ITEM 1. BUSINESS
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 exempt energy services holding company providing retail and wholesale natural gas and related energy services to customers from the Gulf Coast to New England. Its subsidiaries include:
1) New Jersey Natural Gas Company (NJNG), a natural gas distribution company that provides regulated energy and appliance services to 374,000 residential, commercial and industrial customers in central and northern New Jersey, and participates in capacity release and off-system sales programs;
2) NJR Energy Holdings Corporation (Energy Holdings), formerly known as NJR Energy Services Corporation, a sub-holding company of NJR formed in 1995 to better segregate the Company's energy-related operations. Energy Holdings includes the following wholly-owned subsidiaries:
New Jersey Natural Energy Company (NJNE), formed in 1995 to participate in the unregulated retail and wholesale marketing of natural gas and fuel and capacity management services; and
NJR Energy Services Company (Energy Services), formerly known as NJR Power Services Corporation, formed in 1996 to segregate the Company's unregulated fuel and capacity management and other wholesale marketing services from its unregulated retail marketing services; and
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);
3) NJR Development Corporation, a sub-holding company of NJR, which includes the Company's remaining unregulated operating subsidiaries, as follows:
Commercial Realty & Resources Corp. (CR&R), a commercial office real estate developer.
See Note 2 to the Consolidated Financial Statements - Discontinued Operations in the Company's 1997 Annual Report, filed as Exhibit 13-1 hereto, for a discussion of the Company's decision to exit the oil and gas production business and no longer pursue investments in cogeneration and independent power production facilities.
The Company is an exempt holding company under Section 3(a)(1) of the Public Utility Holding Company Act of 1935 (PUHCA).
BUSINESS SEGMENTS
See Note 12 to the Consolidated Financial Statements - Business Segment Data in the Company's 1997 Annual Report, for business segment financial information.
NEW JERSEY NATURAL GAS COMPANY
General
NJNG provides natural gas service to 374,000 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 11,708, 10,978 and 12,465 new customers in 1997, 1996 and 1995, respectively. This annual growth rate of more than 3% is expected to continue with projected additions of 35,000 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 1997 Annual Report for a discussion of NJNG's projected capital expenditure program associated with this growth in 1998 and 1999.
In assessing the potential for future growth in its service area, NJNG uses information derived from county and municipal planning boards which describes housing development in various stages of approval. In addition, builders in NJNG's service area are surveyed to determine their development plans for future time periods. Finally, NJNG uses information concerning its service territory and projected population growth rates from a periodic study prepared by outside consultants. 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% 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, 1997, operating revenues and throughput by customer class were as follows:
See MD&A - NJNG Operations in the Company's 1997 Annual Report for a discussion of gas and transportation sales. Also see NJNG Operating Statistics in the Company's 1997 Annual Report for information on operating revenues and throughput for the past six years. During this period, no single customer represented more than 10% of operating revenues.
Seasonality of Gas Revenues
As a result of the heat-sensitive nature of NJNG's residential customer base, therm sales are largely 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 1997 Annual Report for a discussion of the effect 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% from normal, or 20-year average, weather. The accumulated adjustment from one heating season (i.e., October-May) is billed or credited to customers in the subsequent year. See MD&A - NJNG Operations in the Company's 1997 Annual Report and Item 1. Business - State Regulation and Rates for additional information with regard to the WNC.
Gas Supply
A) Firm Natural Gas Supplies
NJNG currently purchases a diverse gas supply portfolio consisting of long-term (over six months), winter-term (for the five winter months) and short-term contracts. In 1997, NJNG purchased gas from 55 suppliers under contracts ranging from less than one month to thirteen years. NJNG has eight long-term firm gas purchase contracts and purchased approximately 16% of its gas in 1997 under one long-term firm gas purchase contract with Alberta Northeast Gas Limited, which expires in 2006. NJNG does not purchase more than 10% 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, which feeds the above pipelines are: Texas Gas Transmission Corporation, CNG Transmission Corporation, Columbia Gulf Transmission Corporation, Equitrans, Inc. and Carnegie Interstate Pipeline Company.
In addition, NJNG has storage and related transportation contracts that provide additional maximum daily deliverability of 102,941 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 significant storage contracts with CNG Transmission Corporation (maximum daily deliverability of 93,661 Dths) and Equitrans, Inc. (maximum daily deliverability of 9,996 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 and purchases firm storage services. See Item 2
ITEM 2. PROPERTIES
NJNG (All properties are in New Jersey)
NJNG owns 11,170 miles of distribution main and services, 325 miles of transmission main and approximately 385,400 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 a 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-seven supplemental indentures (Indenture), as security for NJNG's bonded debt, which totaled approximately $220 million at September 30, 1997. In addition, under the terms of its Indenture, NJNG could have issued approximately $222 million of additional first mortgage bonds as of September 30, 1997. In October 1997, NJNG issued $13.5 million of adjustable rate Series DD First Mortgage Bonds, due 2027 under its Indenture. The proceeds were used to redeem the $13.5 million 9% Series Q Bonds in December 1997.
Energy Holdings
Pipeline has a 2.8% 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 Energy sold its interest in Market Hub Partners, L.P. in 1997.
NJR Development Corporation (All properties are in New Jersey)
At September 30, 1997, CR&R owned 183 acres of vacant land and two fully-occupied buildings. The buildings consisted of 284,000 square feet of commercial office and mixed-use commercial/industrial space, of which one 280,000 square-foot building was sold in October 1997.
CR&R is currently constructing a 20,000 square-foot, build-to-suit office building which is supported by a ten-year lease and is expected to be completed in the second quarter of fiscal 1998.
See Item 1. Business - NJR Development Corporation for a description of the sale of CR&R's properties. See Item 1. Environment for a discussion of regulatory matters concerning one of the business parks.
Capital Expenditure Program
See MD&A - Liquidity and Capital Resources in the Company's 1997 Annual Report for a discussion of the Company's anticipated 1998 and 1999 capital expenditures for each business segment.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
a. Aberdeen
Since June 1993, a total of six complaints, of which one is still pending, have been filed in New Jersey Superior Court against NJNG and its contractor by persons alleging injuries arising out of a natural gas explosion and fire on June 9, 1993, at a residential building in Aberdeen Township, New Jersey. The plaintiffs allege in their respective actions, among other things, that the defendants were negligent or are strictly liable in tort in connection with their maintaining, replacing or servicing natural gas facilities at such building. The plaintiffs separately seek compensatory damages from NJNG and its contractor. To date, NJNG and its contractors have received demands for damages totaling $25.2 million from various plaintiffs.
In May 1994, the New Jersey Superior Court ordered that all causes of action relating to the Aberdeen Township explosion be consolidated for purposes of discovery.
NJNG's liability insurance carriers are participating in the defense of these matters. NJNG is unable to predict the extent to which other claims will be asserted against, or liability imposed on, NJNG. 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.
b. Gas Remediation
NJNG has identified eleven former manufactured gas plant (MGP) sites, dating back to the late 1800's and early 1900's, and 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 since 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 owner. NJNG is currently involved in administrative proceedings with the NJDEP and local government authorities with respect to the plant sites in question, and is participating in various studies and investigations by outside consultants to determine the nature and extent of any such contaminated residues and to develop appropriate programs of remedial action, where warranted. Since October 1989, NJNG has entered into Administrative Consent Orders or Memoranda of Agreement with the NJDEP covering all eleven sites. These documents establish the procedures to be followed by NJNG in developing a final remedial clean-up plan for each site.
Most of the cost of such studies and investigations is being shared under an agreement with the former owner and operator of ten of the MGP sites. See Note 11 to the Consolidated Financial Statements - Commitments and Contingent Liabilities in the Company's 1997 Annual Report for a discussion of the regulatory treatment of gas remediation costs.
In March 1995, NJNG filed a complaint in New Jersey Superior Court against various insurance carriers for declaratory judgment and for damages arising from such defendants' breach of their contractual obligations to defend and/or indemnify NJNG against liability for claims and losses (including defense costs) alleged against NJNG relating to environmental contamination at the former MGP sites and other sites. NJNG is seeking (i) a declaration of the rights, duties and liabilities of the parties under various primary and excess liability insurance policies purchased from the defendants by NJNG from 1951 through 1985, and (ii) compensatory and other damages, including costs and fees arising out of defendants' obligations under such insurance policies. The complaint was amended in July 1996 to name Kaiser-Nelson Steel & Salvage Company (Kaiser-Nelson) and its successors as additional defendants. The Company is seeking (a) a declaration of the rights, duties and liabilities of the parties under agreements with respect to claims against the Company that allege property damage caused by various substances used, handled or generated by NJNG or the predecessor in title that were removed from several of the MPG 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.
c. South Brunswick Asphalt, L.P.
NJNG has been named a defendant in a civil action commenced in New Jersey Superior Court by South Brunswick Asphalt, L.P. (SBA) and its affiliated companies seeking damages arising from alleged environmental contamination at three sites owned or occupied by SBA and its affiliated companies. Specifically, the suit charges that tar emulsion removed from 1979 through 1983 by an affiliate of SBA (Seal Tite, Inc.) 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 material. These applications are currently under review by NJDEP. 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.
d. Bessie-8
NJNR and others (the Joint Venture, et al.) were named in a complaint filed by the People's Natural Gas Company (People's) before the Pennsylvania Public Utility Commission (PaPUC). People's sought a determination that the Joint Venture, et al. were a public utility subject to the jurisdiction of the PaPUC and an order prohibiting natural gas service by the Joint Venture, et al. until proper PaPUC authorization was obtained.
In April 1988, an Administrative Law Judge (ALJ) issued an initial decision denying and dismissing People's complaint, "because the demonstrated activities of the Bessie-8 joint venture are not within the jurisdiction of the PaPUC to regulate". An initial decision is subject to adoption, modification or rejection by the full PaPUC. In April 1989, alternative motions to adopt the ALJ's initial decision or to subject the Joint Venture, et al. to the jurisdiction of the PaPUC failed due to 2-2 tie votes. In October 1992, the PaPUC, on its own initiative and without notice to any of the parties, determined in a 3-0 vote that the Joint Venture, et al. are a "public utility" under the Pennsylvania Public Utility Code and granted People's exceptions to the ALJ's April 1988 initial decision. In December 1992, the PaPUC issued a Final Order requiring the Joint Venture, et al. to apply for a certificate of public convenience or to cease and desist from providing service through the pipeline.
In January 1993, the Joint Venture, et al. filed two separate Petitions for Review with the Commonwealth Court of Pennsylvania. The first Petition for Review challenged the lawfulness of the PaPUC's action in October 1992 in light of the April 1989 tie vote. On appeal of the Commonwealth Court's order reversing the PaPUC, the Pennsylvania Supreme Court held that the April 1989 tie vote did not preclude the PaPUC from taking its October 1992 vote.
The second Petition for Review challenged the merits of the PaPUC's determination that the Joint Venture, et al. are a "public utility" under the Pennsylvania Public Utility Code. In July 1996, a three-judge panel of the Commonwealth Court, in a 2-1 decision, affirmed the PaPUC's determination that the Joint Venture, et al. were a "public utility" under Pennsylvania law. The Joint Venture, et al. filed a petition for review with the Pennsylvania Supreme Court, which petition is now pending before the Court.
In September 1993, People's instituted an action in the Court of Common Pleas of Allegheny County against the Joint Venture, et al. by filing a Praecipe for Writ of Summons which merely tolled the statute of limitations and preserved any claim People's may have against the defendants until resolution of the actions discussed above. On June 16, 1997, People's filed a complaint in equity against the Joint Venture, et al. in the Allegheny County Common Pleas Court. The complaint alleges, among other things, that the Joint Venture, et al. unlawfully provided natural gas services without prior authorization of the PaPUC and tortiously interfered with the contractual and business relations of various existing and potential Peoples' customers. The complaint seeks unspecified money damages and injunctive relief against the Joint Venture et al. NJNR is unable to predict the outcome of these matters. 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.
In 1994, the Company wrote-off its $1 million investment in the Bessie-8 pipeline.
e. Securities and Exchange Commission
On December 19,1997, the Company submitted an Offer of Settlement (the December 19 Offer) to the Securities and Exchange Commission (SEC) in connection with the previously reported investigation by the SEC into certain transactions engaged in by subsidiaries of the Company in 1992. In the Offer, the Company agreed, without admitting or denying the SEC's findings, to consent to the entry of an administrative order finding that the Company had not fully complied with Sections 10(b), 13(a) and 13(b) of the Securities Exchange Act of 1934 (the Order). The Order agreed to by the Company does not impose any monetary penalty or require any restatement of the Company's financial statements. The Company previously had submitted a similar Offer of Settlement on October 10, 1997 (the October 10 Offer) that was accepted by the SEC. Following negotiations between the SEC and other parties, the Company and the SEC agreed to modify the proposed order that was the basis for the October 10 Offer. As of this date, the December 19 Offer has not been formally accepted by the SEC and the Order has not been filed. In addition, NJR's former Chairman and CEO, Oliver G. Richard III, and three current officers, Laurence M. Downes, Glenn C. Lockwood and Jay B. Corn, submitted Offers of Settlement to the SEC, without admitting or denying the SEC's findings, in which they consent to the entry of orders finding that they had caused the Company to not fully comply with Section 13(a) of the Securities Exchange Act of 1934. These orders do not impose any fines or penalties on these individuals. These offers also have not been formally accepted by the SEC.
f. Various
The Company is party to various other claims, legal actions and complaints arising in the ordinary course of business. In management's opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
INFORMATION CONCERNING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements where those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. Certain of the statements contained in this report (other than the financial statements and other statements of historical fact), including, without limitation, statements as to management expectations and belief presented in Part I under the captions "New Jersey Natural Gas Company - General" and "Future Supplies", are forward-looking statements. Forward-looking statements are made based upon management's expectations and belief concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management.
The Company wishes to caution readers that the assumptions which form the basis for forward- looking statements with respect to or that may impact financial results and capital requirements for fiscal 1998 and thereafter include many factors that are beyond the Company's ability to control or
estimate precisely, such as estimates of future market conditions and the behavior of other market participants. Among the factors that could cause actual results to differ materially from estimates reflected in such forward-looking statements are weather conditions, economic conditions, and demographic changes in NJNG's service territory, fluctuations in energy commodity prices, 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, the availability of Canada's reserves for export to the United States and other regulatory changes.
While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Company does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.
PART II
Information for Items 5 through 9 of this report appears in the Company's 1997 Annual Report as indicated on the following table and 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 28, 1998, which is expected to be filed with the SEC pursuant to Regulation 14A on December 30, 1997.
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 1997 Annual Report, are incorporated by reference in Item 8