when taking such gas distribution pipelines out of service.

The following is an analysis of the change in the ARO liability for the nine month period ended June 30, 2010:

(Thousands)
Balance at October 1, 2009
$25,097
 
Accretion
1,173
 
Additions
 
Retirements
(676
)
Balance at June 30, 2010
$25,594
 

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.

INCOME TAXES

The Company’s federal income tax returns through fiscal 2006 have either been reviewed by the Internal Revenue Service (IRS), or the related statute of limitations has expired and all matters have been settled. The IRS has recently begun to examine returns for fiscal 2007 through fiscal 2009.
 
 
 
22

New Jersey Resources Corporation
Part I
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NJR evaluates its tax positions to determine the appropriate accounting and recognition of potential future obligations associated with unrecognized tax benefits. As of June 30, 2010, there is no reserve established related to uncertain tax positions nor does the Company believe, based on its analysis, that there is a need to recognize any liabilities associated with Uncertain Tax Positions.

The Company utilizes federal investment tax credits (ITC) as allowed based on the cost and life of certain assets purchased. To the extent that NJNG invests in property that qualifies for ITC’s, the ITC is deferred and amortized to income over the life of the equipment in accordance with regulatory treatment. For its unregulated subsidiaries, NJR recognizes ITCs as a reduction to income tax expense when the property is placed in service.

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 $107 million at current contract rates and volumes, which are recoverable through the 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 range 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.

Commitments as of June 30, 2010, for natural gas purchases and future demand fees, for the next five fiscal year periods, are as follows:

(Thousands)
2010
2011
2012
2013
2014
Thereafter
NJRES:
           
Natural gas purchases
$215,206
$215,299
$185,495
$  63,371
$        —
$          —
Storage demand fees
10,983
28,959
17,734
12,220
6,545
15,281
Pipeline demand fees
7,071
31,288
18,855
11,639
7,631
23,999
Sub-total NJRES
$233,260
$275,546
$222,084
$  87,230
$14,176
$  39,280
NJNG:
           
Natural gas purchases
$ 61,898
$  14,863
$          —
$          —
$        —
$          —
Storage demand fees
7,813
27,729
23,322
21,146
16,257
55,810
Pipeline demand fees
17,573
79,413
74,463
74,773
70,153
259,007
Sub-total NJNG
$87,284
$122,005
$  97,785
$  95,919
$86,410
$314,817
Total
$320,544
$397,551
$319,869
$183,149
$100,586
$354,097

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
June 30,
Nine Months Ended
June 30,
(Millions)
2010
 
2009
 
2010
 
2009
 
NJRES
$22.6
 
$30.1
 
$82.4
 
$  87.9
 
NJNG
25.3
 
20.1
 
73.6
 
62.9
 
Total
$47.9
 
$50.2
 
$156.0
 
$150.8
 

NJNG’s capital expenditures are estimated at $106.6 million for fiscal 2010, of which approximately $58 million has been committed, and $79 million for fiscal 2011, and consist primarily of its construction program to support customer growth, maintenance of its distribution systems and replacement needed under pipeline safety regulations. Fiscal 2010 and 2011 include an estimated $44.2 and $20.6 million, respectively, related to AIP construction costs.

In addition, during fiscal 2010, NJRHS and NJRCEV have entered into agreements to install solar equipment on residential and commercial rooftops, which are expected to be completed by mid fiscal 2011 at an estimated cost of $26 million.

The Company’s future minimum lease payments under various operating leases are less than $2.7 million annually for the next five years and $1.4 million in the aggregate for all years thereafter through 2026.
 
 
 
23

New Jersey Resources Corporation
Part I
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Guarantees

As of June 30, 2010, there were NJR guarantees covering approximately $290 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 five-year terms, 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 June 30, 2010, the present value of the liability recognized in the Unaudited Condensed Consolidated Balance Sheets is $582,000. In the event performance under the guarantee is required, the Company’s maximum future payment would be $911,000.

Legal Proceedings

Manufactured Gas Plant Remediation

NJNG is responsible for the remedial cleanup of five 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 7-year periods pursuant to the Remediation Adjustment (RA) approved by the BPU. On January 27, 2009, NJNG filed an application regarding its SBC including MGP remediation expenditures incurred through September 30, 2008, resulting in an expected annual recovery of approximately $20 million. The BPU approved the recovery of the remediation expenditures through September 30, 2008 on April 28, 2010. On June 25, 2010, NJNG filed an application regarding its SBC to maintain the current MGP factor and to recover the MGP remediation expenditures incurred through September 30, 2009. As of June 30, 2010, $75.2 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 2009, 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 will range from approximately $146.7 million to $244.3 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, actual costs can differ from these estimates. Where it is probable that costs will be incurred, but the information is sufficient only to establish a range of possible liability, and no point within the range is more likely than any 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 $146.7 million on the Unaudited Condensed Consolidated Balance Sheet. 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 is presently investigating the potential settlement of alleged Natural Resource Damage claims that might be brought by the NJDEP concerning the five MGP sites. NJDEP has not made any specific demands for compensation for alleged injury to groundwater or other natural resources. NJNG’s evaluation of these potential claims is in the early stages, and it is not yet possible to quantify the amount of compensation, if any that NJDEP might seek to recover. NJNG anticipates any costs associated with this matter would be recoverable through the RA.

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 cost 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.
 
 
 
 
24

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.  
BUSINESS SEGMENT AND OTHER OPERATIONS DATA

As stated on Note 2. Summary of Significant Accounting Policies, effective October 1, 2009, NJR established Midstream Assets as a new reportable segment to reflect the way it currently views and manages its investments in Iroquois, a natural gas pipeline operating with regulated rates, and Steckman Ridge, a storage facility that operates under market-based rates. Consequently, the results of operations, assets and other financial information for Iroquois and Steckman Ridge, previously included in Retail and Other operations, are now reported as components of the Midstream Assets segment. As required, prior year information for both Midstream Assets and Retail and Other operations has been restated below to be consistent with current year presentation.

NJR organizes its businesses based on its products and services as well as regulatory environment. As a result, the Company chooses to manage 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; as noted above, 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 other corporate activities.

Information related to the Company’s various business segments and other operations is detailed below.

 
Three Months Ended
June 30,
Nine Months Ended
June 30,
(Thousands)
2010
2009
2010
2009
Operating revenues
               
Natural Gas Distribution
               
External customers
$105,130
 
$148,826
 
$   794,311
 
$   958,995
 
Intercompany
 
 
8,047
 
 
Energy Services
               
External customers
364,776
 
283,439
 
1,193,912
 
1,217,182
 
Intercompany
24
 
 
13,254
 
2,114
 
Segment subtotal
469,930
 
432,265
 
2,009,524
 
2,178,291
 
Retail and Other
10,058
 
8,832
 
19,803
 
3,828
 
Eliminations
(94
)
(45
)
(21,541
)
(2,247
)
Total
$479,894
 
$441,052
 
$2,007,786
 
$2,179,872
 
Depreciation and amortization
               
Natural Gas Distribution
$7,939
 
$7,668
 
$23,321
 
$22,120
 
Energy Services
37
 
51
 
136
 
153
 
Midstream Assets
1
 
 
4
 
 
Segment subtotal
7,977
 
7,719
 
23,461
 
22,273
 
Retail and Other
159
 
161
 
475
 
476
 
Total
$8,136
 
$7,880
 
$23,936
 
$22,749
 
Interest income (1)
               
Natural Gas Distribution
$608
 
$772
 
$1,508
 
$1,934
 
Energy Services
7
 
172
 
11
 
509
 
Midstream Assets
227
 
267
 
658
 
267
 
Segment subtotal
842
 
1,211
 
2,177
 
2,710
 
Retail and Other
(4
)
22
 
3
 
41
 
Eliminations
(216
)
(168
)
(642
)
(487
)
Total
$622
 
$1,065
 
$1,538
 
$2,264
 
Interest expense, net of capitalized interest
               
Natural Gas Distribution
$4,139
 
$4,028
 
$12,545
 
$14,692
 
Energy Services
425
 
73
 
917
 
244
 
Midstream Assets
380
 
882
 
2,037
 
946
 
Segment subtotal
4,944
 
4,983
 
15,499
 
15,882
 
Retail and Other
294
 
104
 
447
 
290
 
Eliminations
 
100
 
 
(219
)
Total
$5,238
 
$5,187
 
$15,946
 
$15,953
 
(1)      Included in Other income in the Unaudited Condensed Consolidated Statement of Operations.
 
 
 
25

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
Three Months Ended
June 30,
Nine Months Ended
June 30,
(Thousands)
2010
2009
2010
2009
Income tax provision (benefit)
               
Natural Gas Distribution
$    2,081
 
$   2,369
 
$41,326
 
$40,472
 
Energy Services
(13,316
)
(14,764
)
25,506
 
(11,004
)
Midstream Assets
(625
)
(372
)
(1,159
)
(409
)
Segment subtotal
(11,860
)
(12,767
)
65,673
 
29,059
 
Retail and Other
269
 
803
 
(1,751
)
(7,536
)
Eliminations
223
 
(182
)
897
 
(227
)
Total
$(11,368
)
$(12,146
)
$64,819
 
$21,296
 
Equity in earnings of affiliates, net of taxes
               
Midstream Assets (net of taxes of $1 million, $928,000 $4.2 million and $1.8 million, respectively)
$1,494
 
$1,367
 
$6,029
 
$2,720
 
Segment subtotal
1,494
 
1,367
 
6,029
 
2,720
 
Eliminations
(326
)
110
 
(1,391
)
58
 
Total
$1,168
 
$1,477
 
$4,638
 
2,778
 
Net financial earnings (loss)
               
Natural Gas Distribution
$  6,109
 
$4,134
 
$70,087
 
$  68,796
 
Energy Services
3,336
 
(4,484
)
29,347
 
35,977
 
Midstream Assets
1,828
 
940
 
5,218
 
2,119
 
Segment subtotal
11,273
 
590
 
104,652
 
106,892
 
Retail and Other
314
 
656
 
(1,641
)
(740
)
Total
$11,587
 
$1,246
 
$103,011
 
$106,152
 
Capital expenditures
               
Natural Gas Distribution
$23,778
 
$35,514
 
$55,948
 
$55,183
 
Segment subtotal
23,778
 
35,514
 
55,948
 
55,183
 
Retail and Other
367
 
211
 
460
 
356
 
Total
$24,145
 
$35,725
 
$56,408
 
$55,539
 
Investments in equity method investees
               
Midstream Assets
$—
 
$20,343
 
$4,300
 
$41,343
 
Total
$—
 
$20,343
 
$4,300
 
$41,343
 

The chief operating decision maker of the Company is the Chief Executive Officer (CEO). The CEO uses net financial earnings as a measure of profit or loss in measuring the results of the Company’s segments and operations. A reconciliation of consolidated net financial earnings to consolidated net income, for the three and nine months ended June 30, 2010 and 2009, respectively, is as follows:

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
(Thousands)
2010
2009
2010
2009
Consolidated net financial earnings
$11,587
 
$1,246
 
$103,011
 
$106,152
 
Less:
               
Unrealized loss from derivative instruments and related transactions, net of taxes(1)
15,886
 
6,981
 
3,936
 
39,557
 
Effects of economic hedging related to natural gas inventory, net of taxes
5,878
 
8,420
 
(16,867
)
20,490
 
Consolidated net (loss) income
$(10,177
)
$(14,155
)
$115,942
 
$  46,105
 
(1)
Excludes unrealized loss of $16,000 and $144,000 related to an intercompany transaction between NJNG and NJRES that has been eliminated in consolidation for the three and nine months ended June 30, 2010.





 
26

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The company uses derivative instruments as economic hedges of purchases and sales of physical gas inventory. For GAAP purposes, these derivatives are recorded at fair value and related changes in fair value are included in reported earnings. Revenues and cost of gas related to physical gas flow is recognized as the gas is delivered to customers. Consequently, there is a mismatch in the timing of earnings recognition between the economic hedges and physical gas flows. Timing differences occur in two ways:

Ÿ
Unrealized gains and losses on derivatives are recognized in reported earnings in periods prior to physical gas inventory flows; and
   
Ÿ
Unrealized gains and losses of prior periods are reclassified as realized gains and losses when derivatives are settled in the same period as physical gas inventory movements occur.

Net financial earnings is a measure of the earnings based on eliminating these timing differences, to effectively match the earnings effects of the economic hedges with the physical sale of gas. Consequently, to reconcile between GAAP and net financial earnings, current period unrealized gains and losses on the derivatives are excluded from net financial earnings as a reconciling item. Additionally, realized derivative gains and losses are also included in current period net income, however net financial earnings include only realized gains and losses related to natural gas sold out of inventory, effectively matching the full earnings effects of the derivatives with realized margins on physical gas flows.

The Company’s assets for the various business segments and business operations are detailed below:

 
June 30,
September 30,
(Thousands)
2010
2009
Assets at end of period:
       
Natural Gas Distribution
$1,812,976
 
$1,797,165
 
Energy Services
422,286
 
327,532
 
Midstream Assets
163,137
 
153,609
 
Segment Subtotal
2,398,399
 
2,278,306
 
Retail and Other
76,067
 
69,411
 
Intercompany assets (1)
(28,992
)
(26,687
)
Total
$2,445,474
 
$2,321,030
 
(1)  Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation.

NJRES’ assets increased 28.9 percent from September 30, 2009 to June 30, 2010, due primarily to an increase in accounts receivable and gas in storage as a result of higher natural gas prices, partially offset by a decrease in the fair value of derivative assets.

15.  
RELATED PARTY TRANSACTIONS

During fiscal 2009, NJRES entered into park and loan agreements and firm storage contracts with Steckman Ridge, an affiliated FERC regulated natural gas storage facility, for up to 2 Bcf of natural gas storage with various terms ranging from April 2009 to December 2010. As of June 30, 2010, NJRES had no outstanding amounts payable to Steckman Ridge. Demand fees expensed as a component of gas purchases in the Unaudited Condensed Consolidated Statements of Operations during the nine months ended June 30, 2010, was $3.6 million.

In December 2009, NJNG and NJRES entered into an asset management agreement that began in January 2010 and ends in March 2013. Under the terms of this agreement, NJNG will release certain transportation and storage contracts to NJRES for the entire term of the agreement. NJNG also will sell approximately 1 Bcf of natural gas in storage at cost to NJRES. In return, NJNG will have the option to purchase index priced gas from NJRES at NJNG’s city gate and other delivery locations to maintain operational reliability.

In January 2010, NJNG entered into a 10-year agreement effective April 1, 2010 through March 31, 2020, for 3 Bcf of firm storage capacity with Steckman Ridge. Under the terms of the agreement, NJNG will incur demand fees, at market rates, of approximately $9.3 million annually. These fees are recoverable through NJNG’s BGSS mechanism. Demand fees incurred during the nine months ended June 30, 2010, were $2.3 million. As of June 30, 2010, NJNG had fees payable to Steckman Ridge in the amount of $775,000.



 
27

New Jersey Resources Corporation
Part I


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 New England region, the West Coast and Canada through its two principal subsidiaries, New Jersey Natural Gas (NJNG) and NJR Energy Services (NJRES).

Comprising the 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).

NJRES comprises the 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.

Effective October 1, 2009, NJR established Midstream Assets as a reportable segment to reflect the way it currently views and manages growth opportunities associated with natural gas transportation and storage facilities. Specifically, the Midstream Asset segment includes NJR Energy Holdings Corporation (NJREH), which 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), a natural gas storage facility that was jointly developed and is being marketed with a partner in Pennsylvania. The results of operations, assets and other financial information for Iroquois and Steckman Ridge, previously included in Retail and Other operations, are now reported as components of the Midstream Assets segment. As a result, prior year information for both Midstream Assets and Retail and Other operations has been restated to be consistent with current year presentation.

The retail and other business operations (Retail and Other) includes:  NJR Energy Corporation (NJR Energy), a company that invests in energy-related ventures, NJR Clean Energy Ventures (NJRCEV), a company that invests in clean energy projects, NJR Home Services (NJRHS), which provides service, sales and installation of appliances; 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 (NJR Service), which provides support services to the various NJR businesses.

Assets by business segment and operations are as follows:

(Thousands)
June 30,
2010
September 30,
2009
Assets:
               
Natural Gas Distribution
$1,812,976
 
74
%
$1,797,165
 
77
%
Energy Services
422,286
 
17
 
327,532
 
14
 
Midstream Assets
163,137
 
7
 
153,609
 
7
 
Retail and Other
76,067
 
3
 
69,411
 
3
 
Intercompany assets (1)
(28,992
)
(1
)
(26,687
)
(1
)
Total
$2,445,474
 
100
%
$2,321,030
 
100
%
(1)  Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation.

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

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
(Thousands)
2010
2009
2010
2009
Net income (loss)
                               
Natural Gas Distribution
$6,109
 
(60
)%
$4,134
 
(30
)%
$  70,087
 
60
%
$68,796
 
149
%
Energy Services
(18,823
)
185
 
(20,170
)
142
 
44,262
 
38
 
(13,828
)
(30
)
Midstream Assets
1,828
 
(18