ITEM 1. BUSINESS
ORGANIZATIONAL STRUCTURE
New Jersey Resources Corporation (the Company or NJR) is a New Jersey corporation formed in 1982 pursuant to a corporate reorganization. The Company is an energy services holding company providing retail and wholesale natural gas and related energy services to customers from the Gulf Coast to New England. The Company is an exempt holding company under Section 3(a)(1) of the Public Utility Holding Company Act of 1935. Its subsidiaries include:
1) New Jersey Natural Gas Company (NJNG), a local natural gas distribution company that provides regulated energy service to more than 409,000 residential and commercial customers in central and northern New Jersey and participates in the off-system sales and capacity release markets. In November 2000, NJNG transferred its appliance service business to NJR Home Services Company, a newly formed unregulated subsidiary of the Company;
2) NJR Energy Services Company (Energy Services), formerly a wholly-owned subsidiary of NJR Energy Holdings Corporation, formed in 1996 to provide unregulated fuel and capacity management and other wholesale marketing services;
3) NJR Retail Holdings Corporation (Retail Holdings), a sub-holding company of NJR formed in November 2000 as an unregulated affiliate to consolidate the Company's unregulated retail operations. Retail Holdings includes the following wholly-owned subsidiaries:
NJR Home Services Company (Home Services), a company formed in August 1998 to provide appliance service repair and contract services. In November 2000, NJNG received approval from the New Jersey Board of Public Utilities (BPU) to transfer its appliance service business, which consists of more than 134,000 customers under protection plan contracts, to Home Services; and
NJR Natural Energy Company (Natural Energy), formerly New Jersey Natural Energy Company and a wholly-owned subsidiary of NJR Energy Holdings Corporation, formed in 1995 to participate in the unregulated retail marketing of natural gas; and
NJR Power Services Company (Power Services), a company formed in May 2000 that is involved in the distribution of alternative sources of energy (e.g., fuel cells and microturbines);
4) NJR Capital Corporation (Capital), formerly NJR Development Corporation, a sub-holding company of NJR formed to consolidate the Company's energy-related and real estate investments. Capital includes the following wholly-owned subsidiaries:
Commercial Realty & Resources Corp. (CR&R), a company formed in May 1966 to develop commercial real estate; and
NJR Investment Company, a company formed in October 2000 to make certain energy-related equity investments; and
NJR Energy Holdings Corporation, formerly a sub-holding company of NJR, which includes NJR Energy Corporation (NJR Energy), an investor in energy-related ventures through its operating subsidiaries, New Jersey Natural Resources Company (NJNR) and NJNR Pipeline Company (Pipeline).
5) NJR Service Corporation (Service Corp.), a company formed in August 2000 to provide shared administrative services, including Corporate Communications, Financial and Administrative, Internal Audit, Legal and Technology for all subsidiaries.
BUSINESS SEGMENTS
See Note 12 to the Consolidated Financial Statements - Business Segment Data in the Company's 2000 Annual Report, for business segment financial information.
NEW JERSEY NATURAL GAS COMPANY
General
NJNG provides natural gas service to more than 409,000 customers. Its service territory encompasses 1,436 square miles, covering 104 municipalities with an estimated population of 1.3 million.
NJNG's service territory is primarily suburban, with a wide range of cultural and recreational activities, highlighted by approximately 100 miles of New Jersey seacoast. It is in proximity to New York, Philadelphia and the metropolitan areas of northern New Jersey and is accessible through a network of major roadways and mass transportation. These factors have contributed to NJNG adding 12,558, 11,890 and 11,819 new customers in 2000, 1999 and 1998, respectively. This annual growth rate of 3 percent is expected to continue with projected additions of 36,000 new customers over the next three years. See Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) - Liquidity and Capital Resources - NJNG in the Company's 2000 Annual Report for a discussion of NJNG's projected capital expenditure program associated with this growth in 2001 and 2002.
In assessing the potential for future growth in its service area, NJNG uses information derived from county and municipal planning boards that describes housing developments in various stages of approval. In addition, builders in NJNG's service area are surveyed to determine their development plans for future time periods. In addition to customer growth through new construction, NJNG's business strategy includes aggressively pursuing conversions from other fuels, such as electricity and oil. It is estimated that approximately 40 percent of NJNG's projected customer growth will consist of conversions. NJNG will also continue to pursue off-system sales and non-peak sales, such as natural gas-fueled electric generating projects.
Throughput
For the fiscal year ended September 30, 2000, operating revenues and throughput by customer class were as follows:
See MD&A - NJNG Operations in the Company's 2000 Annual Report for a discussion of gas and transportation sales. Also see NJNG Operating Statistics in the Company's 2000 Annual Report for information on operating revenues and throughput for the past six years. During this period, no single customer represented more than 10 percent of operating revenues.
Seasonality of Gas Revenues
As a result of the heat-sensitive nature of NJNG's residential customer base, therm sales are significantly affected by weather conditions. Specifically, customer demand substantially increases during the winter months when natural gas is used for heating purposes. See MD&A - Liquidity and Capital Resources - NJNG in the Company's 2000 Annual Report for a discussion of the impact of seasonality on cash flow.
The impact of weather on the level and timing of NJNG's revenues and cash flows has been affected by a weather-normalization clause (WNC), which provides for a revenue adjustment if the weather varies by more than one-half of 1 percent from normal, or 20-year-average, weather. The WNC does not fully protect the Company from factors such as unusually warm weather and declines in customer usage patterns, which were set in January 1994. The accumulated adjustment from one heating season (i.e., October-May) is billed or credited to customers in subsequent periods. See MD&A - NJNG Operations in the Company's 2000 Annual Report and Item 1. Business - State Regulation and Rates for additional information with regard to the WNC.
Appliance Service Business
In November 2000, NJNG received approval from the BPU to transfer its existing appliance service business to Home Services, a newly formed unregulated subsidiary of the Company. The transfer includes more than 134,000 customers under protection plan contracts.
Gas Supply
A) Firm Natural Gas Supplies
NJNG currently purchases a diverse gas supply portfolio consisting of long-term (over seven months), winter-term (for the five winter months) and short-term contracts. In 2000, NJNG purchased gas from 69 suppliers under contracts ranging from one month to eleven years. NJNG has five long-term firm gas purchase contracts and purchased approximately 10 percent of its gas in 2000 under one long-term firm gas purchase contract with Alberta Northeast Gas Limited, which expires in 2006. NJNG does not purchase more than 10 percent of its total gas supplies under any other single long-term firm gas purchase contract. NJNG believes that its supply strategy should adequately meet its expected firm load over the next several years.
B) Firm Transportation and Storage Capacity
In order to deliver the above supplies, NJNG maintains agreements for firm transportation and storage capacity with several interstate pipeline companies. The pipeline companies that provide firm transportation service to NJNG's city gate stations in New Jersey, the maximum daily deliverability of that capacity and the contract expiration dates are as follows:
The pipeline companies that provide firm transportation service to NJNG and feed the above pipelines are: Texas Gas Transmission Corporation, Dominion Transmission Corporation and Columbia Gulf Transmission Corporation.
In addition, NJNG has storage and related transportation contracts that provide additional maximum daily deliverability of 206,000 dekatherms (Dths) from storage fields in its Northeast market area. The significant storage suppliers, the maximum daily deliverability of that storage capacity and the contract expiration dates are as follows:
NJNG also has storage contracts with Dominion Transmission Corporation (maximum daily deliverability of 103,661 Dths), but utilizes NJNG's existing transportation contracts to transport that gas from the storage fields to its city gate.
C) Peaking Supply
To meet its increased winter peak day demand, NJNG, in addition to utilizing the previously mentioned firm storage services, maintains two liquefied natural gas (LNG) facilities. See Item 2
ITEM 2. PROPERTIES
NJNG (All properties are in New Jersey)
NJNG owns 11,859 miles of distribution main and services, 215 miles of transmission main and approximately 412,984 meters. Mains are primarily located under public roads. Where mains are located under private property, NJNG has obtained easements from the owners of record.
In addition to mains and services, NJNG owns and operates two LNG storage plants located in Stafford Township, Ocean County, and Howell Township, Monmouth County. The two LNG plants have an estimated maximum capacity of 19,200 and 150,000 Dths per day, respectively. These facilities are used for peaking supply and emergencies.
NJNG owns four service centers located in Rockaway Township, Morris County; Atlantic Highlands and Wall Township, Monmouth County; and Lakewood, Ocean County. These service centers house storerooms, garages, gas distribution and appliance service operations and administrative offices. NJNG leases its headquarters facilities in Wall Township, customer service offices located in Asbury Park and Wall Township, Monmouth County and a service center in Manahawkin, Ocean County. These customer service offices support customer contact, marketing and other functions. NJNG also owns an equipment storage facility in Long Branch, Monmouth County.
Substantially all of NJNG's properties, not expressly excepted or duly released, are subject to the lien of an Indenture of Mortgage and Deed of Trust to Harris Trust and Savings Bank, Chicago, Illinois,
dated April 1, 1952, as amended by twenty-nine supplemental indentures (Indenture), as security for NJNG's bonded debt, which totaled approximately $218 million at September 30, 2000. In addition, under the terms of its Indenture, NJNG could have issued approximately $287 million of additional first mortgage bonds as of September 30, 2000.
See Note 5 to the Consolidated Financial Statements - Long-Term Debt, Dividends and Retained Earnings Restrictions in the Company's 2000 Annual Report for additional information regarding NJNG's bonded debt.
Energy Holdings
NJR Energy has a $2.3 million equity interest in Capstone Turbine Corporation, a developer of energy efficient, gas-fired microturbines that produce electricity. Pipeline has a 2.8 percent equity interest in the Iroquois Gas Transmission System, L.P. which owns and operates the Iroquois pipeline project, a 375-mile pipeline located from the Canadian border in upstate New York to Long Island.
NJR Development Corporation (All properties are in New Jersey)
At September 30, 2000, CR&R owned 210 acres of undeveloped land and two fully-occupied buildings. The buildings consisted of 25,000 square feet of commercial office and mixed-use commercial/industrial space.
In 2000, CR&R completed the sale of 7.7 acres of undeveloped land for $275,000 and incurred an after-tax loss of $44,000.
See Item 1. - Environment for a discussion of regulatory matters concerning one of the business parks owned by CR&R.
Capital Expenditure Program
See MD&A - Liquidity and Capital Resources in the Company's 2000 Annual Report for a discussion of the Company's anticipated 2001 and 2002 capital expenditures for each business segment.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
a. Gas Remediation
NJNG has identified eleven former manufactured gas plant (MGP) sites, dating back to the late 1800's and early 1900's, which contain contaminated residues from the former gas manufacturing operations. Ten of the eleven sites in question were acquired by NJNG in 1952. All of the gas manufacturing operations ceased at these sites at least by the mid-1950's and in some cases had been discontinued many years earlier, and all of the old gas manufacturing facilities were subsequently dismantled by NJNG or the former owners. NJNG is currently involved in administrative proceedings with the New Jersey Department of Environmental Protection (NJDEP) and local government authorities with respect to the plant sites in question, and is participating in various studies and investigations by outside consultants to determine the nature and extent of any such contaminated residues and to develop appropriate programs of remedial action, where warranted. Since October
1989, NJNG has entered into Administrative Consent Orders or Memoranda of Agreement with the NJDEP covering all eleven sites. These documents establish the procedures to be followed by NJNG in developing a final remedial clean-up plan for each site.
Until September 2000, most of the cost of such studies and investigations had been shared under an agreement with the former owner and operator of ten of the MGP sites. In September 2000, a revised agreement was executed pursuant to which NJNG is responsible for two of the sites, while the former owner is responsible for the remaining eight sites. Also in September 2000, NJNG purchased a 20-year cost containment insurance policy for these two sites. NJNG continues to participate in the investigation and remedial action for one MGP site that was not subject to the original cost-sharing agreement. Through a Remediation Rider approved by the BPU, NJNG is recovering its expenditures incurred through June 30, 1998 over a seven-year period. Costs incurred subsequent to June 30, 1998, including carrying costs on the deferred expenditures as noted above, will be reviewed annually and recovered over rolling seven-year periods, subject to BPU approval. In September 1999, NJNG filed for recovery of expenditures incurred through June 30, 1999. See Note 11 to the Consolidated Financial Statements - Commitments and Contingent Liabilities in the Company's 2000 Annual Report for additional information regarding estimated costs of remediation.
In March 1995, NJNG filed a complaint in the New Jersey Superior Court against various insurance carriers for declaratory judgment and for damages arising from such defendants' breach of their contractual obligations to defend and/or indemnify NJNG against liability for claims and losses (including defense costs) alleged against NJNG relating to environmental contamination at the former MGP sites and other sites. NJNG is seeking (i) a declaration of the rights, duties and liabilities of the parties under various primary and excess liability insurance policies purchased from the defendants by NJNG from 1951 through 1985, and (ii) compensatory and other damages, including costs and fees arising out of defendants' obligations under such insurance policies. The complaint was amended in July 1996 to name Kaiser-Nelson Steel & Salvage Company (Kaiser-Nelson) and its successors as additional defendants. The Company is seeking (a) a declaration of the rights, duties and liabilities of the parties under agreements with respect to claims against the Company that allege property damage caused by various substances used, handled or generated by NJNG or the predecessor in title that were removed from several of the MGP sites by Kaiser-Nelson, and (b) money damages or compensatory relief for the harm caused by Kaiser-Nelson's aforementioned actions. Discovery is proceeding in this matter. There can be no assurance as to the outcome of these proceedings.
b. South Brunswick Asphalt, L.P.
NJNG has been named as a defendant in a civil action commenced in the New Jersey Superior Court by South Brunswick Asphalt, L.P. (SBA) and its affiliated companies seeking damages arising from alleged environmental contamination at three sites owned or occupied by SBA and its affiliated companies. Specifically, the suit charges that tar emulsion removed from 1979 to 1983 by an affiliate of SBA (Seal Tite Corp.) from NJNG's former gas manufacturing plant sites has been alleged by the NJDEP to constitute a hazardous waste and that the tar emulsion has contaminated the soil and ground water at the three sites in question. In February 1991, the NJDEP issued letters classifying the tar emulsion/sand and gravel mixture at each site as dry industrial waste, a non-hazardous classification. In April 1996, in a meeting with all parties to the litigation and the judge assigned to the case, the NJDEP confirmed the non-hazardous classification, which will allow for conventional disposal. In May 1997, SBA submitted applications to NJDEP for permits to allow SBA to recycle the tar emulsion/sand and gravel mixture at each site into asphalt, to be used as a paving materials. In July
1998, SBA filed an amended complaint adding NJDEP to the proceedings to facilitate the resolution of these applications. Following service of SBA's amended complaint, NJDEP filed a motion for dismissal of the amended complaint, but has not formally granted or denied SBA's permit applications. In March 1999, the court granted NJDEP's motion in part and denied NJDEP's motion in part, and directed SBA to file a more definite statement of its claims for equitable relief against NJDEP, including its request that a mandatory injunction be imposed compelling NJDEP to issue the subject permits. SBA has filed a more definite statement of its claims, and NJDEP has renewed its motion to dismiss the amended complaint. In its motion, NJDEP alleges, among other things, that it has not acted upon SBA's applications for permits to recycle the tar emulsion/sand and gravel mixture because SBA has not submitted completed applications for these permits. This allegation is denied by SBA. NJDEP's motion to dismiss is pending in the Superior Court and it is not known when the Court will issue a decision. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial condition or results of operations
c. Combe Fill South Landfill
NJNG has been joined as a third-party defendant in two civil actions commenced in October 1998 in the U.S. District Court for the District of New Jersey by the U.S. Environmental Protection Agency and NJDEP. These two actions seek recovery of costs expended in connection with, and for continuation of the cleanup of, the Combe Fill South Landfill, a Superfund site in Chester, New Jersey. The plaintiffs claim that hazardous waste NJNG is alleged to have generated was sent to the site. There are approximately 180 defendants and third-party defendants in the actions thus far. Each third-party complaint seeks damages under CERCLA Section 113 and the New Jersey Spill Act, declaratory relief holding each third-party defendant strictly liable, and contribution and indemnification under the common law of the United States and New Jersey. No specific monetary demands or scope of cleanup work have been set forth to date. NJNG is in the process of investigating the allegations, formulating its position with respect thereto and has agreed to participate in an alternate dispute resolution process encouraged by the Court. Its insurance carriers have been notified and one has agreed to assume responsibility for the legal expenses, while reserving its rights with regard to liability. NJNG is currently unable to predict the extent, if any, to which it may have cleanup or other liability with respect to these civil actions, but would seek recovery of any such costs through the ratemaking process. No assurance can be given as to the timing or extent of the ultimate recovery of any such costs.
d. Various
The Company is party to various other claims, legal actions and complaints arising in the ordinary course of business. In management's opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report (other than the financial statements and other statements of historical fact), including, without limitation, statements as management expectations and belief
presented in Part I under the captions "New Jersey Natural Gas Company - General; - Gas Supply; - Regulation and Rates; - Competition," "Environment" and "Legal Proceedings", are forward looking statements. Forward-looking statements can also be identified by the use of forward-looking terminology such as "may", "intend", "expect", or "continue" or comparable terminology and are made based upon management's expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management.
The Company cautions readers that the assumptions that form the basis for forward-looking statements regarding financial results and capital requirements for fiscal 2001 and thereafter include many factors that are beyond the Company's ability to control or estimate precisely, such as estimates of future market conditions and the behavior of other market participants. Among the factors that could cause actual results to differ materially from estimates reflected in such forward-looking statements are weather and economic conditions, demographic changes in NJNG's service territory, fluctuations in energy commodity prices, energy conversion activity and other marketing efforts, the conservation efforts of NJNG's customers, the ability to extend certain fuel management contracts, the pace of deregulation of retail gas markets, competition for the acquisition of gas, the regulatory and pricing policies of federal and state regulatory agencies, changes due to legislation at the federal and state level, the availability of Canadian reserves for export to the United States and other regulatory changes.
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.
PART II
Information for Items 5 through 9 of this report appears below or in the Company's 2000 Annual Report as indicated on the following table and the 2000 Annual Report information is incorporated herein by reference, as follows:
PART III
Information for Items 10 through 13 of this report is incorporated herein by reference to the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on January 24, 2001, which was filed with the SEC pursuant to Regulation 14A on December 18, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following Financial Statements of the Registrant and Independent Auditors' Report, included in the Company's 2000 Annual Report, are incorporated by reference in Item 8