-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qrj3f3/VetoMJOOz1T2Ehx6PC8071iS9XmgjVRH6WinSWFuIQ70DGd3Y5zCEroXL tfy4Zgq81TdQqCcF54aWkw== 0000950123-02-007735.txt : 20020812 0000950123-02-007735.hdr.sgml : 20020812 20020812164951 ACCESSION NUMBER: 0000950123-02-007735 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW JERSEY RESOURCES CORP CENTRAL INDEX KEY: 0000356309 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 222376465 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08359 FILM NUMBER: 02727276 BUSINESS ADDRESS: STREET 1: 1415 WYCKOFF RD STREET 2: PO BOX 1468 CITY: WALL STATE: NJ ZIP: 07719 BUSINESS PHONE: 9089381494 MAIL ADDRESS: STREET 1: 1350 CAMPUS PKWY STREET 2: P O BOX 1468 CITY: WALL STATE: NJ ZIP: 07719 10-Q 1 y63088e10vq.txt NEW JERSEY RESOURCES CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended Commission file number 1-8359 June 30, 2002 NEW JERSEY RESOURCES CORPORATION (Exact name of registrant as specified in its charter) NEW JERSEY 22-2376465 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1415 WYCKOFF ROAD, WALL, NEW JERSEY - 07719 732-938-1480 (Address of principal executive offices) (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: X NO: The number of shares outstanding of $2.50 par value Common Stock as of August 6, 2002 was 26,884,004. PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 -------- -------- ---------- ----------- (Thousands, except per share data) OPERATING REVENUES ............................................. $442,309 $260,644 $1,363,920 $ 1,818,166 -------- -------- ---------- ----------- OPERATING EXPENSES Gas purchases ................................................ 395,929 215,741 1,134,292 1,585,517 Operation and maintenance .................................... 22,605 20,961 69,208 68,192 Depreciation and amortization ................................ 7,981 8,210 23,950 24,587 Energy and other taxes ....................................... 6,213 6,947 32,819 39,006 -------- -------- ---------- ----------- Total operating expenses ...................................... 432,728 251,859 1,260,269 1,717,302 -------- -------- ---------- ----------- OPERATING INCOME ............................................... 9,581 8,785 103,651 100,864 Other income ................................................... 2,293 2,280 4,543 4,975 Interest charges, net .......................................... 4,054 4,120 12,509 15,156 -------- -------- ---------- ----------- INCOME BEFORE INCOME TAXES ..................................... 7,820 6,945 95,685 90,683 Income tax provision ........................................... 3,056 2,633 36,310 34,285 -------- -------- ---------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING 4,764 4,312 59,375 56,398 Cumulative effect of a change in accounting for derivatives, net of tax of $930 ................................................. -- -- -- (1,347) NET INCOME ..................................................... $ 4,764 $ 4,312 $ 59,375 $ 55,051 ======== ======== ========== =========== EARNINGS PER COMMON SHARE-BASIC INCOME BEFORE ACCOUNTING CHANGE ........................... $ .18 $ .16 $ 2.21 $ 2.12 ======== ======== ========== =========== NET INCOME ................................................ $ .18 $ .16 $ 2.21 $ 2.07 ======== ======== ========== =========== EARNINGS PER COMMON SHARE-DILUTED INCOME BEFORE ACCOUNTING CHANGE ........................... $ .17 $ .16 $ 2.19 $ 2.11 ======== ======== ========== =========== NET INCOME ................................................ $ .17 $ .16 $ 2.19 $ 2.06 ======== ======== ========== =========== DIVIDENDS PER COMMON SHARE ..................................... $ .30 $ .29 $ .90 $ .88 ======== ======== ========== =========== AVERAGE SHARES OUTSTANDING BASIC ..................................................... 26,937 26,672 26,846 26,562 ======== ======== ========== =========== DILUTED ................................................... 27,255 26,945 27,156 26,750 ======== ======== ========== ===========
See Notes to Consolidated Financial Statements 1 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED JUNE 30, (Thousands) 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ...................................... $ 59,375 $ 55,051 Adjustments to reconcile net income to cash flows Depreciation and amortization .................. 23,950 24,587 Amortization of deferred charges ............... 3,502 3,901 Deferred income taxes .......................... 3,538 15,211 Manufactured gas plant remediation costs ....... (18,990) (8,739) Change in working capital ...................... (37,898) (96,516) Other, net ..................................... (3,270) (2,619) -------- -------- Net cash flows from operating activities ......... 30,207 (9,124) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common stock ...................... 9,224 8,642 Proceeds from long-term debt .................... 91,981 -- Payments of long-term debt ...................... (1,152) (16,343) Purchases of treasury stock ..................... (4,275) (2,473) Payments of common stock dividends .............. (23,936) (23,161) Payments of preferred stock ..................... (3) (102) Net change in short-term debt ................... (71,600) 81,000 -------- -------- Net cash flows from financing activities ......... 239 47,563 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for Utility plant .................................. (31,320) (31,114) Real estate properties and other ............... (300) (4,302) Equity investments ............................. -- (2,634) Cost of removal ................................ (3,245) (3,981) Proceeds from asset sales ....................... 4,314 4,511 -------- -------- Net cash flows from investing activities ......... (30,551) (37,520) -------- -------- Net change in cash and temporary investments ..... (105) 919 Cash and temporary investments at September 30 ... 4,044 1,904 -------- -------- Cash and temporary investments at June 30 ........ $ 3,939 $ 2,823 ======== ======== CHANGES IN COMPONENTS OF WORKING CAPITAL Receivables ..................................... $(92,932) $ (1,917) Construction fund ............................... 3,600 4,000 Inventories ..................................... 2,840 18,211 Deferred gas costs .............................. 9,775 (28,781) Purchased gas ................................... 59,734 (52,502) Prepaid and accrued taxes, net .................. 10,130 4,177 Customers' credit balances and deposits ......... 237 (7,798) Accounts payable & other ........................ (3,302) (8,764) Broker margin accounts .......................... (16,111) (30,372) Other, net ...................................... (11,869) 7,230 -------- -------- Total ............................................ $(37,898) $(96,516) ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid for Interest (net of amounts capitalized) ........... $ 12,343 $ 15,306 Income taxes .................................... $ 28,159 $ 4,604
See Notes to Consolidated Financial Statements 2 CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, SEPTEMBER 30, JUNE 30, 2002 2001 2001 (unaudited) (unaudited) ----------- ----------- ----------- (Thousands) PROPERTY, PLANT AND EQUIPMENT Utility plant, at cost .................. $ 1,043,730 $ 1,016,911 $ 1,004,642 Real estate properties and other, at cost 24,533 26,759 31,892 ----------- ----------- ----------- 1,068,263 1,043,670 1,036,534 Accumulated depreciation and amortization (317,257) (299,721) (294,151) ----------- ----------- ----------- Property, plant and equipment, net ..... 751,006 743,949 742,383 ----------- ----------- ----------- CURRENT ASSETS Cash and temporary investments .......... 3,939 4,044 2,823 Construction fund ....................... -- 3,600 3,600 Customer accounts receivable ............ 173,190 78,367 107,320 Unbilled revenues ....................... 6,770 7,724 3,664 Allowance for doubtful accounts ......... (3,884) (3,026) (4,813) Gas in storage, at average cost ......... 67,215 70,019 46,165 Materials and supplies, at average cost . 2,967 3,003 2,972 Prepaid state taxes ..................... 6,174 8,268 20,120 Underrecovered gas costs ................ 22,996 15,335 41,485 Derivatives ............................. 5,214 24,698 30,614 Broker margin accounts .................. 45,009 28,898 16,567 Other ................................... 27,606 20,822 6,937 ----------- ----------- ----------- Total current assets ................... 357,196 261,752 277,454 ----------- ----------- ----------- DEFERRED CHARGES AND OTHER Equity investments ...................... 14,751 15,468 20,588 Regulatory assets ....................... 111,539 98,753 119,455 Underrecovered gas costs ................ 15,570 33,006 -- Derivatives ............................. 10,796 14,428 10,270 Other ................................... 24,421 24,836 9,545 ----------- ----------- ----------- Total deferred charges and other ....... 177,077 186,491 159,858 ----------- ----------- ----------- Total assets ..................... $ 1,285,279 $ 1,192,192 $ 1,179,695 =========== =========== ===========
See Notes to Consolidated Financial Statements 3 CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES
JUNE 30, SEPTEMBER 30, JUNE 30, 2002 2001 2001 (unaudited) (unaudited) ---------- ---------- ---------- (Thousands) CAPITALIZATION Common stock equity ....................... $ 372,023 $ 352,069 $ 371,622 Redeemable preferred stock ................ 295 298 298 Long-term debt ............................ 418,215 353,799 325,185 ---------- ---------- ---------- Total capitalization ..................... 790,533 706,166 697,105 ---------- ---------- ---------- CURRENT LIABILITIES Current maturities of long-term debt ...... 26,942 529 495 Short-term debt ........................... 14,200 85,800 74,300 Purchased gas ............................. 145,060 85,326 100,957 Accounts payable and other ................ 34,864 38,166 31,647 Dividends payable ......................... 8,075 7,837 7,828 Accrued taxes ............................. 27,732 15,771 20,326 Derivatives ............................... 36,551 35,431 31,619 Customers' credit balances and deposits ... 14,660 14,423 8,488 ---------- ---------- ---------- Total current liabilities ................ 308,084 283,283 275,660 ---------- ---------- ---------- DEFERRED CREDITS Deferred income taxes ..................... 79,605 95,182 108,042 Deferred investment tax credits ........... 9,236 9,497 9,584 Deferred revenue .......................... 15,420 19,046 19,538 Derivatives ............................... 12,510 9,209 7,411 Manufactured gas plant remediation ........ 53,840 53,840 45,219 Other ..................................... 16,051 15,969 17,136 ---------- ---------- ---------- Total deferred credits ................... 186,662 202,743 206,930 ---------- ---------- ---------- Total capitalization and liabilities $1,285,279 $1,192,192 $1,179,695 ========== ========== ==========
See Notes to Consolidated Financial Statements 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General The financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The September 30, 2001 balance sheet data is derived from the audited financial statements of New Jersey Resources Corporation (the Company). Although management believes that the disclosures are adequate to make the information presented not misleading, it is recommended that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 2001 Annual Report on Form 10-K and December 31, 2001, and March 31, 2002, Quarterly Reports on Form 10-Q. In the opinion of management, the information furnished reflects all adjustments necessary for a fair statement of the results of the interim periods. Because of the seasonal nature of the Company's utility operations and other factors, the results of operations for the interim periods presented are not indicative of the results to be expected for the entire year. 2. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, New Jersey Natural Gas Company (NJNG), NJR Energy Services Company (Energy Services), NJR Retail Holdings Corporation (Retail Holdings), NJR Capital Services Corporation (Capital) and NJR Service Corporation. The Retail and Other segment includes Retail Holdings and its four wholly-owned subsidiaries, NJR Home Services Company (Home Services), NJR Natural Energy Company (Natural Energy), NJR Power Services Company and NJR Plumbing Services Company. Retail and Other also includes Capital and its wholly-owned subsidiaries, Commercial Realty & Resources Corp. (CR&R), NJR Investment Company and NJR Energy Corporation (NJR Energy). 3. Capitalized and Deferred Interest The Company's capitalized interest totaled $55,000 and $195,000 for the three months ended June 30, 2002 and 2001, respectively, and $283,000 and $728,000 for the nine months ended June 30, 2002 and 2001, respectively. Pursuant to a New Jersey Board of Public Utilities (BPU) order, NJNG recovers carrying costs on uncollected balances related to its manufactured gas plant (MGP) remediation expenditures (see Note 4c.-Manufactured Gas Plant Remediation) and underrecovered gas costs (see Note 4b.-LGA and Other Adjustment Clauses). Accordingly, Other income included deferred interest of $685,000 and $1.7 million for the three months ended June 30, 2002 and 2001, respectively, and $2.2 million and $3.3 million for the nine months ended June 30, 2002 and 2001, respectively, related to remediation and underrecovered gas costs. 5 4. Legal and Regulatory Proceedings a. Energy Deregulation Legislation In February 1999, the Electric Discount and Energy Competition Act (Act), which provides the framework for the restructuring of New Jersey's energy markets, became law. In March 2001, the BPU issued a written order that approved a stipulation agreement among various parties to fully open NJNG's residential markets to competition, restructure its rates to segregate its Basic Gas Supply Service (BGSS) and Delivery (i.e., transportation) service prices as required by the Act, and expand an incentive for residential and small commercial customers to switch to transportation service. The Act allows continuation of each utility's role as the provider of BGSS at least until December 31, 2002. The Act required the BPU to determine by December 31, 2001, the role other parties should have in providing BGSS after December 31, 2002. In June 2001, the BPU initiated a proceeding to review issues related to the potential of making the BGSS competitive. In July 2001, NJNG submitted a BGSS proposal that provides for additional customer choices and includes a request to develop new incentive mechanisms. In January 2002, the BPU issued an order which stated that BGSS could be provided by suppliers other than state natural gas utilities, but at this time it should be provided by the state's natural gas utilities. The parties are currently discussing NJNG's July 2001 proposal, and no assurance can be made as to the timing or terms of any resolution to such proposal. b. LGA and Other Adjustment Clauses In fiscal 2001, the BPU approved price increases of approximately 2 percent per month for a period from December 2000 through July 2001 under a Flexible Pricing Mechanism (FPM). The BPU also directed NJNG to establish a Gas Cost Underrecovery Adjustment (GCUA) surcharge to collect the underrecovered gas costs and accrue interest at a rate of 5.75 percent per year, commencing December 1, 2001 until November 30, 2004. On November 15, 2001, NJNG filed with the BPU for the establishment of the GCUA to collect $29.9 million in underrecovered gas costs and sought to reduce its gas cost recovery rate. The combined effect of the two changes resulted in an approximate 10.8 percent price decrease effective December 1, 2001. The filing also contained a proposal to extend the existing margin-sharing mechanisms related to NJNG's off-system sales and capacity management programs for two years beyond their currently scheduled expiration of December 31, 2002. NJNG is currently negotiating with the parties to the proceeding and has no reason to believe that the incentives will not be extended on terms acceptable to NJNG. On January 21, 2002, NJNG filed with the BPU for an additional 3 percent price decrease as a result of lower projected gas costs. The BPU approved this filing on February 6, 2002, and the decrease became effective immediately. NJNG is also involved in various proceedings associated with several other adjustment clauses (e.g., Transportation Education and Implementation (TEI) and Comprehensive Resource Analysis (CRA) factors) which, in management's opinion, will not have a material adverse effect on its financial condition or results of operations. 6 c. Manufactured Gas Plant (MGP) Remediation NJNG has identified 11 former MGP sites, dating back to the late 1800s and early 1900s, which contain contaminated residues from the former gas manufacturing operations. Ten of the 11 sites in question were acquired by NJNG in 1952. All of the gas manufacturing operations ceased at these sites at least by the mid-1950s and in some cases had been discontinued many years earlier, and all of the former gas manufacturing facilities were subsequently dismantled by NJNG or the previous 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 11 sites. These documents establish the procedures to be followed by NJNG in developing a final remedial clean-up plan for each site. With respect to 10 of the MGP sites, 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 such 10 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 7-year period. Costs incurred subsequent to June 30, 1998, including carrying costs on the deferred expenditures (see Note 3 - Capitalized and Deferred Interest), will be reviewed annually and recovered over rolling 7-year periods, subject to BPU approval. In September 1999, NJNG filed for recovery of expenditures incurred through June 30, 1999, and in January 2001, NJNG filed for recovery of expenditures incurred through June 30, 2000. The BPU is currently reviewing these filings. In March 1995, NJNG instituted an action for declaratory relief against 24 separate insurance companies in the Superior Court of New Jersey. These insurance carriers provided comprehensive general liability coverage to NJNG from 1951 through 1985. Prior to the institution of the suit, NJNG requested the insurance carriers to defend and indemnify it with respect to the environmental liability created by the former manufactured gas plants. All insurance carriers denied coverage claiming that various terms in the policies preclude coverage. In 2001, settlements were reached with several of the excess carriers, while other carriers were dismissed without prejudice when it was determined that the state's allocation method would not have assessed any liability to the particular carrier. In September 2001, NJNG reached a favorable settlement with the insurance carrier that provided the majority of NJNG's coverage. This settlement involves a significant cash payment to NJNG that will be tendered in four annual installments. NJNG has reached a settlement with the last carrier. NJNG is also pursuing a claim against Kaiser-Nelson Steel and Salvage Company and its successors. Kaiser-Nelson Steel and Salvage was responsible for demolishing the structures at several of the MGP sites and removing the contents of the vessels. Discovery is expected to be completed within the next 60 days. There can be no assurance as to the outcome of this proceeding. 7 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. 5. Earnings Per Share (EPS) On January 22, 2002, the Board of Directors approved a three-for-two split of its outstanding shares of common stock and on March 4, 2002, the Company began trading on a post-split basis. All share and per share amounts have been adjusted to reflect this split. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 317,872 and 273,044 for the three months ended June 30, 2002 and 2001, respectively, and 310,050 and 187,713 for the nine months ended June 30, 2002 and 2001, respectively. These shares relate to stock options and restricted stock and were calculated using the treasury stock method. The numerator for each applicable basic and diluted calculation was income before cumulative effect of a change in accounting and net income, respectively. Net income for the nine months ended June 30, 2001 included a charge of $1.3 million, or $.05 per share, resulting from the cumulative effect of a change in accounting for derivatives under SFAS 133. There was no comparable charge in the current period. 6. Construction Fund and Long-Term Debt The Company has $335 million in revolving credit agreements with several banks. The New Jersey Resources Corporation portion of the facility consists of $135 million with a 3-year term expiring January 2004, and the NJNG portion of the facility consists of $100 million with a 364-day term and $100 million with a 3-year term expiring January 2004. The New Jersey Resources Corporation facilities are used to finance its unregulated operations. New Jersey Resources Corporation has also entered into a $10 million demand loan agreement and a $15 million loan agreement with banks, both of which expire December 31, 2002. The NJNG facility is used to support its commercial paper borrowings. Consistent with management's intent to maintain a portion of its commercial paper borrowings on a long-term basis, and as supported by its long-term revolving credit facility, $50 million of commercial paper borrowings is included in Long-term debt on the Consolidated Balance Sheet at June 30, 2002, September 30, 2001 and June 30, 2001. In April 1998, NJNG entered into a loan agreement whereby the New Jersey Economic Development Authority (EDA) loaned NJNG the proceeds from its $18 million Natural Gas Facilities Revenue Bonds, Series 1998C, which were deposited into a construction fund. NJNG may draw down these funds in reimbursement for certain qualified expenditures. NJNG drew down the final $3.6 million of these funds in May 2002. On June 24, 2002, NJNG filed an application with the EDA for approval of $12 million of new funds to finance NJNG's northern division construction over the next three years. On July 9, 2002, the application was approved. 8 On July 10, 2002, NJNG entered into $97.1 million of interest-rate caps with several banks at a rate of 3.25 percent, expiring in July 2004. These caps are designed to limit NJNG's variable rate debt exposure for all of its outstanding EDA Bonds. 7. Segment Reporting The Natural gas distribution segment consists of regulated energy and off-system and capacity management operations. The Energy services segment consists of unregulated fuel and capacity management and wholesale marketing operations. The Retail and other segment consists of appliance service, commercial real estate development, retail marketing, investment and other corporate activities.
Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 --------- --------- ----------- ----------- (Thousands) Operating Revenues Natural gas distribution $ 144,199 $ 140,216 $ 653,756 $ 885,820 Energy services 293,810 116,560 696,279 920,059 Retail and other 4,330 4,141 14,035 16,278 --------- --------- ----------- ----------- Subtotal 442,339 260,917 1,364,070 1,822,157 Intersegment revenues (30) (273) (150) (3,991) --------- --------- ----------- ----------- Total $ 442,309 $ 260,644 $ 1,363,920 $ 1,818,166 ========= ========= =========== =========== Operating Income Natural gas distribution $ 7,267 $ 7,522 $ 90,267 $ 91,796 Energy services 1,785 58 10,532 5,564 Retail and other 529 1,205 2,852 3,504 --------- --------- ----------- ----------- Total $ 9,581 $ 8,785 $ 103,651 $ 100,864 ========= ========= =========== ===========
The Company's assets for the various business segments are detailed below:
As of As of As of June 30, 2002 September 30, 2001 June 30, 2001 ---------- ---------- ---------- (Thousands) Assets Natural gas distribution $1,032,101 $1,065,748 $1,060,937 Energy services 209,111 78,042 56,610 Retail and other 44,067 48,402 62,148 ---------- ---------- ---------- Total $1,285,279 $1,192,192 $1,179,695 ========== ========== ==========
9 8. Investments Included in Equity investments on the Consolidated Balance Sheet is the Company's less-than-1-percent ownership interest in the Capstone Turbine Corporation (Capstone), a developer of microturbines, which completed its initial public offering in June 2000. In July 2001, the Company entered into a 5-year zero-premium collar to hedge changes in the value of 100,000 shares of its investment in Capstone. The collar consists of a purchased put option with a strike price of $9.97 per share and a sold call option with a strike price of $24.16 per share for 100,000 shares. The Company entered into this transaction to hedge its anticipated sale of 100,000 shares of Capstone at the settlement date in 2006 and, accordingly, accounts for the transaction as a cash flow hedge. The change in Other comprehensive income for the nine months ended June 30, 2002, is a $252,000 unrealized gain related to this collar. Through June 30, 2002, Accumulated other comprehensive income includes a $704,000 unrealized gain related to this collar. In July 2002, the Company sold all of its unhedged Capstone shares and realized an after-tax loss of $449,000. 9. Comprehensive Income
Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ------ -------- -------- -------- (Thousands) Net income $4,764 $ 4,312 $ 59,375 $ 55,051 ------ -------- -------- -------- Other comprehensive income: Change in fair value of equity investments, net $ 30 $ (1,175) $ (188) $ (9,774) Change in fair value of derivatives, net 2,612 (15,318) (22,398) (5,660) Cumulative effect of a change in accounting for derivatives, net -- -- -- 20,530 ------ -------- -------- -------- Total other comprehensive income $2,642 $(16,493) $(22,586) $ 5,096 ------ -------- -------- -------- Comprehensive income $7,406 $(12,181) $ 36,789 $ 60,147 ====== ======== ======== ========
Accumulated other comprehensive income, included in Stockholders equity on the Consolidated Balance Sheets, was a negative $13 million at June 30, 2002, $9.6 million at September 30, 2001 and $18.6 million at June 30, 2001. 10 10. Change in Accounting Effective October 1, 2000, the Company adopted SFAS 133. At October 1, 2000, the effect of adopting SFAS 133 was as follows: (Thousands)
Increase/ (Decrease) ---------- Fair value of derivative assets $ 56,963 Fair value of derivative liabilities $ 17,657 Regulatory liability $ 6,834 Cumulative effect on net income from a change in accounting, net $ (1,347) Cumulative effect of a change in accounting for derivatives in other comprehensive income, net $ 20,530
The cumulative effect on net income from a change in accounting resulted from derivatives that do not qualify for hedge accounting. The amounts included in Other comprehensive income, which relate to natural gas instruments, will reduce or be charged to gas costs as the related transaction occurs. Based on the amount recorded to Accumulated other comprehensive income at June 30, 2002, $3.8 million is expected to be recorded as an increase to gas costs in the fourth quarter of fiscal 2002. For the three months ended June 30, 2002 and 2001, $1.5 million was credited and $7.8 million was charged to gas costs, and for the nine months ended June 30, 2002 and 2001, $32.8 million was credited and $7.5 million was charged to gas costs, respectively. The cash flow hedges described above cover various periods of time ranging from July 2002 to October 2010. 11. Commitments and Contingent Liabilities Energy Services has entered into a marketing and management agreement for the Stagecoach storage project. Stagecoach is a 12 billion cubic feet (Bcf) high-injection/high-withdrawal facility in New York State with interstate pipeline connections to the Northeast markets, which received Federal Energy Regulatory Commission (FERC) certification for full operations on June 27, 2002. Energy Services is the exclusive agent for marketing Stagecoach services for a 10-year period, subject to standard termination rights, ending March 31, 2012. During this period, Energy Services has agreed to arrange contracts for, or purchase at fixed prices, sufficient services to provide Stagecoach with revenues of approximately $14 million for the period from July 1, 2002, to March 31, 2003, and $22 million annually from April 1, 2003, to March 31, 2012. Stagecoach can require Energy Services to make the foregoing purchases only if Stagecoach is capable of providing the underlying services. In addition, Energy Services believes that the price at which it would be required to purchase these services is 11 currently below market. Energy Services has reached 3-year agreements with third parties for the purchase of over 50 percent of the required level of services from Stagecoach. On August 8, 2002, NJNG, in connection with its system requirements, was awarded 2-year agreements for Stagecoach storage and transportation services. These agreements were awarded pursuant to an open bid process. The NJNG agreements represent an additional 35 percent of the required level of services for the 2-year period. Due to the price levels of the potential purchase obligations to Energy Services, as compared with current market prices, and the current and expected level of contracts, the Company does not currently believe that the potential purchase obligation in the Stagecoach agreement will result in any future losses. Additionally, under the Stagecoach agreement, Energy Services is required to provide to, and maintain at, the Stagecoach facility 2 Bcf of firm base gas, and to manage up to 3 Bcf of interruptible base gas for the term of the agreement. As of June 30, 2002, NJNG has $97.1 million in stand-by letters of credit (Letters of Credit) with several banks which provide liquidity support for Natural Gas Facilities Refunding Revenue Bonds and Natural Gas Revenue Bonds issued by the EDA for the benefit of NJNG's northern division construction projects. The Letters of Credit have various expiration dates with the latest expiring in January 2003. The Bond issues, which are recorded as Long-term debt on the Consolidated Balance Sheet, are being remarketed on a weekly and daily basis. 12. Other At June 30, 2002, there were 26,892,771 shares of common stock outstanding and the book value per share was $13.83. Certain reclassifications have been made of previously reported amounts to conform with current year classifications. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED JUNE 30, 2002 A. RESULTS OF OPERATIONS Consolidated net income for the quarter ended June 30, 2002 increased 11.6 percent to $4.8 million, compared with $4.3 million for the same period last year. Basic EPS increased 12.5 percent to $.18, compared with $.16 last year. Diluted EPS increased 6.3 percent to $.17, compared with $.16 last year. Consolidated net income for the nine months ended June 30, 2002 increased 7.8 percent to $59.4 million, compared with $55.1 million for the same period last year. Basic EPS increased 6.8 percent to $2.21, compared with $2.07 last year. Diluted EPS increased 6.3 percent to $2.19, compared with $2.06 last year. The increase in consolidated net income in both the three and nine months ended June 30, 2002 was attributable primarily to continued profitable customer growth at the Company's principal subsidiary, NJNG, higher results in Energy Services and lower net interest charges, which more than offset the impact of warm weather. Consolidated net income for the nine months ended June 30, 2001 included a charge of $1.3 million, or $.05 per share, resulting from the cumulative effect of a change in accounting for derivatives under SFAS 133. There was no comparable charge in the current period. NATURAL GAS DISTRIBUTION OPERATIONS NJNG's financial results are summarized as follows:
Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands) Revenue $144,199 $140,216 $653,756 $885,820 ======== ======== ======== ======== Gross margin Residential and commercial sales $ 28,042 $ 29,401 $149,522 $148,458 Transportation 4,930 3,992 18,656 24,345 -------- -------- -------- -------- Total firm margin 32,972 33,393 168,178 172,803 Off-system and capacity management 886 1,100 3,762 4,583 Interruptible 237 226 659 586 -------- -------- -------- -------- Total gross margin $ 34,095 $ 34,719 $172,599 $177,972 ======== ======== ======== ======== Operation and maintenance expense $ 18,400 $ 18,558 $ 57,136 $ 60,104 ======== ======== ======== ======== Operating income $ 7,267 $ 7,522 $ 90,267 $ 91,796 ======== ======== ======== ======== Other income $ 861 $ 1,957 $ 2,425 $ 3,294 ======== ======== ======== ======== Cumulative effect of a change in accounting -- -- -- $ 275 ======== ======== ======== ======== Net income $ 3,062 $ 3,349 $ 51,415 $ 51,396 ======== ======== ======== ========
13 Gross Margin Gross margin is defined as gas revenues less gas costs, sales tax and a Transitional Energy Facilities Assessment (TEFA). Gross margin provides a more meaningful basis for evaluating utility operations since gas costs, sales tax and TEFA are passed through to customers and, therefore, have no effect on earnings. Gas costs are charged to operating expenses on the basis of therm sales at the rates included in NJNG's tariff. The Levelized Gas Adjustment Clause (LGA) allows NJNG to recover gas costs that exceed the level reflected in its base rates. Sales tax is calculated at 6 percent of revenue and excludes sales to other utilities, off-system sales and federal accounts. TEFA is calculated on a per-therm basis and excludes sales to other utilities and off-system sales. Firm Margin Residential and commercial gross margin is subject to 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 NJNG from factors such as unusually warm weather and declines in customer usage patterns, which were set at the conclusion of NJNG's last base rate case in January 1994. The accumulated adjustment from one heating season (i.e., October through May) is billed or credited to customers in subsequent periods. This mechanism reduces the variability of both customer bills and NJNG's gross margin due to weather fluctuations. The components of gross margin from residential and commercial customers are affected by customers switching between sales service and transportation service. NJNG's total gross margin is not affected negatively by customers who utilize its transportation service and purchase their gas from another supplier because its tariff is designed such that no profit is earned on the commodity portion of sales to firm customers. All customers who purchase gas from another supplier continue to utilize NJNG for transportation service. Total firm margin decreased $421,000, or 1.3 percent, and $4.6 million, or 2.7 percent, for the three and nine months ended June 30, 2002, respectively, compared with the same periods last year, due primarily to 21 percent warmer weather as compared with the nine month period last year. This record warm weather for the nine month period resulted in lower average customer usage, which more than offset the impact of customer growth and the WNC. The weather for the nine months ended June 30, 2002 was 17 percent warmer than normal, which, in accordance with the WNC, resulted in the accrual of $16.4 million of gross margin for recovery from NJNG's customers in the future. At June 30, 2002, NJNG also had $857,000 in deferred WNC margin to be credited to its customers through fiscal 2004 due to prior year's activity. NJNG estimates that for the nine months ended June 30, 2002, the warm weather resulted in $6.2 million of lost margin beyond the amount captured in the WNC. Gross margin from sales to residential and commercial customers decreased $1.4 million, or 4.6 percent, and increased $1.1 million, or less than 1 percent, for the three and nine months ended June 30, 2002, respectively, compared with the same periods last year. The increase in gross margin for the nine months ended June 30, 2002 was due primarily to the impact of 11,271 customer additions during the twelve months ended June 30, 2002, the impact of the WNC, and firm transportation customers switching back to firm sales service, which more than offset the decrease in sales due to the warm weather. Sales to residential and commercial customers were 6.7 Bcf and 40.4 Bcf for the three and nine months ended June 30, 2002, respectively, compared with 7.3 Bcf and 47.4 Bcf for the same periods last year. 14 Gross margin from transportation service increased $938,000, or 23 percent, and decreased $5.7 million, or 23 percent, for the three and nine months ended June 30, 2002, compared with the same periods last year. The decrease in margin for the nine months ended June 30, 2002 was due primarily to customers switching back to sales service. NJNG transported 1.2 Bcf and 6.3 Bcf for the three and nine months ended June 30, 2002, respectively, compared with 0.7 Bcf and 8.6 Bcf, in the same periods last year. NJNG had 10,879 and 17,252 residential customers and 5,127 and 3,127 commercial customers using transportation service at June 30, 2002 and 2001, respectively. The decrease in the number of residential transportation customers was due primarily to changes in market conditions, which resulted in customers returning to sales service from transportation service. The increase in commercial transportation customers was due primarily to an increase in marketer activity during the third fiscal quarter. Off-System and Capacity Management To reduce the overall cost of its gas supply commitments, NJNG has entered into contracts to sell gas to customers outside its franchise territory when the gas is not needed for system requirements. These off-system sales enable NJNG to spread its fixed demand costs, which are charged by pipelines to access their supplies year round, over a larger and more diverse customer base. NJNG also participates in the capacity release market on the interstate pipeline network when the capacity is not needed for its firm system requirements. Effective October 1, 1998, through December 31, 2002, NJNG retains 15 percent of the gross margin from these sales, with 85 percent credited to firm customers through the LGA. An incentive mechanism designed to reduce the fixed cost of NJNG's gas supply portfolio also became effective October 1, 1998. Any savings achieved through the permanent reduction or replacement of capacity or other services is shared between customers and shareowners. Under this program, NJNG retains 40 percent of the savings for the first 12 months following any transaction and retains 15 percent for the remaining period through December 31, 2002, with 60 percent and 85 percent, respectively, credited to firm sales customers through the LGA. NJNG also has a Financial Risk Management (FRM) program, which is designed to provide price stability to its system supply portfolio. The FRM program includes an incentive mechanism designed to encourage the use of financial instruments to hedge NJNG's gas costs, with an 80/20 percent sharing of the costs and results between customers and shareowners, respectively, through December 31, 2002. NJNG has requested an extension of these incentives through December 31, 2004 (See Note 4b.-LGA and Other Adjustment Clauses). NJNG is currently negotiating with the parties to the proceeding and has no reason to believe that the incentives will not be extended on terms acceptable to NJNG. NJNG's off-system sales, capacity management and FRM programs totaled 19.4 Bcf and generated $886,000 of gross margin, and 75.8 Bcf and $3.8 million of gross margin, for the three and nine months ended June 30, 2002, respectively, compared with 12.1 Bcf and $1.1 million of gross margin, and 66.7 Bcf and $4.6 million of gross margin for the respective periods last year. The decrease in margin for the nine months was due primarily to lower results from the FRM program. 15 Interruptible NJNG serves 52 customers through interruptible sales and/or transportation tariffs. Sales made under the interruptible sales tariff are priced on market-sensitive oil and gas parity rates. Although therms sold and transported to interruptible customers represented 5.7 percent and 5.9 percent of total throughput for the nine months ended June 30, 2002 and 2001, respectively, they accounted for less than 1 percent of the total gross margin in each period due to the margin-sharing formulas that govern these sales. Under these formulas, NJNG retains 10 percent of the gross margin from interruptible sales and 5 percent of the gross margin from transportation sales, with 90 percent and 95 percent, respectively, credited to firm sales customers through the LGA. Interruptible sales were 0.6 Bcf and 0.8 Bcf for the nine months ended June 30, 2002 and 2001, respectively. In addition, NJNG transported 6.8 Bcf and 6.9 Bcf for the nine months ended June 30, 2002 and 2001, respectively, for its interruptible customers. Operation & Maintenance (O&M) Expense O&M expense decreased $158,000, or 1 percent, and $3 million, or 4.9 percent, for the three and nine months ended June 30, 2002, respectively, compared with the same periods last year. The reduction in O&M expense was due primarily to the benefits of an early retirement program initiated last year, a reduction in bad debt expense associated with lower revenue, lower regulatory rider expenses due to lower sales and general cost control efforts. Operating Income Operating income decreased $255,000, or 3.4 percent, and $1.5 million, or 1.7 percent, for the three and nine months ended June 30, 2002, respectively, compared with the same periods last year. The decreases were due primarily to the decrease in total gross margin described above, which was partially offset by a reduction in O&M and depreciation expenses. The decrease in depreciation expense was due primarily to components of NJNG's computer software becoming fully depreciated. NJNG installed the software between 1995 and 1997 and currently does not anticipate any significant capital expenditures to replace or upgrade the software in the near future. Net Income Net income decreased $287,000, or 8.6 percent, and increased $19,000, or less than 1 percent, for the three and nine months ended June 30, 2002, respectively, compared with the same periods last year. The nine month increase was due primarily to lower interest costs, resulting primarily from lower interest rates, and increased recovery of carrying costs on deferred regulatory assets, which is included in Other income (see Note 3. Capitalized and Deferred Interest), more than offsetting the lower operating income. Net income for the nine months ended June 30, 2001 included a charge of $275,000 resulting from the cumulative effect of a change in accounting for derivatives under SFAS 133. There was no comparable charge in the current period. 16 ENERGY SERVICES OPERATIONS Energy Services provides unregulated fuel and capacity management and wholesale marketing services.
Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 --------- --------- --------- --------- (Thousands) Revenues $ 293,810 $ 116,560 $ 696,279 $ 920,059 ========= ========= ========= ========= Gross margin $ 2,840 $ 939 $ 13,585 $ 7,756 ========= ========= ========= ========= Operating income $ 1,785 $ 58 $ 10,532 $ 5,564 ========= ========= ========= ========= Other income $ 53 $ 129 $ 158 $ 605 ========= ========= ========= ========= Cumulative effect of a change in accounting -- -- -- $ (688) ========= ========= ========= ========= Net income $ 853 $ 661 $ 6,024 $ 3,766 ========= ========= ========= =========
Energy Services' revenues increased for the three months ended and decreased for the nine months ended June 30, 2002, compared to the same periods last year. The increase in revenue for the three months ended June 30, 2002 was due primarily to increased sales. The nine month decrease in revenue was due primarily to significantly lower wholesale natural gas prices prevailing during the first six months of the fiscal year. Energy Services' gross margin and operating income increased for the three and nine months ended June 30, 2002, compared with the same periods last year, as a result of higher margins from pipeline and storage transactions and daily and term wholesale capacity and commodity marketing. Net income for the nine months ended June 30, 2001 included a charge of $688,000 resulting from the cumulative effect of a change in accounting for derivatives under SFAS 133. There was no comparable charge in the current period. Energy deliveries totaled 82.2 Bcf and 230 Bcf for the three and nine months ended June 30, 2002, respectively, compared with 24.6 Bcf and 139.3 Bcf for the same periods last year. The increases were due primarily to additional volumes from pipeline, storage and capacity transactions, and additional sales to wholesale customers. RETAIL AND OTHER OPERATIONS Retail and other consists primarily of Home Services, which provides appliance and installation services to approximately 131,000 customers, Natural Energy, which has participated in the unregulated retail marketing of natural gas, CR&R, which develops commercial real estate, and NJR Energy, which consists primarily of equity investments in Capstone and the Iroquois Gas Transmission System, L.P. (Iroquois). The consolidated financial results of Retail and other are summarized as follows: 17
Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Thousands) Revenues $ 4,330 $ 4,141 $ 14,035 $ 16,278 ======== ======== ======== ======== Other income $ 1,379 $ 199 $ 1,960 $ 1,092 ======== ======== ======== ======== Cumulative effect of a change in accounting -- -- -- $ (384) ======== ======== ======== ======== Net income (loss) $ 849 $ 302 $ 1,936 $ (111) ======== ======== ======== ========
Retail and other revenues for the nine months ended June 30, 2002 decreased compared with the same period last year due primarily to the expiration of Natural Energy's residential contracts, which more than offset increased revenue at Home Services. Revenue in Home Services increased due primarily to the formation of the installation service business in July 2001 and price increases on appliance service contracts. The increase in revenue for the three months ended June 30, 2002, compared with the same period last year was due primarily to improved results at Home Services. Other income for the three and nine months ended June 30, 2002 increased compared with the same periods last year due primarily to a $885,000 pre-tax gain associated with the sale of a 20,000-square-foot building by CR&R. This sale generated proceeds of $3.3 million. Net income for the three and nine months ended June 30, 2002 increased compared with the same periods last year due primarily to revenue growth and cost containment efforts at Home Services and improved results from the Company's equity investment in Iroquois. Last year's results included a charge of $384,000 resulting from the cumulative effect of a change in accounting for derivatives under SFAS 133. There was no comparable charge in the current period. In 1996, CR&R entered into a sale-leaseback transaction that generated a pre-tax gain of $17.8 million, which is included in Deferred revenue and is being amortized to Other income over the 25-year term of the lease. The primary tenant of the facility, NJNG, is leasing the building under a long-term master lease agreement and continues to occupy a majority of the space in the building. B. LIQUIDITY AND CAPITAL RESOURCES In order to meet the working capital and external debt financing requirements of its unregulated subsidiaries, as well as its own working capital needs, New Jersey Resources Corporation maintains committed credit facilities with several banks totaling $160 million. At June 30, 2002, there was $137.3 million outstanding under these agreements. NJNG satisfies its debt needs by issuing short- and long-term debt based upon its own financial profile. The Company meets its common equity requirements, if any, through new issuances of the Company's common stock, including the proceeds from its Automatic Dividend Reinvestment Plan (DRP). The DRP also allows for the purchase of shares in the open market to satisfy the plan's needs. The Company can switch funding options every 90 days. 18 The following table is a summary of contractual cash obligations and their applicable payment due dates.
Payments Due by Period Less than 1 1-3 Contractual Obligations Total Year Years 4-5 Years After 5 Years ---------- -------- -------- -------- -------- (Thousands) Long-term debt $405,095 $ 35,000 $202,250 - $167,845 Capital lease obligations 50,062 1,825 6,401 $ 2,320 39,516 Operating leases 7,783 2,269 4,349 402 763 Commercial paper 4,200 4,200 - - - Potential storage obligations 178,797 7,243 21,824 43,416 106,314 Gas supply purchase obligations 733,885 117,407 256,676 120,384 239,418 ---------- -------- -------- -------- -------- Total contractual cash obligations $1,379,822 $167,944 $491,500 $166,522 $553,856 ========== ======== ======== ======== ========
NJNG The seasonal nature of NJNG's operations creates large short-term cash requirements, primarily to finance gas purchases and customer accounts receivable. NJNG obtains working capital for these requirements, as well as for the temporary financing of construction expenditures, MGP remediation expenditures and energy tax payments, through the issuance of commercial paper and short-term bank loans. To support the issuance of commercial paper, NJNG maintains a committed credit facility totaling $200 million, consisting of $100 million with a 364-day term and $100 million with a 3-year term. Remaining fiscal 2002 construction expenditures are estimated at $14 million. These expenditures will be incurred for services, mains and meters to support NJNG's continued customer growth, and general system renewals and improvements. In addition, NJNG incurred $18.9 million remediating its former MGP sites during the nine months ended June 30, 2002, and estimates additional expenditures of approximately $8.5 million, net of insurance recoveries, for the remaining three months of fiscal 2002 (see Note 4c. - Manufactured Gas Plant Remediation). NJNG expects to finance these expenditures through internal generation and the issuance of short-term debt. The timing and mix of these issuances will be geared toward maintaining a common equity ratio of at least 50 percent, which is consistent with maintaining its current short- and long-term credit ratings. ENERGY SERVICES Energy Services does not currently expect any significant capital expenditures or external financing requirements in fiscal 2002. Energy Services meets its working capital requirements for storage inventories, margin requirements and wholesale operations through loans from the Company. Such requirements fluctuate based on inventory levels, positions held and natural gas prices. 19 RETAIL AND OTHER Retail and other does not currently expect any significant capital expenditures or external financing requirements in fiscal 2002. CRITICAL ACCOUNTING POLICIES The following is a description of the most important accounting principles generally accepted in the United States of America that are used by the Company. Management exercises good judgment in selecting and applying accounting principles. The consolidated financial statements of the Company include estimates and actual results in the future may differ from such estimates. The Company's Critical Accounting Policies are described below. Regulatory Assets & Liabilities The Company's largest subsidiary, NJNG, maintains its accounts in accordance with the Uniform System of Accounts as prescribed by the BPU. As a result of the ratemaking process, NJNG is required to follow Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71) and, as a result, the accounting principles applied by NJNG differ in certain respects from those applied by unregulated businesses. NJNG is required under SFAS 71 to record the impact of regulatory decisions on its financial statements. NJNG's LGA requires it to project its gas costs over the subsequent 12 months and recover the excess, if any, of such projected costs over those included in its base rates through levelized charges to customers. Any under- or over-recoveries are treated as a Regulatory asset or liability and reflected in the LGA in subsequent years. NJNG also enters into derivatives that are used to hedge gas purchases and the offset to the resulting derivative assets or liabilities are recorded as a Regulatory asset or liability. In addition to the LGA, other regulatory assets include the remediation costs associated with MGP sites, which are discussed below under Environmental Items, and the WNC, which is discussed in the Natural gas distribution operations segment of the MD&A. If there are changes in future regulatory positions that indicate the recovery of such regulatory assets is not probable, the related cost would be charged to income. Energy Trading Activity Derivative activities are recorded in accordance with SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS 133), under which the Company records the fair value of derivatives held as assets and liabilities. The changes in the fair value of the effective portion of derivatives qualifying as cash flow hedges are recorded, net of tax, in Other comprehensive income, a component of Common stock equity. Under SFAS 133, the Company also has certain derivative instruments that do not qualify as cash flow hedges. The change in fair value of these derivatives is recorded in net income. In addition, the changes in the fair value of the ineffective portion of derivatives qualifying for hedge accounting are recorded as an increase or decrease in gas costs or interest expense, as applicable, based on the nature of the derivatives. The derivatives that NJNG utilizes to hedge its gas purchasing activities are recoverable through its LGA. Accordingly, the offset to the change in fair value of these derivatives is recorded as a Regulatory asset or liability. The Company has not designated any derivatives as fair value hedges as of June 30, 2002. 20 The fair value of derivative investments is determined by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. In the absence thereof, the Company utilizes mathematical models based on current and historical data. The effect on earnings of valuations from our mathematical models is immaterial. In providing its unregulated fuel and capacity management and wholesale marketing services, Energy Services enters into physical contracts to buy and sell natural gas. These contracts qualify as normal purchases and sales under SFAS 133 in that they provide for the purchase or sale of natural gas that will be delivered in quantities expected to be used or sold by Energy Services over a reasonable period in the normal course of business. Accordingly, Energy Services accounts for these contracts under settlement accounting. Environmental Items NJNG periodically updates the environmental review of its MGP sites (see Note 4c. - Manufactured Gas Plant Remediation), including a review of its potential liability for investigation and remedial action, based on assistance from an outside consulting firm. On the basis of such review, NJNG will estimate expenditures to remediate and monitor these MGP sites, exclusive of any insurance recoveries. NJNG's estimate of these liabilities are based upon currently available facts, existing technology and presently enacted laws and regulations. Where available information is sufficient to estimate the amount of the liability, it is NJNG's policy to accrue the full amount of such estimate. Where the information is sufficient only to establish a range of probable 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. Since NJNG expects to recover these expenditures, as well as related litigation costs, through the regulatory process, in accordance with SFAS 71, it has recorded a Regulatory asset corresponding to the accrued liability, which is included in Other deferred credits on the 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. If there are changes in future regulatory positions that indicate the recovery of such regulatory asset is not probable, the related cost would be charged to income. As of June 30, 2002, $91.2 million of previously incurred and accrued remediation costs is included in Regulatory assets on the Consolidated Balance Sheet. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FINANCIAL RISK MANAGEMENT Commodity Market Risks Natural gas is a nationally traded commodity, and its prices are determined effectively by the New York Mercantile Exchange (NYMEX) and over-the-counter markets. The prices on the NYMEX and over-the-counter markets generally reflect the notional balance of natural gas supply and demand, but are also influenced significantly from time to time by other events. The regulated and unregulated natural gas businesses of the Company and its subsidiaries are subject to market risk due to fluctuations in the price of natural gas. To hedge against such fluctuations, the Company and its subsidiaries have entered into futures contracts, options agreements and over-the-counter swap agreements. To manage these instruments, the Company has well-defined risk management policies and procedures, which include daily monitoring of volumetric limits and monetary guidelines. The Company's natural gas businesses are conducted through three of its operating subsidiaries. First, NJNG is a regulated utility whose recovery of gas costs is protected by the LGA, which utilizes futures, options and swaps to hedge against price fluctuations. Second, using futures and swaps, Energy Services hedges purchases and sales of storage gas and transactions with wholesale customers. Finally, NJR Energy has entered into several swap transactions to hedge an 18-year fixed-price contract to sell approximately 20.9 Bcf of natural gas (Gas Sale Contract) to a gas marketing company. NJR Energy has hedged both its price and physical delivery risks associated with the Gas Sale Contract. To hedge its price risk, NJR Energy entered into two swap agreements effective November 1995. Under the terms of these swap agreements, NJR Energy will pay to its swap counterparties the identical fixed price it receives from the gas marketing company in exchange for the payment by such swap counterparties of a floating price based on an index price plus a spread per Mmbtu for the total volumes under the Gas Sale Contract. In order to hedge its physical delivery risk, NJR Energy entered into a purchase contract with a second gas marketing company for the identical volumes that it is obligated to sell under the Gas Sale Contract, under which it pays the identical floating price it receives under the swap agreements mentioned above. The following table reflects the changes in the fair market value of commodity derivatives from September 30, 2001 to June 30, 2002.
Balance Increase (Decrease) Less Balance September 30, 2001 in Fair Market Value Amounts Settled June 30, 2002 --------- -------- -------- -------- (Thousands) NJNG $(20,978) $ (20,028) $(29,592) $ (11,414) Energy Services 15,355 (9,288) 33,490 (27,423) NJR Energy (343) 5,175 (250) 5,082 --------- -------- -------- -------- Total $ (5,966) $(24,597) $ 3,648 $(33,755) ========= ======== ======== ========
22 There were no contracts originated and valued at fair market value and no changes in methods of valuations during the nine months ended June 30, 2002. The following is a summary of fair market value of commodity derivatives at June 30, 2002, by method of valuation and by maturity.
Current Next Fiscal Next Three In Excess of Total Fiscal Year Year Fiscal Years 5 years Fair Value ------- -------- ------- ----- -------- (Thousands) Price based on NYMEX $(8,070) $(27,570) $(9,537) $(852) $(46,029) Price based on over-the-counter published quotations $222 $3,494 $8,135 $1,040 $12,891 Price based upon models - $189 $187 $(993) $(617)
The following is a summary of commodity derivatives by type as of June 30, 2002:
Amounts included in Volume Price per Derivatives (Bcf) Mmbtu (Thousands) - ------------------------------------------------------------------------------------------------------------- NJNG Futures 0.5 $2.53 - 3.89 $(323) Swaps 25.0 $(7,207) Options 4.4 $3.00 - 10.00 $(3,884) Energy Services Futures 2.7 $2.40 - 4.63 $(28,663) Swaps 25.0 $1,240 NJR Energy Swaps 21.3 $5,082
The Company uses a value-at-risk (VAR) model to assess the market risk of its net futures, swaps and options positions. The VAR at June 30, 2002, using the variance-covariance method with a 95 percent confidence level and a one-day holding period, was $209,000. The calculated VAR represents an estimate of the potential change in the value of the net positions. These estimates may not be indicative of actual results since actual market fluctuations may differ from forecasted fluctuations. 23 Interest Rate Risk - Long-Term Debt As of June 30, 2002, the Company (excluding NJNG) had variable rate debt of $137.3 million. According to the Company's sensitivity analysis, if interest rates were to change by 1 percent, annual interest expense, net of tax, would change by $810,000. At June 30, 2002, NJNG had total variable-rate debt outstanding of $147 million, of which $97.1 million has been hedged by the purchase of a 3.25-percent interest-rate cap through July 2004. According to the Company's sensitivity analysis, at June 30, 2002, NJNG's annual interest rate exposure on the $97.1 million, based on the difference between current average rates and the 3.25 percent interest-rate cap, is limited to $140,000, net of tax. If interest rates were to change by 1 percent on the remaining $50 million of variable rate debt at June 30, 2002, NJNG's annual interest expense, net of tax, would change by $295,000. 24 INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report including, without limitation, those with respect to expected disposition of legal and regulatory proceedings, exposure under the Stagecoach agreement, a need to replace or upgrade NJNG's computer software, expected capital expenditures, external financing requirements, the impact of changes in market rates of interest and the impact of changes in market prices of commodities 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," "continue," or comparable terminology and are made based upon management's expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management. The Company wishes to caution readers that the assumptions that form the basis for forward-looking statements with respect to, or that may impact earnings for, fiscal 2002 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 interest rates. Among the factors that could cause actual results to differ materially from estimates reflected in such forward-looking statements are weather conditions 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 pace of deregulation of retail gas markets, competition for the acquisition of gas, regulatory decisions made by the BPU, the regulatory and pricing policies of federal and state regulatory agencies, changes due to legislation at the federal and state levels, the availability of Canadian 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. 25 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings Information required by this Item is incorporated herein by reference to Part I, Item 1, Note 5 - Legal and Regulatory Proceedings. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 4-1 Amended and Restated Syndicated credit agreement, dated January 4, 2002, among NJNG, PNC Bank and other parties named therein. 4-2 Demand Loan Agreement dated May 27, 2002, between New Jersey Resources Corporation and Citizens Bank of Massachusetts. 4-3 Demand Loan Agreement dated August 1, 2002, between New Jersey Resources Corporation and Wachovia Securities. 99-1 Statement, dated August 12, 2002, of the principal executive officer, and principal financial officer of the Company regarding facts and circumstances relating to the Company's filings under the Securities Exchange Act of 1934. (b) Reports on Form 8-K On May 6, 2002, a report on Form 8-K was filed by the Company furnishing under Item 9 information disclosed pursuant to Regulation FD. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW JERSEY RESOURCES CORPORATION Date: August 12, 2002 /s/ Glenn C. Lockwood --------------------------- Glenn C. Lockwood Senior Vice President and Chief Financial Officer 27 EX-4.2 3 y63088exv4w2.txt DEMAND LOAN AGREEMENT EXHIBIT 4-2 ________________________________________________________________ ________________________________________________________________ DEMAND LOAN AGREEMENT dated as of May 29, 2002 between NEW JERSEY RESOURCES CORPORATION and CITIZENS BANK OF MASSACHUSETTS ________________________________________________________________ ________________________________________________________________ DEMAND LOAN AGREEMENT DEMAND LOAN AGREEMENT dated as of May 29, 2002 between NEW JERSEY RESOURCES CORPORATION, a New Jersey corporation ("Borrower"), and CITIZENS BANK OF MASSACHUSETTS ("Bank"). SECTION 1. CERTAIN DEFINITIONS. (a) As used herein the following terms have the meanings set forth below: "Adjusted LIBOR Rate" means, with respect to any LIBOR Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBOR Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Affiliate" means, with respect to a specified Person, another Person that Controls or is Controlled by or is under common Control with the Person specified. Notwithstanding the foregoing, no individual shall be an Affiliate solely by reason of his or her being a director, officer or employee of Borrower. "Approved Fund" means, with respect to Bank, any fund that invests in commercial loans and is managed or advised by Bank or by an Affiliate of Bank. "Base Rate", when used in reference to any Demand Loan or Borrowing refers to whether such Demand Loan, or the Demand Loans comprising such Borrowing, is or are bearing interest at a rate determined by reference to the Prime Rate. "Board" means the Board of Governors of the Federal Reserve System of the United States. "Borrowing" means Demand Loans of the same Type made, converted or continued on the same date, and in the case of LIBOR Demand Loans, as to which a single Interest Period is in effect. "Business Day" means, in respect of any date that is specified in this Agreement to be a day on which commercial banks settle payments in (a) Boston or London, if the payment obligation is calculated by reference to any LIBOR Rate, or (b) Boston, if the payment obligation is calculated by reference to the Prime Rate. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by Bank (or Bank's holding company) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Control" means the possession, directly or indirectly, through one or more intermediaries, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Demand Loan" and "Demand Loans" have the meanings set forth in Section 2(a) hereof. "Demand Loan Commitment" means the agreement of Bank to make Demand Loans to Borrower in a maximum aggregate principal amount of $10,000,000, as the same may be reduced from time to time in accordance with Section 2(e) hereof. "Demand Note" means the promissory note of Borrower payable to the order of Bank in the principal amount of $10,000,000 substantially in the form of Exhibit A hereto. "Effective Date" has the meaning assigned to such term in Section 3 hereof. "Environmental Laws" means all applicable laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of Borrower directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with Borrower, is treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code. Notwithstanding the foregoing, for purposes of any liability related to a Multiemployer Plan under Title IV of ERISA, the term "ERISA Affiliate" means any trade or business that together with Borrower is treated as a single employer within the meaning of Section 4001(b) of ERISA. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to any Pension Plan, (b) the existence with respect to any Pension Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Pension Plan, (d) the incurrence by Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Pension Plan, (e) the receipt by Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Pension Plan or Pension Plans or to appoint a trustee to administer any Pension Plan or (f) the receipt by Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from Borrower or any ERISA Affiliate of any notice of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Event of Default" has the meaning ascribed thereto in Section 8 hereof. "Excluded Taxes" means, with respect to Bank or any other recipient of any payment to be made by or on account of any obligation of Borrower hereunder, (a) income, net worth or franchise taxes imposed on (or measured by) its net income or net worth by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any 2 other jurisdiction in which Borrower is located and (c) any amounts constituting penalties and interest imposed with respect to the foregoing. "Existing Credit Agreement" means the Credit Agreement dated as of January 5, 2001 by and among New Jersey Resources Corporation, the financial institutions party thereto, certain other parties thereto, and PNC Bank, National Association, as Administrative Agent, as amended by the First Amendment thereto dated as of October 3, 2001, and as it may be further amended, restated, supplemented or otherwise modified from time to time. "GAAP" means generally accepted accounting principles in the United States of America. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature in each case regulated or subject to regulation pursuant to any Environmental Law. "Indemnified Taxes" means all Taxes other than (a) Excluded Taxes and Other Taxes and (b) amounts constituting penalties or interest imposed with respect to Excluded Taxes or Other Taxes. "Interest Period" means with respect to any LIBOR Borrowing, the period commencing on the date of such LIBOR Borrowing and ending on the numerically corresponding day in the calendar month that is one, two or three months thereafter, as Borrower may elect; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a LIBOR Borrowing initially shall be the date on which such LIBOR Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such LIBOR Borrowing. Notwithstanding the foregoing, (x) if any Interest Period for any LIBOR Borrowing would otherwise end after the Maturity Date, such Interest Period shall end on the Maturity Date, and (y) notwithstanding the foregoing clause (x), no Interest Period shall have a duration of less than one month and, if the Interest Period for any LIBOR Borrowing would otherwise be a shorter period, such LIBOR Borrowing shall not be available hereunder as a LIBOR Borrowing for such period without the prior consent of Bank. "LIBOR", when used in reference to any Demand Loan or Borrowing, refers to whether such Demand Loan or the Demand Loans comprising such Borrowing is or are bearing interest at a rate determined by reference to the LIBOR Rate. "LIBOR Rate" means, with respect to any LIBOR Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently 3 provided on such page of such Service, as determined by Bank from time to time for purposes of providing quotations of interest rates applicable to U.S. dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for U.S. dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBOR Rate" with respect to such LIBOR Borrowing for such Interest Period shall be the rate at which U.S. dollar deposits of $5,000,000, and for a maturity comparable to such Interest Period, are offered by four major banks in the London interbank market as selected by Bank in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Loan Documents" means this Agreement, the Demand Note, and any other instruments or documents delivered or to be delivered from time to time pursuant to this Agreement. "Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations or financial condition of Borrower, (b) the ability of Borrower to perform its obligations under this Agreement or the other Loan Documents or (c) the rights of or benefits available to Bank under this Agreement and the other Loan Documents. "Maturity Date" means December 31, 2002. "Multiemployer Plan" means a multiemployer as defined in Section 4001(a)(3) of ERISA. "Obligations" means the aggregate unpaid principal amount of the Demand Loans and all interest, fees, debts, liabilities, obligations (including contingent obligations under guaranties and letters of credit), agreements, undertakings, covenants and duties owing or to be performed or observed by Borrower to or in favor of Bank and/or any affiliate of Bank, of every kind and description (whether or not: evidenced by any note or other instrument; for the payment of money; arising out of this Agreement or any agreement or any other instrument contemplated hereby; arising out of or relating or similar to transactions described herein; or contemplated as of the date hereof), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including all interest, reasonable attorneys' fees, costs and other amounts chargeable to Borrower under this Agreement. "Other Taxes" means any and all present or future stamp or documentary Taxes or any other excise or property Taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement and the other Loan Documents, provided that there shall be excluded from "Other Taxes" all Excluded Taxes. "Pension Plan" means any Plan that is a defined benefit pension plan subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Person" means any individual partnership, firm, association, business enterprise, trust, estate, company, joint venture, Governmental Authority, corporation, limited liability company or partnership, or other entity. "Plan" means any employee benefit plan within the meaning of Section 3(3) of ERISA in which Borrower or any ERISA Affiliate is an "employer" as defined in Section 3(5) of ERISA including but not limited to any Pension Plan or Multiemployer Plan. "Post-Default Rate" means a rate per annum equal to the Prime Rate plus 2.00%. 4 "Prime Rate" means the rate of interest per annum publicly announced from time to time by Bank, as its prime rate in effect at its principal office in Boston, Massachusetts; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective shareholders, directors, officers, employees, counsel, agents, advisors and subsidiaries of such Person and such Person's Affiliates. "Special Counsel" means Palmer & Dodge LLP, in its capacity as special counsel to Bank. "Statutory Reserve Rate" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which Bank is subject with respect to the Adjusted LIBOR Rate, for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. LIBOR Borrowings shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to Bank under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. References herein to "Subsidiaries" shall, unless the context requires otherwise, be deemed to be references to Subsidiaries of Borrower. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Type", when used in reference to any Demand Loan or Borrowing, refers to whether the rate of interest on such Demand Loan, or on the Demand Loans comprising such Borrowing, is determined by reference to the LIBOR Rate or the Prime Rate. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. (b) Classification of Demand Loans and Borrowings. For purposes of this Agreement, Demand Loans may be classified and referred to by Type (e.g. a "Base Rate Demand Loan" or a "LIBOR Demand Loan"). In similar fashion, Borrowings may be classified and referred to by Type. (c) Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as 5 referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Sections, Exhibits and Schedules shall be construed to refer to Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 2. THE DEMAND LOANS. (a) General. (i) Subject to the terms and conditions hereof, and in reliance upon the representations and warranties contained herein, Bank hereby agrees to make revolving credit loans (each such loan being herein called a "Demand Loan" and all of such loans being herein collectively called the "Demand Loans") to Borrower from time to time prior to the earlier of (A) Maturity Date and (B) the date on which Bank makes demand for payment of the Obligations hereunder, in an aggregate principal amount that will not result in the aggregate outstanding principal amount of the Demand Loans exceeding the Demand Loan Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, Borrower may borrow, prepay and reborrow Demand Loans. Unless earlier terminated in accordance with Section 2(e), the Demand Loan Commitment shall expire on the earlier of (A) the Maturity Date and (B) the date on which Bank makes demand for payment of the Obligations. (ii) Demand Loans shall be effected at the principal office of Bank in Boston, Massachusetts, and shall be made at such times before the Maturity Date as Borrower may request by providing prior notice to Bank. Such notice shall be in writing, or by telephonic communication confirmed by telex, telephonic facsimile or other facsimile transmission on the same day as the telephone request, and shall specify the proposed date and the amount of the Demand Loan. (iii) Subject to Section 2(a)(iv) hereof, each Demand Loan shall be comprised entirely of Base Rate Demand Loans or LIBOR Demand Loans as Borrower may request in accordance herewith. Bank at its option may make any LIBOR Demand Loan by causing any domestic or foreign branch or Affiliate to make such Demand Loan; provided that any exercise of such option shall not affect the obligation of Borrower to repay such Demand Loan in accordance with the terms of this Agreement. (iv) At the commencement of each Interest Period for a LIBOR Demand Loan, such Demand Loan shall be in an aggregate amount at least equal to $250,000 or any greater multiple of $100,000. LIBOR Demand Loans and Base Rate Demand Loans may be outstanding at the same time. There shall not at any time be more than a total of five LIBOR Borrowings outstanding. (v) Each Demand Loan shall bear interest at the rate or rates, and payable on the dates, set forth in Section 2(g). (b) Borrowing Requests. To request a Demand Loan, Borrower shall notify Bank of such request by telephone (i) in the case of a LIBOR Demand Loan, not later than 2:00 p.m., Boston, Massachusetts time, three (3) Business Days before the date of the proposed Demand Loan or (ii) in the case of a Base Rate Demand Loan not later than 2:00 p.m., Boston, Massachusetts time, on the date of the proposed Demand Loan. Each such telephonic request shall be irrevocable and shall be confirmed promptly by hand delivery or telephonic facsimile to Bank of a written loan request in a form approved by 6 Bank and executed by Borrower. Each such telephonic and written loan request shall specify the following information in compliance with this Section 2(b): (i) the aggregate amount of such Demand Loan; (ii) the date of such Demand Loan, which shall be a Business Day; (iii) whether such Demand Loan is to be a Base Rate Demand Loan or a LIBOR Demand Loan; (iv) in the case of a LIBOR Demand Loan, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the account to which funds are to be disbursed. If no election as to the type of Demand Loan is specified, then the requested Demand Loan shall be a Base Rate Borrowing. If no Interest Period is specified with respect to any requested LIBOR Demand Loan, then Borrower shall be deemed to have selected an Interest Period of one month's duration. (c) Conversion and Continuation of Borrowings. Each Borrowing initially shall be of the Type specified in the applicable borrowing request delivered to Bank pursuant to Section 2(b) hereof and, in the case of a LIBOR Borrowing, shall have an initial Interest Period as specified in such borrowing request. Thereafter, Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing, or in the case of a LIBOR Borrowing, may elect Interest Periods therefor, all as provided in this Section To make an election pursuant to this Section 2(c), Borrower shall notify Bank of such election by telephone by the time that Borrower would be required under Section 2(b) if Borrower were requesting a new Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such request shall be irrevocable and shall be confirmed promptly by hand delivery or telephonic facsimile to Bank of a written request in a form approved by Bank and executed by Borrower. Each telephonic and written request shall specify: (i) the Borrowing to which such request applies; (ii) the effective date of the election made pursuant to such request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be a Base Rate Borrowing or a LIBOR Borrowing; and (iv) in the case of a LIBOR Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such request requests a LIBOR Borrowing, but does not specify an Interest Period, Borrower shall be deemed to have selected an Interest Period of one month's duration. If Borrower fails to deliver a timely request for conversion or continuation with respect to a LIBOR Borrowing prior to the end of the Interest Period applicable thereto, then, unless such LIBOR Borrowing is repaid as provided herein, at the end of such Interest Period such LIBOR Borrowing shall be converted to a Base Rate Borrowing. Notwithstanding anything to the contrary contained herein, if an Event of Default has occurred and is continuing or if Bank has made DEMAND on the Demand Loans, then (i) no outstanding Borrowing may be converted to or continued as a LIBOR Borrowing, and (ii) at Bank's option, each LIBOR Borrowing 7 shall be converted to a Base Rate Borrowing (and Borrower shall make any payments required by Section 2(k)). (d) Repayment and Prepayment. Borrower hereby unconditionally promises to pay to Bank the Obligations (i) at any time ON DEMAND or (ii) on the Maturity Date. In addition, if at any time (whether following a reduction in the Demand Loan Commitment pursuant to Section 2(e) or otherwise) the aggregate principal amount of the Demand Loans exceeds the Demand Loan Commitment, Borrower shall prepay Demand Loans in an aggregate amount equal to such excess. Borrower may prepay the Demand Loans at any time without payment or penalty (except for payment of any LIBOR breakage costs as provided in Section 2(k)). (e) Reduction and/or Termination of Demand Loan Commitment. At any time prior to the Maturity Date, on at least five (5) Business Days' prior written notice to Bank, Borrower may in whole terminate, or from time to time reduce, the Demand Loan Commitment. Each notice delivered by Borrower pursuant this Section 2(e) shall be irrevocable. Any such reduction hereunder shall be in an amount of not less than $100,000. Any termination or reduction of the Demand Loan Commitment shall be permanent. In addition, if after giving effect to any termination or reduction of the Demand Loan Commitment, the aggregate outstanding principal amount of the Demand Loans exceeds the Demand Loan Commitment, Borrower shall immediately prepay Demand Loans in an amount equal to such excess. Simultaneously with any termination or reduction of the Demand Loan Commitment hereunder, Borrower shall pay to Bank the Facility Fee on the terminated or reduced portion of the Demand Loan Commitment accrued to the date of such termination or reduction. (f) Demand Note. The Demand Loans shall be evidenced by the Demand Note executed by Borrower. Upon receipt of a customary affidavit and an unsecured agreement of indemnity executed by an officer of Bank as to the loss, theft, destruction or mutilation of the Demand Note or any other Loan Document which is not of public record, Borrower will issue, in lieu thereof, a replacement Demand Note or other Loan Document in the same principal amount thereof and otherwise of like tenor. (g) Interest. Each Demand Loan shall bear interest on the unpaid principal amount thereof until paid in full at the rate or rates per annum determined as follows: (A) the rate for any portion of any Borrowing that is a LIBOR Demand Loan shall be computed at a rate equal to the Adjusted LIBOR Rate plus 0.60% per annum (on the basis of the actual number of days elapsed over a 360-day year), (B) the rate for any portion of any Borrowing that is not then a LIBOR Demand Loan shall be computed at a rate equal to the Prime Rate (on the basis of the actual number of days elapsed over a 365-day year), and (C) all interest shall be payable monthly in arrears on the last day of each month, commencing on the first such day occurring after the Effective Date, except that in respect of any LIBOR Borrowing, interest shall be payable on the last Business Day of the Interest Period applicable to such LIBOR Borrowing. (h) Post-Default Interest. Notwithstanding anything to the contrary set forth herein, during the period when any Event of Default under Section 7(a) or 7(b) shall have occurred and be continuing or after DEMAND, (i) the outstanding principal balance of the Demand Loans shall bear interest at the Post Default Rate, and (ii) accrued interest shall be due and payable on demand. (i) Fees. Borrower shall pay to Bank on the Effective Date a one-time non-refundable origination fee in the amount of $35,000. ---- (j) Increased Costs. If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, Bank (except any such reserve requirement reflected in the Adjusted LIBOR Rate); or 8 (ii) impose on Bank or the London interbank market any other condition affecting this Agreement or LIBOR Borrowings made by Bank; and the result of any of the foregoing shall be to increase the cost to Bank of making or maintaining any LIBOR Borrowing (or of maintaining its obligation to make any such LIBOR Borrowing) or to reduce the amount of any sum received or receivable by Bank hereunder (whether of principal, interest or otherwise), then Borrower will pay to Bank such additional amount or amounts as will compensate Bank for such additional costs incurred or reduction suffered. If Bank reasonably determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on Bank's capital or on the capital of Bank's holding company, if any, as a consequence of this Agreement or the Demand Loans made by Bank, to a level below that which Bank or Bank's holding company could have achieved but for such Change in Law (taking into consideration Bank's policies and the policies of Bank's holding company with respect to capital adequacy), then from time to time Borrower will pay to Bank such additional amount or amounts as will compensate Bank or Bank's holding company, for any such reduction suffered. A certificate of Bank setting forth the amount or amounts necessary to compensate Bank or its holding company, as the case may be, as specified in this paragraph (j) shall be delivered to Borrower and shall be conclusive so long as it reflects a reasonable basis for the calculation of the amounts set forth therein and does not contain any manifest error. Borrower shall pay Bank the amount shown as due on any such certificate within 10 days after receipt thereof. Failure or delay on the part of Bank to demand compensation pursuant to this paragraph (j) shall not constitute a waiver of Bank's right to demand such compensation; provided that Borrower shall not be required to compensate Bank pursuant to this paragraph (i) for any increased costs or reductions incurred more than six months prior to the date that Bank notifies Borrower of the Change in Law giving rise to such increased costs or reductions and of Bank's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is (x) retroactive, and (y) occurred within such six-month period referred to above, then such six-month period shall be extended to include the period of retroactive effect thereof, but in no event any period prior to the date hereof. (k) Break Funding Payments. In the event of (i) the payment of any principal of any LIBOR Borrowing other than on the last day of an Interest Period applicable thereto (including as a result of DEMAND by Bank (notwithstanding if any Event of Default has occurred or is continuing) or an Event of Default), (ii) the conversion of any LIBOR Borrowing other than on the last day of the Interest Period applicable thereto, or (iii) the failure to borrow, convert, continue or prepay any LIBOR Borrowing on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable and is revoked in accordance herewith) then, in any such event, Borrower shall compensate Bank for the loss, cost and expense attributable to such event. In the case of a LIBOR Borrowing, the loss to Bank attributable to any such event shall be deemed to include an amount determined by Bank to be equal to the excess, if any, of (A) the amount of interest that Bank would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such LIBOR Borrowing (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted LIBOR Rate for such Interest Period, over (B) the amount of interest that Bank would earn on such principal amount for such period if Bank were to invest such principal amount for such period at the interest rate that would be bid by Bank (or an affiliate of Bank) for U.S. dollar deposits from other banks in the eurodollar market at the commencement of such period. 9 A certificate of Bank setting forth any amount or amounts that Bank is entitled to receive pursuant to this paragraph (k) shall be delivered to Borrower and shall be conclusive absent manifest error. Borrower shall pay Bank the amount shown as due on any such certificate within 10 days after receipt thereof. (l) Taxes. Any and all payments by or on account of any obligation of Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (A) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this paragraph (l)) Bank receives an amount equal to the sum it would have received had no such deductions been made, (B) Borrower shall make such deductions and (C) Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. In addition, Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. Borrower shall indemnify Bank within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this paragraph (l)) paid by Bank (and any penalties, interest and reasonable expenses arising therefrom or with respect thereto during the period prior to Borrower making any payment demanded under this paragraph (l)), whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to Borrower by Bank shall be conclusive absent manifest error. As soon as practicable after any payment of Indemnified Taxes or Other Taxes by Borrower to a Governmental Authority, Borrower shall deliver to Bank the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to Bank. (m) Payments Generally. Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees or otherwise) prior to 1:00 p.m., Boston, Massachusetts time, on the date when due, in immediately available funds, without setoff or counterclaim. Any amounts received after such time on any date may, in the discretion of Bank, be deemed to have been received on the next succeeding Business Date for purposes of calculating interest thereon. All such payments shall be made to Bank at such of its offices in Boston, Massachusetts as shall be notified to the relevant parties from time to time. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. SECTION 3. CONDITIONS PRECEDENT TO FUNDING OF DEMAND LOANS. (a) Conditions to Effectiveness. This Agreement and the obligation of Bank to fund Demand Loans shall not become effective until the date (the "Effective Date") on which each of the following conditions is satisfied: (i) Bank shall have received an original of this Demand Loan Agreement, duly executed by Borrower. (ii) Bank shall have received an original of the Demand Note, duly executed by Borrower. (iii) Bank shall have received such documents and certificates as Bank or its counsel may reasonably request relating to the organization, existence and good standing of Borrower, the authorization of the transactions contemplated hereby and any other legal matters relating to Borrower, 10 the Loan Documents and such transactions, all in form and substance reasonably satisfactory to Bank and its counsel. (iv) Borrower shall have obtained all permits, licenses, authorizations or consents from all Governmental Authorities and all consents of other Persons, in each case that are necessary in connection with the transactions contemplated by this Agreement and the other Loan Documents, and each of the foregoing shall be in full force and effect. (v) Bank shall have received a certificate, dated as of the Effective Date and signed by an officer of Borrower, confirming compliance with the conditions set forth in Section 3(b)(i) and (ii). (vi) Bank shall have received a certificate of the Chief Financial Officer of Borrower, in form and substance satisfactory to Bank, to the effect that, to the best of such officer's knowledge and belief, as of the Effective Date and after giving effect to the Demand Loans: (A) the aggregate value of all properties of Borrower at their present fair saleable value on a going concern basis (i.e., the amount that may be realized within a reasonable time, considered to be six months to one year, either through collection or sale at the regular market value, conceiving the latter as the amount that could be obtained for such properties within such period by a capable and diligent businessman from an interested buyer who is willing to purchase under ordinary selling conditions), exceed the amount of all the debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) of Borrower; (B) Borrower will not, on a consolidated basis, have unreasonably small capital with which to conduct its business operations as heretofore conducted; and (C) Borrower will have, on a consolidated basis, sufficient cash flow to enable it to pay its debts as they mature. (D) Such certificate shall include a statement to the effect that the financial projections and underlying assumptions contained in such analysis are reasonable in the reasonable judgment of management. (vii) Borrower shall not be in breach, violation or default of the Existing Credit Agreement. (viii) Bank shall have received favorable written opinions (addressed to Bank and dated the Effective Date) of Chapman and Cutler, special counsel to Borrower, and Oleta J. Harden, Esq., General Counsel to Borrower, substantially in the form of Exhibit B hereto; (ix) Bank shall have received such other documents, and completion of such other matters, as counsel for Bank may deem necessary or appropriate. (b) Conditions to Each Borrowing. The obligation of Bank to make a Demand Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (i) The representations and warranties of Borrower set forth in the Loan Documents shall be true and correct in all material respects on and as of the date of such Borrowing, both before and after giving effect thereto and to the use of the proceeds thereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, such representation or warranty shall be or have been true and correct as of such specific date). 11 (ii) At the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing. (iii) The making of each Demand Loan hereunder shall be deemed to be a representation and warranty by Borrower on the date of each such requested Demand Loan, as to the occurrence of the facts referred to in Section 3(b)(i) and (ii). SECTION 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Bank that; (a) Due Organization. Borrower and each of its Subsidiaries is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of organization and is duly qualified to do business and is in good standing in each jurisdiction in which such qualification may be necessary by reason of the nature or location of Borrower's or such Subsidiaries assets or operations and where failure to be so qualified could be reasonably likely to have a Material Adverse Effect. (b) Due Authorization. The execution, delivery and performance of this Agreement are within Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of or filing with any Governmental Authority, and do not contravene or constitute a default under any provision of applicable law or regulation or of the charter, by-laws or other constituent documents of Borrower or of any judgment, order, decree, injunction or material agreement or other instrument by which it or any of its properties may be bound, and will not result in creation or imposition of any lien on any of its assets except in favor of Bank. (c) Enforceability. This Agreement has been duly executed and delivered by Borrower, and constitutes a valid and binding agreement of Borrower, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, moratorium and other laws affecting creditors generally and equitable principles. (d) Tax Returns. Borrower has made or filed all Tax returns, reports and declarations relating to any material Tax liability required by any jurisdiction to which it is subject; has paid all Taxes shown or determined to be due thereon except those being contested in good faith by appropriate proceedings which serve to stay any remedy of the taxing authority; and has made adequate provision for the payment of all Taxes so contested or in respect of subsequent periods. (e) No Adverse Regulations. Borrower (i) is subject to no charter, corporate or other legal restriction, or any judgment, award, decree, order, governmental rule or regulation or contractual restriction which would have a Material Adverse Effect and (ii) is in compliance with its organizational documents and all contractual requirements by which it or any of its properties may be bound and all applicable laws, rules and regulations (including those relating to environmental protection) other than (A) laws, rules or regulations the validity or applicability of which it is contesting in good faith by proceedings which serve to stay the enforcement thereof or (B) such provisions of any of such charter documents, by-laws contractual requirements, laws, rules or regulations as to which the failure to comply with the same would not reasonably be expected to have Material Adverse Effect. (f) Property and Assets. Each of Borrower and its Subsidiaries has good and marketable title to all of its real property and valid title to all other properties and assets. Each of Borrower and its Subsidiaries enjoys quiet possession under all leases to which it is a party as lessee and which is material to its business, and all of such leases are valid, subsisting and in full force and effect. None of such leases contains any provision restricting the incurrence of indebtedness by the lessee or any unusual or 12 burdensome provision materially adversely affecting the current and proposed operations of Borrower and its Subsidiaries. (g) No Adverse Actions. Except as disclosed in the Forms 10-K, 10-Q and 8-K most recently filed by Borrower with the Securities Exchange Commission, there is no action, suit, proceeding or investigation pending or, to Borrower's knowledge, threatened against Borrower, any of its Subsidiaries or any of their assets before or by any Governmental Authority reasonably likely to have a Material Adverse Effect. (h) Compliance with Laws and Agreements. Each of Borrower and its Subsidiaries is in substantial compliance with all laws, regulations, policies and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to so be in compliance, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. Neither the execution or delivery of this Agreement or the other Loan Documents, nor the consummation of the transactions contemplated hereby or thereby, nor compliance with the terms hereof or thereof, will conflict with or result in a breach of or default under the terms, conditions or provisions of the Existing Credit Agreement, or any other agreement, indenture or instrument to which Borrower is a party or by which Borrower or its property is bound. (i) Permits and Licenses. Each of Borrower and its Subsidiaries has, and is in good standing with respect to, all licenses, permits, approvals and authorizations of Governmental Authorities necessary to conduct its business as presently conducted and to own or lease and operate its properties, except where the failure to have, or be in good standing with respect to, such licenses, permits, approvals and authorizations, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. (j) Environmental Matters. Except as disclosed in the Forms 10-K, 10-Q and 8-K most recently filed by Borrower with the Securities Exchange Commission, neither Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law except where such failure would not be expected to result in a Material Adverse Effect, (ii) has become subject to any Environmental Liability, or (iii) has received notice of any claim with respect to any Environmental Liability or any inquiry, allegation, notice or other communication from any Governmental Authority which is currently outstanding or pending concerning its compliance with any Environmental Law. (k) Investment and Holding Company Status. Neither Borrower nor any of its Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940, as amended, (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935, as amended or (c) a "bank holding company" as defined in, or subject to regulation under, the Bank Holding Company Act of 1956, as amended. (l) ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, would reasonably be expected to result in a Material Adverse Effect. SECTION 5. AFFIRMATIVE COVENANTS. Until the principal of and interest on the Demand Loans and all fees and other Obligations payable hereunder shall have been paid in full, and the Demand Loan Commitment has terminated, Borrower covenants and agrees with Bank that: 13 (a) Use of Proceeds. The proceeds of the Demand Loans will be used by Borrower for general corporate and working capital purposes of Borrower. No part of the proceeds of the Demand Loans will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U, T and X. (b) Financial Statements and Other Information. Borrower will furnish to Bank all information of the types specified in Section 4.2 of the Existing Credit Agreement, within the time periods required by Section 4.2 of the Existing Credit Agreement. The terms of Section 4.2 of the Existing Credit Agreement (and attendant definitions) are incorporated herein by reference, and Borrower's obligation to provide such information hereunder shall survive termination of the Existing Credit Agreement. (c) Notices of Material Events. Borrower will furnish to Bank prompt written notice of any of the following: (i) the occurrence of any Default; (ii) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting Borrower or any Affiliate that, if adversely determined, would reasonably be expected to result in a Material Adverse Effect; and (iii) any other development that results in, or would reasonably be expected to result in, a Material Adverse Effect. (d) Existence; Conduct of Business. Each of Borrower and its Subsidiaries will do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business whereby failure to preserve, renew and keep in full force and effect such legal existence and rights, licenses, permits, privileges and franchises could reasonably be expected to have a Material Adverse Effect; provided that the foregoing shall not be deemed to prohibit the merger or consolidation of any Subsidiary with or into any other Subsidiary, the merger or consolidation of any Subsidiary with or into the Borrower (with the Borrower as the surviving entity); or any merger in which the Borrower is the surviving Person. (e) Payment of Obligations. Each of Borrower and its Subsidiaries will pay its obligations, including Tax liabilities, that, if not paid, would reasonably be expected to result in a Material Adverse Effect before the same shall become delinquent or in default, except where (i) the validity or amount thereof is being contested in good faith by appropriate proceedings, (ii) it has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (iii) the failure to make payment pending such contest would not reasonably be expected to result in a Material Adverse Effect. (f) Maintenance of Properties; Insurance. Each of Borrower and its Subsidiaries will (i) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (ii) maintain insurance, with financially sound and reputable insurance companies (or through self insurance), as may be required by law, and such other insurance (or self-insurance) in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations, including business interruption and product liability insurance. (g) Books and Records; Inspection Rights. Each of Borrower and its Subsidiaries will keep proper books of record and account in which entries are made of all dealings and transactions in relation to its business and activities which fairly record such transactions and activities. Borrower will permit any representatives designated by Bank to visit and inspect its and its Subsidiaries' properties, to examine and make extracts from its and its Subsidiaries' books and records, and to discuss its and its Subsidiaries' affairs, finances and condition with officers and independent accountants; provided that, so long as no Default has occurred and is continuing, all such visits shall be upon reasonable notice at reasonable times during regular business hours of Borrower and Bank shall not visit Borrower more frequently than once 14 each fiscal quarter, and provided further that after the occurrence and during the continuance of any Default, Bank may visit at any reasonable times and as often as Bank reasonably deems necessary. (h) Compliance with Laws. Each of Borrower and its Subsidiaries will comply with (i) all laws, rules, regulations and orders including all Environmental Laws, of any Governmental Authority, and (ii) all contractual obligations, in each case applicable to it or its property, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. SECTION 6. [RESERVED]. SECTION 7. EVENTS OF DEFAULT; DEMAND LOANS PAYABLE UPON DEMAND. Borrower expressly acknowledges and agrees that the Demand Loans are and shall at all times be payable in whole or in part ON DEMAND by Bank and that Bank may demand payment of the Demand Loans at any time for any reason or for no reason. Borrower further acknowledges that it is a necessary inducement to Bank to make the Demand Loans that Borrower grant Bank the unconditional right at any time in its sole discretion to demand payment in whole or in part of the principal of and accrued interest on the Demand Loans or of any other demand Obligations including the payment of any LIBOR breakage costs as provided in Section 2(k), which right Borrower expressly grants whether or not Borrower is then in compliance with the provisions hereof. If any of the events set forth below (each an "Event of Default") shall occur and be continuing, Bank may, but shall not be obligated to, make such DEMAND (provided that if any Event of Default of the type described in paragraphs (g) or (h) below shall occur Bank shall be deemed to have automatically (and without any further action or requirement on the part of Bank) made DEMAND upon Borrower); such events are set forth only for purposes of illustration of circumstances in which Bank may exercise such rights, are not exclusive and shall not be a prerequisite to or limit Bank's making demand or withholding advances in any other circumstance where Bank deems that it is insecure or that the prospects for timely or full payment or performance of any Obligation have been impaired: (a) failure by Borrower to pay when due, whether upon demand or at the scheduled due date, any amount due under any Loan Document; or (b) failure by Borrower to pay upon demand (or when due, if not payable on demand) any other Obligation; or (c) failure by Borrower to perform, discharge, observe or comply with any obligation (other than for payment) or any covenant or agreement contained in any Loan Document in accordance with the terms thereof which failure continues beyond the expiration of the applicable grace period (if any); or (d) any representation, warranty or statement of Borrower to Bank in connection with any Loan Document is found to have been false or misleading in any material respect as of the time when made; or (e) any Event of Default shall occur under the Existing Credit Facility; or (f) Borrower's liquidation, termination, dissolution or ceasing to carry on actively any substantial part of its current business; or (g) commencement by Borrower of a voluntary proceeding seeking relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law, or seeking appointment of a trustee, receiver, liquidator or other similar official for it or any substantial part of its assets; or its consent 15 to any of the foregoing in an involuntary proceeding against it; or Borrower shall generally not be paying its debts as they become due or admit in writing its inability to do so; or an assignment for the benefit of, or the offering to or entering into by Borrower of any composition, extension, reorganization or other agreement or arrangement with, its creditors; or (h) commencement of an involuntary proceeding against Borrower seeking relief with respect to it or its debts under any bankruptcy, insolvency or other similar law, or seeking appointment of a trustee, receiver, liquidator or other similar official for it or any substantial part of its assets (other than involuntary proceedings to which Borrower does not consent and which are dismissed or vacated within sixty (60) days following the institution thereof). SECTION 8. BANK'S RIGHTS AND REMEDIES UPON DEMAND. Following demand under Section 7: (a) All Obligations shall become immediately due and payable without further notice to Borrower; all LIBOR Borrowings not so repaid shall convert to Base Rate Borrowings (and Borrower shall make any payments required by Section 2(k)); and Bank shall have the right to proceed to enforce payment of the Obligations and shall have and may exercise any and all rights under applicable law or which are afforded to Bank in this Agreement or the other Loan Documents or otherwise; (b) Whether or not Bank shall have terminated this Agreement or accelerated the Demand Loans, Bank may proceed to protect and enforce its rights and remedies under this Agreement, the Demand Note, or any of the other Loan Documents by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement or the other Loan Documents, or any instrument evidencing the Demand Loans, including, as permitted by applicable law; and Borrower agrees to take any actions that Bank may reasonably request in writing in order to enable Bank to obtain and enjoy the full rights and benefits granted by this Agreement and any of the related documents. Borrower shall not take action to obstruct impede or infringe upon Bank's exercise and enforcement of its rights, benefits and remedies under this Agreement and any agreement related hereto, and Borrower agrees to cooperate fully with any and all actions taken by Bank in good faith pursuant to this Agreement. SECTION 9. MISCELLANEOUS. (a) Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telephonic facsimile (fax), as follows: (i) if to Borrower, to New Jersey Resources Corporation, 1415 Wycoff Road, P.O. Box 1468, Wall, New Jersey 07719, Attn: Director of Treasury Services, Treasurer, General Counsel (fax no. 732-938-2620); and (ii) if to Bank, to Citizens Bank of Massachusetts, Large Corporation Department, 28 State Street, 15th Floor, Boston, Massachusetts 02109, Attention: Michael Ouellet (fax no. 617-263-0439), with a copy to Palmer & Dodge LLP, 111 Huntington Avenue at Prudential Center, Boston, Massachusetts 02199-7613, Attention: George Ticknor (fax no. 617-227-4420); Any party hereto may change its address or fax number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in 16 accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. (b) Waivers; Amendments. (i) No failure or delay by Bank in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of Bank hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (ii) of this Section 9(b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Demand Loan shall not be construed as a waiver of any Event of Default, regardless of whether Bank may have had notice or knowledge of such Event of Default at the time. (ii) Neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by Borrower and Bank. (c) Expenses; Indemnity; Damage Waiver. (i) Borrower agrees to pay, or reimburse Bank, as applicable, for paying, (A) all reasonable out-of-pocket expenses incurred by Bank and its Affiliates, including the reasonable fees, charges and disbursements of Special Counsel, in connection with the preparation of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (B) all out-of-pocket expenses incurred by Bank, including the reasonable fees, charges and disbursements of any counsel for Bank, in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents, including its rights under this Section 9(c), or in connection with the Demand Loans, including in connection with any workout, restructuring or negotiations in respect thereof, and (C) all Other Taxes levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents or any other document referred to herein or therein. (ii) Borrower agrees to indemnify Bank, and each Related Party of Bank (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities, settlement payments, obligations and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee and settlement costs, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (A) the execution or delivery of this Agreement, the other Loan Documents or any agreement or instrument contemplated hereby, the performance by the parties hereto and thereto of their respective obligations hereunder or thereunder or any other transactions contemplated hereby or thereby, (B) the Demand Loans or the use of the proceeds therefrom, or (C) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (are determined by a court of competent jurisdiction by final and nonappealable judgment to have) resulted from the gross negligence or willful misconduct of any Indemnitee. In connection with any of the foregoing, Bank shall be entitled to select and employ separate counsel. 17 (iii) To the extent permitted by applicable law, Borrower shall not assert, and Borrower hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, the other Loan Documents or any agreement or instrument contemplated hereby or thereby, the Demand Loans or the use of the proceeds thereof. (iv) All amounts due under this Section 9 shall be payable promptly after written demand therefor. (d) Successors and Assigns. (i) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of Bank (and any attempted assignment or transfer by Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of Bank) any legal or equitable right, remedy or claim under or by reason of this Agreement. (ii) Bank may assign to one or more assignees all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including all or a portion of the Demand Loans at the time owing to it); provided that except in the case of an assignment to an Affiliate or an Approved Fund of Bank, Borrower must give its prior written consent to such assignment (which consent shall not be unreasonably withheld, delayed or conditioned), provided further that any consent of Borrower otherwise required under this paragraph shall not be required if an Event of Default has occurred. (iii) Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of Bank, including any such pledge or assignment to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release Bank from any of its obligations hereunder or substitute any such assignee for Bank as a party hereto. (iv) Bank may furnish any information concerning Borrower or any of its Subsidiaries in the possession of Bank from time to time to assignees and participants (including prospective assignees and participants) subject, however, to and so long as the recipient agrees in writing to be bound by, the provisions of Section 9(l). In addition, Bank may furnish any information concerning Borrower or any of its Subsidiaries or Affiliates in Bank's possession to any Affiliate of Bank, subject, however, to the provisions of Section 9(l). Borrower shall assist Bank in effectuating any assignment or participation pursuant to this Section 9(d) in whatever manner Bank reasonably deems necessary, including participation in meetings with prospective transferees. (e) Survival. All covenants, agreements, representations and warranties made by Borrower and its Subsidiaries herein and in the other Loan Documents, and in the certificates or other instruments delivered in connection with or pursuant to this Agreement and the other Loan Documents, shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the other Loan Documents and the making of the Demand Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that Bank may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect so long as the principal of or any accrued interest on the Demand Loans or any fee or any other amount payable under this Agreement 18 or the other Loan Documents is outstanding and unpaid and the Demand Loan Commitment has not terminated. The provisions of Sections 2(j) and 9(c) shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Demand Loans, or the termination of this Agreement or any other Loan Document or any provision hereof or thereof. (f) Counterparts; Integration; References to Agreement; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to Bank or its counsel constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 3, this Agreement shall become effective when it shall have been executed by Bank and when Bank shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. (g) Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. (h) Right of Setoff. If an Event of Default shall have occurred and be continuing, Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Bank to or for the credit or the account of Borrower against any of and all the Obligations, irrespective of whether or not Bank shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of Bank under this Section 9(h) are in addition to any other rights and remedies (including other rights of setoff) which Bank may have. (i) Governing Law; Jurisdiction; Consent to Service of Process. (i) This Agreement shall be construed in accordance with and governed by the law of The Commonwealth of Massachusetts. (ii) Each party hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the courts of The Commonwealth of Massachusetts and of the United States District Court for the District of Massachusetts, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Massachusetts court (or, to the extent permitted by law, in such Federal court). Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that Bank may otherwise have to bring any action or proceeding relating to this Agreement against Borrower or any Subsidiary or its properties in the courts of any jurisdiction. 19 (iii) Each party hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any court referred to in paragraph (ii) of this Section 9(i). Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (iv) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9(a). Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. (j) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9(j). (k) Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. (l) Confidentiality. Bank agrees to keep confidential information obtained by it pursuant hereto and the other Loan Documents confidential in accordance with Bank's customary practices and agrees that it will only use such information in connection with the transactions contemplated by this Agreement and not disclose any of such information other than (i) to Bank's employees, representatives, directors, attorneys, auditors, agents, professional advisors, trustees or Affiliates who are advised of the confidential nature of such information or to any direct or indirect contractual counterparty in swap agreements or such contractual counterparty's professional advisor (so long as such contractual counterparty or professional advisor to such contractual counterparty agrees to be bound by the provisions of this Section 9(l)), (ii) to the extent such information presently is or hereafter becomes available to Bank on a non-confidential basis from any source of such information that is in the public domain at the time of disclosure, (iii) to the extent disclosure is required by law (including applicable securities law), regulation, subpoena or judicial order or process (provided that notice of such requirement or order shall be promptly furnished to Borrower unless such notice is legally prohibited) or requested or required by bank, securities, insurance or investment company regulators or auditors or any administrative body or commission to whose jurisdiction Bank may be subject, (iv) to any rating agency to the extent required in connection with any rating to be assigned to Bank, (v) to assignees or participants or prospective assignees or participants who agree to be bound by the provisions of this Section 9(l), (vi) to the extent required in connection with any litigation between Borrower and Bank with respect to the Demand Loans or this Agreement and the other Loan Documents or (vii) with Borrower's prior written consent. 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as a document under seal by their respective authorized officers as of the day and year first above written. NEW JERSEY RESOURCES CORPORATION By: ------------------------------------- Name: Title: CITIZENS BANK OF MASSACHUSETTS By: ------------------------------------- Name: Title: TABLE OF CONTENTS
PAGE SECTION 1. CERTAIN DEFINITIONS............................................... 1 SECTION 2. THE DEMAND LOANs.................................................. 6 (a) General................................................................ 6 (b) Borrowing Requests..................................................... 6 (c) Conversion and Continuation of Borrowings.............................. 7 (d) Repayment and Prepayment............................................... 8 (e) Reduction and/or Termination of Demand Loan Commitment................. 8 (f) Demand Note............................................................ 8 (g) Interest............................................................... 8 (h) Post-Default Interest.................................................. 8 (i) Fees................................................................... 8 (j) Increased Costs........................................................ 8 (k) Break Funding Payments................................................. 9 (l) Taxes.................................................................. 10 (m) Payments Generally..................................................... 10 SECTION 3. CONDITIONS PRECEDENT TO FUNDING OF DEMAND LOANS................... 10 (a) Conditions to Effectiveness............................................ 10 (b) Conditions to Each Borrowing........................................... 11 SECTION 4. REPRESENTATIONS AND WARRANTIES.................................... 12 (a) Due Organization....................................................... 12 (b) Due Authorization...................................................... 12 (c) Enforceability......................................................... 12 (d) Tax Returns............................................................ 12 (e) No Adverse Regulations................................................. 12 (f) Property and Assets.................................................... 12 (g) No Adverse Actions..................................................... 13 (h) Compliance with Laws and Agreements.................................... 13 (i) Permits and Licenses................................................... 13 (j) Environmental Matters.................................................. 13
-i- TABLE OF CONTENTS (CONTINUED)
PAGE (k) Investment and Holding Company Status.................................. 13 (l) ERISA.................................................................. 13 SECTION 5. AFFIRMATIVE COVENANTS............................................. 13 (a) Use of Proceeds........................................................ 14 (b) Financial Statements and Other Information............................. 14 (c) Notices of Material Events............................................. 14 (d) Existence; Conduct of Business......................................... 14 (e) Payment of Obligations................................................. 14 (f) Maintenance of Properties; Insurance................................... 14 (g) Books and Records; Inspection Rights................................... 14 (h) Compliance with Laws................................................... 15 SECTION 6. [RESERVED]....................................................... 15 SECTION 7. EVENTS OF DEFAULT; DEMAND LOANS PAYABLE UPON DEMAND.............. 15 SECTION 8. BANK'S RIGHTS AND REMEDIES UPON DEMAND............................ 16 SECTION 9. MISCELLANEOUS..................................................... 16 (a) Notices................................................................ 16 (b) Waivers; Amendments.................................................... 17 (c) Expenses; Indemnity; Damage Waiver..................................... 17 (d) Successors and Assigns................................................. 18 (e) Survival............................................................... 18 (f) Counterparts; Integration; References to Agreement; Effectiveness...... 19 (g) Severability........................................................... 19 (h) Right of Setoff........................................................ 19 (i) Governing Law; Jurisdiction; Consent to Service of Process............. 19 (j) WAIVER OF JURY TRIAL................................................... 20 (k) Headings............................................................... 20
-ii- An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. EX-4.3 4 y63088exv4w3.txt DEMAND LOAN AGREEMENT EXHIBIT 4-3 PROMISSORY NOTE $15,000,000.00 August 1, 2002 New Jersey Resources Corporation 1415 Wyckoff Road Wall, New Jersey 07719 ("Borrower") Wachovia Bank, National Association 301 South Tryon Street Charlotte, North Carolina 28202 (Hereinafter referred to as "Bank") Borrower promises to pay to the order of Bank, in lawful money of the United States of America, at its office indicated above or wherever else Bank may specify, the sum of Fifteen Million and No/100 Dollars ($15,000,000.00) or such sum as may be advanced and outstanding from time to time, with interest on the unpaid principal balance at the rate and on the terms provided in this Promissory Note (including all renewals, extensions or modifications hereof, this "Note"). LINE OF CREDIT. Borrower may borrow, repay and reborrow, and, upon the request of Borrower, Bank shall advance and readvance under this Note from time to time until the maturity hereof (each an "Advance" and together the "Advances"), so long as the total principal balance outstanding under this Note at any one time does not exceed the principal amount stated on the face of this Note. Bank's obligation to make Advances under this Note shall terminate if Borrower is in Default. As of the date of each proposed Advance, Borrower shall be deemed to represent that each representation made in the Loan Documents is true as of such date. If Borrower subscribes to Bank's cash management services and such services are applicable to this line of credit, the terms of such service shall control the manner in which funds are transferred between the applicable demand deposit account and the line of credit for credit or debit to the line of credit. USE OF PROCEEDS. Borrower shall use the proceeds of the loan(s) evidenced by this Note for the commercial purposes of Borrower, as follows: for general corporate purposes. INTEREST RATE. Interest shall accrue on the unpaid principal balance of each Advance during each Interest Period from the date of such Advance at a rate per annum equal to 1-month LIBOR plus 0.4% ("Interest Rate"). The Interest Rate for each Interest Period shall accrue each day during such Interest Period, commencing on and including the first day to but excluding the last day. "Interest Period" means, in respect of each Advance, each period commencing on the last day of the immediately preceding Interest Period and ending on the same day of the month that interest in respect of such Advance is due the number of months thereafter corresponding to the number of months specified above; provided (i) the first Interest Period shall commence on the date of such Advance and end on the first day thereafter that interest in respect of such Advance is due, (ii) any Interest Period that ends in a month for which there is no day which numerically corresponds to the last day of the immediately preceding Interest Period shall end on the last day of the month, and (iii) any Interest Period that would otherwise extend past the maturity date of this Note shall end on the maturity date of this Note. "LIBOR" means, with respect to each Interest Period, the rate for U.S. dollar deposits with a maturity equal to the number of months specified above, as reported on Telerate page 3750 as of 11:00 a.m., London time, on the second London business day before such Interest Period begins (or if not so reported, then as determined by the Bank from another recognized source or interbank quotation). INDEMNIFICATION. Borrower shall indemnify Bank against Bank's loss or expense as a consequence of (a) Borrower's failure to make any payment when due under this Note, (b) any payment, prepayment or conversion of any loan on a date other than the last day of the Interest Period, or (c) any failure to make a borrowing or conversion after giving notice thereof ("Indemnified Loss or Expense"). The amount of such Indemnified Loss or Expense shall be determined by Bank based upon the assumption that Bank funded 100% of that portion of the loan in the London interbank market. DEFAULT RATE. In addition to all other rights contained in this Note, if a Default (as defined herein) occurs and as long as a Default continues, all outstanding Obligations shall bear interest at the Interest Rate plus 3% ("Default Rate"), except if the Note is governed by the laws of the State of North Carolina and the original principal amount is less than or equal to $300,000.00. The Default Rate shall also apply from acceleration until the Obligations or any judgment thereon is paid in full. INTEREST AND FEE(S) COMPUTATION (ACTUAL/360). Interest and fees, if any, shall be computed on the basis of a 360-day year for the actual number of days in the applicable period ("Actual/360 Computation"). The Actual/360 Computation determines the annual effective yield by taking the stated (nominal) rate for a year's period and then dividing said rate by 360 to determine the daily periodic rate to be applied for each day in the applicable period. Application of the Actual/360 Computation produces an annualized effective interest rate exceeding the nominal rate. REPAYMENT TERMS. This Note shall be due and payable in consecutive monthly payments of accrued interest only, commencing on September 1, 2002, and continuing on the same day of each month thereafter until fully paid. In any event, all principal and accrued interest shall be due and payable on December 31, 2002. FACILITY FEE. Borrower shall pay to Bank monthly in arrears a facility fee equal to 0.10% per annum on the stated amount of this Note, for each day during the preceding calendar month or portion thereof, commencing on September 1, 2002 and continuing on the same day of each month thereafter, with a final payment due and payable on the date that all principal and accrued interest is paid in full. APPLICATION OF PAYMENTS. Monies received by Bank from any source for application toward payment of the Obligations shall be applied to accrued interest and then to principal. If a Default occurs, monies may be applied to the Obligations in any manner or order deemed appropriate by Bank. If any payment received by Bank under this Note or other Loan Documents is rescinded, avoided or for any reason returned by Bank because of any adverse claim or threatened action, the returned payment shall remain payable as an obligation of all persons liable under this Note or other Loan Documents as though such payment had not been made. DEFINITIONS. LOAN DOCUMENTS. The term "Loan Documents", as used in this Note and the other Loan Documents, refers to all documents executed in connection with or related to the loan evidenced by this Note and any prior notes which evidence all or any portion of the loan evidenced by this Note, and any letters of credit issued pursuant to any loan agreement to which this Note is subject, any applications for such letters of credit and any other documents executed in connection therewith or related thereto, and may include, without limitation, a commitment letter that survives closing, a loan agreement, this Note, guaranty agreements, security agreements, security instruments, financing statements, mortgage instruments, any renewals or modifications, whenever any of the foregoing are executed, but does not include swap agreements (as defined in 11 U.S.C. Section 101). OBLIGATIONS. The term "Obligations", as used in this Note and the other Loan Documents, refers to any and all indebtedness and other obligations under this Note, all other obligations under any other Loan Document(s), and all obligations under any swap agreements (as defined in 11 U.S.C. Section 101) between Borrower and Bank executed at any time in connection with this Note. SYNDICATED CREDIT AGREEMENT. The term "Syndicated Credit Agreement", as used in this Note, refers to the Credit Agreement by and among the Borrower, the financial institutions party thereto as the Lenders, and PNC Bank, National Association as the Administrative Agent, dated as of January 5, 2001, as it may be amended from time to time, including, without limitation, by that certain First Amendment to Credit Agreement dated as of October 3, 2001. CERTAIN OTHER TERMS. All terms that Page 2 are used but not otherwise defined in any of the Loan Documents shall have the definitions provided in the Uniform Commercial Code. LATE CHARGE. If any payments are not timely made, Borrower shall also pay to Bank a late charge equal to 4% of each payment past due for 15 or more days. Acceptance by Bank of any late payment without an accompanying late charge shall not be deemed a waiver of Bank's right to collect such late charge or to collect a late charge for any subsequent late payment received. ATTORNEYS' FEES AND OTHER COLLECTION COSTS. Borrower shall pay all of Bank's reasonable expenses incurred to enforce or collect any of the Obligations including, without limitation, reasonable arbitration, paralegals', attorneys' and experts' fees and expenses, whether incurred without the commencement of a suit, in any trial, arbitration, or administrative proceeding, or in any appellate or bankruptcy proceeding. USURY. If at any time the effective interest rate under this Note would, but for this paragraph, exceed the maximum lawful rate, the effective interest rate under this Note shall be the maximum lawful rate, and any amount received by Bank in excess of such rate shall be applied to principal and then to fees and expenses, or, if no such amounts are owing, returned to Borrower. DEFAULT. If any of the following occurs, a default ("Default") under this Note shall exist: NONPAYMENT; NONPERFORMANCE. The failure of (i)payment of (a) interest or fees or any other amount when due hereunder and the continuance of such nonpayment for five (5) business days, or (b) principal on the date due; or (ii) performance of the Obligations or Default under this Note or any other Loan Documents. FALSE WARRANTY. A warranty or representation made or deemed made in the Loan Documents or furnished Bank in connection with the loan evidenced by this Note proves materially false, or if of a continuing nature, becomes materially false. CROSS DEFAULT. At Bank's option, (i) any default in payment or performance of any obligation under any other loans, contracts or agreements of Borrower, any Subsidiary or Affiliate of Borrower, any general partner of or the holder(s) of the majority ownership interests of Borrower with Bank or its affiliates ("Affiliate" shall have the meaning as defined in 11 U.S.C. Section 101, except that the term "Borrower" shall be substituted for the term "Debtor" thereIN; "Subsidiary" shall mean any business in which Borrower holds, directly or indirectly, a controlling interest); or (ii) an Event of Default (as defined in the Syndicated Credit Agreement) shall have occurred, provided, however, that in the event that the Syndicated Credit Agreement is cancelled or terminated, or the Bank ceases to be a Lender thereunder, the Events of Default (as defined therein) shall survive with respect to this Note and shall be incorporated herein. REMEDIES UPON DEFAULT. If a Default occurs under this Note or any Loan Documents, Bank may at any time thereafter, take the following actions: BANK LIEN. Foreclose its security interest or lien against Borrower's accounts without notice. ACCELERATION UPON DEFAULT. Accelerate the maturity of this Note and, at Bank's option, any or all other Obligations, other than Obligations under any swap agreements (as defined in 11 U.S.C. Section 101) between Borrower and Bank, which shall be governed by the default and termination provisions of said swap agreements; whereupon this Note and the accelerated Obligations shall be immediately due and payable; provided, however, if the Default is based upon a bankruptcy or insolvency proceeding commenced by or against Borrower or any guarantor or endorser of this Note, all Obligations (other than Obligations under any swap agreement as referenced above) shall automatically and immediately be due and payable. CUMULATIVE. Exercise any rights and remedies as provided under the Note and other Loan Documents, or as provided by law or equity. FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information as Bank may reasonably request from time to time, including without limitation, financial statements and information pertaining to Borrower's financial condition. Such information shall be true, complete, and accurate. REPRESENTATIONS AND WARRANTIES, AFFIRMATIVE COVENANTS, NEGATIVE COVENANTS. From the date hereof until final payment of the Obligations, Borrower agrees that the Representations Page 3 and Warranties, Affirmative Covenants and Negative Covenants contained in Articles III, IV and V of the Syndicated Credit Agreement shall be incorporated herein, and shall survive in the event of (i) the termination or cancellation of the Syndicated Credit Agreement, or (ii) the Bank ceasing to be a Lender thereunder. Any notices or other materials which the Borrower is required to deliver to the Administrative Agent under the Syndicated Credit Agreement shall be delivered to Bank (within the stated time periods) if either (i) the Syndicated Credit Agreement has been terminated or cancelled, or (ii) Bank shall cease to be a Lender under the Syndicated Credit Agreement. WAIVERS AND AMENDMENTS. No waivers, amendments or modifications of this Note and other Loan Documents shall be valid unless in writing and signed by an officer of Bank. No waiver by Bank of any Default shall operate as a waiver of any other Default or the same Default on a future occasion. Neither the failure nor any delay on the part of Bank in exercising any right, power, or remedy under this Note and other Loan Documents shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or remedy. Each Borrower or any person liable under this Note waives presentment, protest, notice of dishonor, demand for payment, notice of intention to accelerate maturity, notice of acceleration of maturity, notice of sale and all other notices of any kind. Further, each agrees that Bank may extend, modify or renew this Note or make a novation of the loan evidenced by this Note for any period, and grant any releases, compromises or indulgences with respect to any collateral securing this Note, or with respect to any other Borrower or any other person liable under this Note or other Loan Documents, all without notice to or consent of each Borrower or each person who may be liable under this Note or any other Loan Document and without affecting the liability of Borrower or any person who may be liable under this Note or any other Loan Document. MISCELLANEOUS PROVISIONS. ASSIGNMENT. This Note and the other Loan Documents shall inure to the benefit of and be binding upon the parties and their respective heirs, legal representatives, successors and assigns. Bank's interests in and rights under this Note and the other Loan Documents are freely assignable, in whole or in part, by Bank. In addition, nothing in this Note or any of the other Loan Documents shall prohibit Bank from pledging or assigning this Note or any of the other Loan Documents or any interest therein to any Federal Reserve Bank. Borrower shall not assign its rights and interest hereunder without the prior written consent of Bank, and any attempt by Borrower to assign without Bank's prior written consent is null and void. Any assignment shall not release Borrower from the Obligations. APPLICABLE LAW; CONFLICT BETWEEN DOCUMENTS. This Note and, unless otherwise provided in any other Loan Document, the other Loan Documents shall be governed by and construed under the laws of the state named in Bank's address shown above without regard to that state's conflict of laws principles. If the terms of this Note should conflict with the terms of any loan agreement or any commitment letter that survives closing, the terms of this Note shall control. BORROWER'S ACCOUNTS. Except as prohibited by law, Borrower grants Bank a security interest in all of Borrower's accounts with Bank and any of its affiliates, except for any such accounts containing property held in trust for the benefit of third parties. JURISDICTION. Borrower irrevocably agrees to non-exclusive personal jurisdiction in the state named in Bank's address shown above. SEVERABILITY. If any provision of this Note or of the other Loan Documents shall be prohibited or invalid under applicable law, such provision shall be ineffective but only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note or other such document. NOTICES. Any notices to Borrower shall be sufficiently given, if in writing and mailed or delivered to the Borrower's address shown above or such other address as provided hereunder, and to Bank, if in writing and mailed or delivered to Bank's office address shown above or such other address as Bank may specify in writing from time to time. In the event that Borrower changes Borrower's address at any time prior to the date the Obligations are paid in full, Borrower agrees to promptly give written notice of said change of address by registered or certified mail, return receipt requested, all charges prepaid. PLURAL; CAPTIONS. All references in the Loan Documents to Borrower, guarantor, person, document or other nouns of reference mean both the singular and plural form, as the case may be, and the term "person" shall mean any individual, person or entity. The captions contained in the Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of the Loan Documents. ADVANCES. Bank may, in its sole discretion, make other advances which shall be deemed to be advances under this Note, even though the stated principal Page 4 amount of this Note may be exceeded as a result thereof. POSTING OF PAYMENTS. All payments received during normal banking hours after 2:00 p.m. local time at the office of Bank first shown above shall be deemed received at the opening of the next banking day. FEES AND TAXES. Borrower shall promptly pay all documentary, intangible recordation and/or similar taxes on this transaction whether assessed at closing or arising from time to time. ARBITRATION. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any claim or controversy arising out of or relating to the Loan Documents between parties hereto (a "Dispute") shall be resolved by binding arbitration conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and the Federal Arbitration Act. Disputes may include, without limitation, tort claims, counterclaims, a dispute as to whether a matter is subject to arbitration, claims brought as class actions, or claims arising from documents executed in the future. A judgment upon the award may be entered in any court having jurisdiction. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. SPECIAL RULES. All arbitration hearings shall be conducted in the city named in the address of Bank first stated above. A hearing shall begin within 90 days of demand for arbitration and all hearings shall conclude within 120 days of demand for arbitration. These time limitations may not be extended unless a party shows cause for extension and then for no more than a total of 60 days. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000.00. Arbitrators shall be licensed attorneys selected from the Commercial Financial Dispute Arbitration Panel of the AAA. The parties do not waive applicable Federal or state substantive law except as provided herein. PRESERVATION AND LIMITATION OF REMEDIES. Notwithstanding the preceding binding arbitration provisions, the parties agree to preserve, without diminution, certain remedies that any party may exercise before or after an arbitration proceeding is brought. The parties shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale or under applicable law by judicial foreclosure including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Any claim or controversy with regard to any party's entitlement to such remedies is a Dispute. WAIVER OF EXEMPLARY DAMAGES. The parties agree that they shall not have a remedy of punitive or exemplary damages against other parties in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. WAIVER OF JURY TRIAL. THE PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A DISPUTE. IN WITNESS WHEREOF, Borrower, as of the day and year first above written, has caused this Note to be executed under seal. PLACE OF EXECUTION AND DELIVERY. Borrower hereby certifies that this Note and the Loan Documents were executed in the State of New Jersey and delivered to Bank in the State of North Carolina. New Jersey Resources Corporation Taxpayer Identification Number: ___________________ By: ____________________________________(SEAL) Name: ________________________, Title: _____________ Page 5 EX-99.1 5 y63088exv99w1.txt STATEMENT FROM PRINCIPAL EXEC & FINANCIAL OFFICERS EXHIBIT 99-1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Laurence M. Downes and Glenn C. Lockwood hereby jointly certify as follows: (a) They are the Chief Executive Officer and the Chief Financial Officer, respectively, of New Jersey Resources Corporation (the "Company"); (b) The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Report") complies in all material respects with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (c) Based upon a review of the Report, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. NEW JERSEY RESOURCES CORPORATION Date: August 12, 2002 By: /s/Laurence M. Downes --------------- --------------------- Laurence M. Downes Chairman & Chief Executive Officer Date: August 12, 2002 By: /s/Glenn C. Lockwood --------------- -------------------- Glenn C. Lockwood Senior Vice President, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----