Quarterly Report




 

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

FORM 10‑Q

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM             TO             
 
Commission file number 001‑08359
 
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
New Jersey
 
22‑2376465
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1415 Wyckoff Road, Wall, New Jersey 07719
 
732‑938‑1480
(Address of principal
executive offices)
 
(Registrant's telephone number,
including area code)
 
 
 
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock ‑ $2.50 Par Value
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes: x             No: o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes: x             No: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer:   x
Accelerated filer:   o
Non-accelerated filer: o
Smaller reporting company : o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes: o             No: x

The number of shares outstanding of $2.50 par value Common Stock as of February 6, 2017 was 86,313,212 .

 


New Jersey Resources Corporation

TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
PART II. OTHER INFORMATION
 
 
ITEM 1.
 
ITEM 1A.
 
ITEM 2.
 
ITEM 6.
 
 




GLOSSARY OF KEY TERMS                                                                                                                                                        
AFUDC
Allowance for Funds Used During Construction
AOCI
Accumulated Other Comprehensive Income
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bcf
Billion Cubic Feet
BGSS
Basic Gas Supply Service
BPU
New Jersey Board of Public Utilities
CIP
Conservation Incentive Program
CME
Chicago Mercantile Exchange
CR&R
Commercial Realty & Resources Corp.
DM
Dominion Midstream Partners, L.P., a master limited partnership
DM Common Units
Common units representing limited partnership interests in DM
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
DRP
NJR Direct Stock Purchase and Dividend Reinvestment Plan
Dths
Dekatherms
FASB
Financial Accounting Standards Board
FCM
Futures Commission Merchant
FERC
Federal Energy Regulatory Commission
Financial margin
A non-GAAP financial measure, which represents revenues earned from the sale of natural gas less costs of natural gas sold including any transportation and storage costs, and excludes any accounting impact from the change in the fair value of certain derivative instruments
FMB
First Mortgage Bond
FRM
Financial Risk Management
GAAP
Generally Accepted Accounting Principles of the United States
Home Services and Other
Home Services and Other Operations (formerly Retail and Other Operations)
ICE
Intercontinental Exchange
ISDA
The International Swaps and Derivatives Association
ITC
Federal Investment Tax Credit
LNG
Liquefied Natural Gas
MGP
Manufactured Gas Plant
Moody's
Moody's Investors Service, Inc.
Mortgage Indenture
The Amended and Restated Indenture of Mortgage, Deed of Trust and Security Agreement between NJNG and U.S. Bank National Association dated as of September 1, 2014
MW
Megawatts
MWh
Megawatt Hour
NAESB
The North American Energy Standards Board
NFE
Net Financial Earnings
NGV
Natural Gas Vehicles
NJ RISE
New Jersey Reinvestment in System Enhancement
NJCEP
New Jersey's Clean Energy Program
NJDEP
New Jersey Department of Environmental Protection
NJNG
New Jersey Natural Gas Company
NJNG Credit Facility
NJNG's $250 million unsecured committed credit facility expiring in May 2019
NJR Credit Facility
NJR's $425 million unsecured committed credit facility expiring in September 2020
NJR Energy
NJR Energy Corporation
NJR or The Company
New Jersey Resources Corporation

1


GLOSSARY OF KEY TERMS (cont.)                                                                                                                                           
 
 
NJRCEV
NJR Clean Energy Ventures Corporation
NJRES
NJR Energy Services Company
NJRHS
NJR Home Services Company
Non-GAAP
Not in accordance with Generally Accepted Accounting Principles of the United States
NPNS
Normal Purchase/Normal Sale
NYMEX
New York Mercantile Exchange
O&M
Operation and Maintenance
OCI
Other Comprehensive Income
OPEB
Other Postemployment Benefit Plans
PennEast
PennEast Pipeline Company, LLC
PIM
Pipeline Integrity Management
PPA
Power Purchase Agreement
PTC
Federal Production Tax Credit
RA
Remediation Adjustment
REC
Renewable Energy Certificate
S&P
Standard & Poor's Financial Services, LLC
SAFE
Safety Acceleration and Facility Enhancement
SAVEGREEN
The SAVEGREEN Project®
SBC
Societal Benefits Charge
SEC
U.S. Securities and Exchange Commission
SREC
Solar Renewable Energy Certificate
SRL
Southern Reliability Link
Steckman Ridge
Collectively, Steckman Ridge GP, LLC and Steckman Ridge, LP
Superstorm Sandy
Post-Tropical Cyclone Sandy
Tetco
Texas Eastern Transmission
The Exchange Act
The Securities Exchange Act of 1934, as amended
Trustee
U.S. Bank National Association
U.S.
The United States of America
USF
Universal Service Fund


2

New Jersey Resources Corporation

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS                                                                           

Certain statements contained in this report, including, without limitation, statements as to management expectations, assumptions and beliefs presented in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures About Market Risk,” Part II, Item I. “Legal Proceedings” and in the notes to the financial statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. Forward-looking statements can also be identified by the use of forward-looking terminology such as “anticipate,” “estimate,” “may,” “could,” “might,” “intend,” “expect,” “believe,” “will” “plan,” or “should,” or comparable terminology and are made based upon management's current expectations, assumptions and beliefs as of this date concerning future developments and their potential effect on us. There can be no assurance that future developments will be in accordance with management's expectations, assumptions or beliefs, or that the effect of future developments on us will be those anticipated by management.

We caution readers that the expectations, assumptions and beliefs that form the basis for forward-looking statements regarding customer growth, customer usage, qualifications for ITCs, PTCs and SRECs, future rate case proceedings, financial condition, results of operations, cash flows, capital requirements, future capital expenditures, market risk, effective tax rate and other matters for fiscal 2017 and thereafter include many factors that are beyond our ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes in the debt and equity capital markets. The factors that could cause actual results to differ materially from our expectations, assumptions and beliefs include, but are not limited to, those discussed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 , as well as the following:

weather and economic conditions;
demographic changes in NJR's service territory and their effect on NJR's customer growth;
volatility of natural gas and other commodity prices and their impact on NJNG customer usage, NJNG's BGSS incentive programs, NJRES operations and on our risk management efforts;
changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to our Company;
the impact of volatility in the credit markets on our access to capital;
the ability to comply with debt covenants;
the impact to the asset values and resulting higher costs and funding obligations of our pension and postemployment benefit plans as a result of potential downturns in the financial markets, lower discount rates, revised actuarial assumptions or impacts associated with the Patient Protection and Affordable Care Act;
accounting effects and other risks associated with hedging activities and use of derivatives contracts;
commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties, and liquidity in the wholesale energy trading market;
the ability to obtain governmental and regulatory approvals, such as the PennEast pipeline project, land-use rights, electric grid connection (in the case of clean energy projects) and/or financing for the construction, development and operation of our unregulated energy investments and NJNG's infrastructure projects in a timely manner;
risks associated with the management of our joint ventures and partnerships, and investment in a master limited partnership;
risks associated with our investments in clean energy projects, including the availability of regulatory and tax incentives, the availability of viable projects, our eligibility for ITCs and PTCs, the future market for SRECs and electricity prices, and operational risks related to projects in service;
timing of qualifying for ITCs and PTCs due to delays or failures to complete planned solar and wind energy projects and the resulting effect on our effective tax rate and earnings;
the level and rate at which NJNG's costs and expenses are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process, including through future base rate case filings;
access to adequate supplies of natural gas and dependence on third-party storage and transportation facilities for natural gas supply;
operating risks incidental to handling, storing, transporting and providing customers with natural gas;
risks related to our employee workforce;
the regulatory and pricing policies of federal and state regulatory agencies;
the costs of compliance with present and future environmental laws, including potential climate change-related legislation;
the impact of a disallowance of recovery of environmental-related expenditures and other regulatory changes;
environmental-related and other litigation and other uncertainties;
risks related to cyber-attack or failure of information technology systems; and
the impact of natural disasters, terrorist activities and other extreme events on our operations and customers.

While we periodically reassess material trends and uncertainties affecting our results of operations and financial condition in connection with the preparation of management's discussion and analysis of results of operations and financial condition contained in our Quarterly and Annual Reports on Form 10-Q and Form 10-K, respectively, we do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.

3

New Jersey Resources Corporation
Part I


ITEM 1. FINANCIAL STATEMENTS                                                                                                                                          

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three Months Ended
 
December 31,
(Thousands, except per share data)
2016

2015
OPERATING REVENUES
 
 
 
Utility
$
185,556

 
$
151,606

Nonutility
355,472

 
292,652

Total operating revenues
541,028

 
444,258

OPERATING EXPENSES
 
 
 
Gas purchases:
 
 
 
Utility
61,320

 
46,665

Nonutility
337,932

 
254,088

Related parties
2,111

 
2,074

Operation and maintenance
52,228

 
46,233

Regulatory rider expenses
12,601

 
9,628

Depreciation and amortization
19,260

 
16,482

Energy and other taxes
14,101

 
9,637

Total operating expenses
499,553

 
384,807

OPERATING INCOME
41,475

 
59,451

Other income, net
3,776

 
1,924

Interest expense, net of capitalized interest
10,615

 
6,777

INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
34,636

 
54,598

Income tax provision
2,018

 
6,722

Equity in earnings of affiliates
2,311

 
2,406

NET INCOME
$
34,929

 
$
50,282

 
 
 
 
EARNINGS PER COMMON SHARE
 
 
 
Basic
$0.41
 
$0.59
Diluted
$0.40
 
$0.58
DIVIDENDS DECLARED PER COMMON SHARE
$0.255
 
$0.24
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
Basic
86,084

 
85,675

Diluted
86,855

 
86,676


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended
 
December 31,
(Thousands)
2016
 
2015
Net income
$
34,929

 
$
50,282

Other comprehensive income, net of tax
 
 
 
Unrealized gain on available for sale securities, net of tax of $(3,786) and $(2,614), respectively
5,515

 
3,701

Net unrealized (loss) on derivatives, net of tax of $0 and $19, respectively

(1)  
(33
)
Adjustment to postemployment benefit obligation, net of tax of $(217) and $(174), respectively
317

 
256

Other comprehensive income
5,832

 
3,924

Comprehensive income
$
40,761

 
$
54,206

(1)
Effective January 1, 2016, the Company elected not to designate its foreign currency derivatives as accounting hedges and, as a result, changes in fair value of the effective portion of the hedges are no longer recorded in OCI. See Note 4 Derivative Instruments for more information on these transactions.

See Notes to Unaudited Condensed Consolidated Financial Statements


4

New Jersey Resources Corporation
Part I
 
ITEM 1. FINANCIAL STATEMENTS (Continued)                                                                                                                      

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
 
December 31,
(Thousands)
2016
 
2015
CASH FLOWS (USED IN) OPERATING ACTIVITIES
 
 
 
Net income
$
34,929

 
$
50,282

Adjustments to reconcile net income to cash flows from operating activities
 
 
 
Unrealized loss (gain) on derivative instruments
28,302

 
(1,135
)
Depreciation and amortization
19,260

 
16,482

Allowance for equity used during construction
(584
)
 
(1,215
)
Allowance for bad debt expense
230

 
334

Deferred income taxes
16,262

 
46,166

Manufactured gas plant remediation costs
(1,619
)
 
(1,520
)
Distributions received from equity investees, net of equity in earnings
1,101

 
1,139

Cost of removal - asset retirement obligations
(198
)
 
(33
)
Contributions to postemployment benefit plans
(1,712
)
 
(30,144
)
Tax benefit from stock-based compensation
1,188

 
1,635

Changes in:
 
 
 
Components of working capital
(150,480
)
 
(102,068
)
Other noncurrent assets
7,242

 
(20,270
)
Other noncurrent liabilities
15

 
4,173

Cash flows (used in) operating activities
(46,064
)
 
(36,174
)
CASH FLOWS (USED IN) INVESTING ACTIVITIES
 
 
 
Expenditures for:
 
 
 
Utility plant
(31,396
)
 
(42,465
)
Solar and wind equipment
(46,785
)
 
(45,006
)
Real estate properties and other
(171
)
 
(797
)
Cost of removal
(7,459
)
 
(6,575
)
Investments in equity investees
(4,636
)
 
(2,846
)
Distribution from equity investees in excess of equity in earnings
688

 
555

Withdrawal from restricted cash construction fund

 
1,001

Proceeds from sale of investment
3,218

 

Proceeds from sale of property

 
748

Cash flows (used in) investing activities
(86,541
)
 
(95,385
)
CASH FLOWS FROM FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from short-term debt
162,900

 
144,650

Payments of long-term debt
(2,716
)
 
(2,676
)
Proceeds from sale-leaseback transaction
9,587

 
7,107

Payments of common stock dividends
(21,931
)
 
(20,524
)
Proceeds from issuance of common stock
4,616

 
3,807

Purchases of treasury stock
(6,355
)
 
(1,008
)
Tax withholding payments related to net settled stock compensation
(4,167
)
 
(3,042
)
Cash flows from financing activities
141,934

 
128,314

Change in cash and cash equivalents
9,329

 
(3,245
)
Cash and cash equivalents at beginning of period
37,546

 
4,928

Cash and cash equivalents at end of period
$
46,875

 
$
1,683

CHANGES IN COMPONENTS OF WORKING CAPITAL
 
 
 
Receivables
$
(152,180
)
 
$
(27,784
)
Inventories
(13,954
)
 
(26,772
)
Recovery of gas costs
(2,472
)
 
(11,882
)
Gas purchases payable
47,767

 
(7,071
)
Gas purchases payable - related parties
5

 
(406
)
Prepaid and accrued taxes
7,954

 
(27,794
)
Accounts payable and other
(12,405
)
 
(22,489
)
Restricted broker margin accounts
(26,173
)
 
6,855

Customers' credit balances and deposits
616

 
10,056

Other current assets
362

 
5,219

Total
$
(150,480
)
 
$
(102,068
)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
 
 
 
Cash paid (received) for:
 
 
 
Interest (net of amounts capitalized)
$
8,153

 
$
5,403

Income taxes
$
(7,020
)
 
$
202

Accrued capital expenditures
$
28,442

 
$
21,721

 
See Notes to Unaudited Condensed Consolidated Financial Statements

5

New Jersey Resources Corporation
Part I
 
ITEM 1. FINANCIAL STATEMENTS (Continued)                                                                                                                      

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

ASSETS
(Thousands)
December 31,
2016
September 30,
2016
PROPERTY, PLANT AND EQUIPMENT
 
 
Utility plant, at cost
$
2,123,926

$
2,107,375

Construction work in progress
131,576

122,268

Solar and wind equipment, real estate properties and other, at cost
747,788

631,696

Construction work in progress
5,903

93,791

Total property, plant and equipment
3,009,193

2,955,130

Accumulated depreciation and amortization, utility plant
(470,444
)
(467,702
)
Accumulated depreciation and amortization, solar and wind equipment, real estate properties and other
(87,000
)
(79,776
)
Property, plant and equipment, net
2,451,749

2,407,652

CURRENT ASSETS
 
 
Cash and cash equivalents
46,875

37,546

Customer accounts receivable
 
 
Billed
252,755

142,658

Unbilled revenues
47,648

5,744

Allowance for doubtful accounts
(4,916
)
(4,865
)
Regulatory assets
43,140

54,286

Gas in storage, at average cost
220,097

206,251

Materials and supplies, at average cost
10,886

10,778

Prepaid and accrued taxes
26,391

34,179

Derivatives, at fair value
50,215

29,964

Restricted broker margin accounts
79,118

47,644

Asset held for sale
7,660

7,660

Other
35,194

35,419

Total current assets
815,063

607,264

NONCURRENT ASSETS
 
 
Investments in equity method investees
145,169

141,148

Regulatory assets
408,481

441,294

Derivatives, at fair value
3,660

5,227

Available for sale securities
64,447

55,789

Other
60,937

60,196

Total noncurrent assets
682,694

703,654

Total assets
$
3,949,506

$
3,718,570


See Notes to Unaudited Condensed Consolidated Financial Statements

6

New Jersey Resources Corporation
Part I
 
ITEM 1. FINANCIAL STATEMENTS (Continued)                                                                                                                      

CAPITALIZATION AND LIABILITIES
(Thousands)
December 31,
2016
September 30,
2016
CAPITALIZATION
 
 
Common stock, $2.50 par value; authorized 150,000,000 shares;
outstanding December 31, 2016 — 86,196,239; September 30, 2016 — 86,086,355
$
222,153

$
221,654

Premium on common stock
218,476

215,580

Accumulated other comprehensive (loss), net of tax
(9,323
)
(15,155
)
Treasury stock at cost and other;
shares December 31, 2016
 2,664,765; September 30, 2016  2,575,139
(84,450
)
(81,044
)
Retained earnings
838,505

825,556

Common stock equity
1,185,361

1,166,591

Long-term debt
1,026,682

1,055,038

Total capitalization
2,212,043

2,221,629

CURRENT LIABILITIES
 
 
Current maturities of long-term debt
96,832

61,452

Short-term debt
284,600

121,700

Gas purchases payable
187,219

139,452

Gas purchases payable to related parties
1,155

1,150

Accounts payable and other
72,776

107,184

Dividends payable
21,980

21,975

Accrued taxes
1,246

1,080

Regulatory liabilities
12,120

9,469

New Jersey clean energy program
13,180

14,232

Derivatives, at fair value
93,080

61,080

Restricted broker margin accounts
5,294


Customers' credit balances and deposits
33,450

32,834

Total current liabilities
822,932

571,608

NONCURRENT LIABILITIES
 
 
Deferred income taxes
490,017

473,847

Deferred investment tax credits
4,538

4,619

Deferred gain
28,317

28,519

Derivatives, at fair value
4,527

25,252

Manufactured gas plant remediation
168,506

172,000

Postemployment employee benefit liability
140,978

141,604

Regulatory liabilities
38,726

41,411

Asset retirement obligation
29,664

28,379

Other
9,258

9,702

Total noncurrent liabilities
914,531

925,333

Commitments and contingent liabilities (Note 12)



Total capitalization and liabilities
$
3,949,506

$
3,718,570


See Notes to Unaudited Condensed Consolidated Financial Statements


7

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                              

1.
NATURE OF THE BUSINESS

New Jersey Resources Corporation provides regulated gas distribution services and operates certain unregulated businesses primarily through the following subsidiaries:

New Jersey Natural Gas Company provides natural gas utility service to approximately 525,500 retail customers in central and northern New Jersey and is subject to rate regulation by the BPU. NJNG comprises the Natural Gas Distribution segment;

NJR Clean Energy Ventures Corporation, the Company's clean energy subsidiary, comprises the Clean Energy Ventures segment and consists of the Company's capital investments in commercial and residential solar projects located throughout New Jersey and onshore wind investments in Montana, Iowa, Kansas, Wyoming and Pennsylvania;

NJR Energy Services Company comprises the Energy Services segment that maintains and transacts around a portfolio of natural gas storage and transportation capacity contracts and provides physical wholesale energy and energy management services in the U.S. and Canada;

NJR Midstream Holdings Corporation invests in energy-related ventures through its subsidiaries, NJR Steckman Ridge Storage Company, which holds the Company's 50 percent combined interest in Steckman Ridge, located in Pennsylvania, and NJR Pipeline Company, which holds the Company's 20 percent ownership interest in PennEast and NJNR Pipeline Company, which holds the Company's 1.84 million Common Units of Dominion Midstream Partners, L.P. The investments in Steckman Ridge, PennEast and DM comprise the Midstream segment; and

NJR Retail Holdings Corporation has two principal subsidiaries, NJR Home Services Company, which provides heating, central air conditioning, standby generators, solar and other indoor and outdoor comfort products to residential homes throughout New Jersey, and Commercial Realty & Resources Corporation, which owns commercial real estate. NJR Retail Holdings Corporation is included in Home Services and Other operations. NJR Energy Corporation, a subsidiary of CR&R, was dissolved on November 28, 2016, and all assets were moved to CR&R during the first quarter of fiscal 2017.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by NJR in accordance with the rules and regulations of the SEC and GAAP. The September 30, 2016 Balance Sheet data is derived from the audited financial statements of the Company. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the notes thereto included in NJR's 2016 Annual Report on Form 10-K.

The Unaudited Condensed Consolidated Financial Statements include the accounts of NJR and its subsidiaries. In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments necessary for a fair presentation of the results of the interim periods presented. These adjustments are of a normal and recurring nature. Because of the seasonal nature of NJR's utility and wholesale energy services operations, in addition to other factors, the financial results for the interim periods presented are not indicative of the results that are to be expected for the fiscal year ending September 30, 2017 . Intercompany transactions and accounts have been eliminated.

Gas in Storage

The following table summarizes gas in storage, at average cost by company as of:
 
December 31,
2016
September 30,
2016
($ in thousands)
Gas in Storage
 
Bcf
Gas in Storage
 
Bcf
NJRES
 
$
163,393

62.9

 
$
130,493

62.0

NJNG
 
56,704

15.9

 
75,758

21.3

Total
 
$
220,097

78.8

 
$
206,251

83.3



8

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


Sales Tax Accounting

Sales tax that is collected from customers is presented in both operating revenues and operating expenses on the Unaudited Condensed Consolidated Statements of Operations was $11.2 million and $7.2 million during the three months ended December 31, 2016 and 2015 , respectively. Effective January 1, 2017, the New Jersey sales tax rate decreased from 7 percent to 6.875 percent .

Asset Held for Sale

NJR’s subsidiary, CR&R, has committed to sell an approximately 56,400 square foot office building on five acres of land located in Monmouth County with a net book value of $7.7 million . Since it is probable that the sale will be completed within the next 12 months, as of September 30, 2016, the Company has classified the property as held for sale in the Unaudited Condensed Consolidated Balance Sheets.

Available for Sale Securities

Included in available for sale securities on the Unaudited Condensed Consolidated Balance Sheets are investments in two publicly traded energy companies. The Company's available for sale securities had a fair value of $64.4 million and $55.8 million as of December 31, 2016 and September 30, 2016 , respectively. Total unrealized gains associated with these investments are included as a part of accumulated other comprehensive income (loss), a component of common stock equity and were $16.5 million , $9.7 million after tax, and $7.2 million , $4.2 million after tax, as of December 31, 2016 and September 30, 2016 , respectively.

During the three months ended December 31, 2016 , NJR received proceeds of approximately $3.2 million from the sale of available-for-sale securities and realized a pre-tax gain of $2.6 million , which is included in other income in the Unaudited Condensed Consolidated Statements of Operations. Reclassifications of realized gains out of other comprehensive income into income are determined based on average cost.

Customer Accounts Receivable

Customer accounts receivable include outstanding billings from the following subsidiaries as of:
(Thousands)
December 31,
2016
 
September 30,
2016
NJRES
$
173,708

69
%
 
$
102,884

72
%
NJNG (1)
71,404

28

 
30,951

22

NJRCEV
2,121

1

 
1,807

1

NJRHS and other
5,522

2

 
7,016

5

Total
$
252,755

100
%
 
$
142,658

100
%
(1)
Does not include unbilled revenues of $47.6 million and $5.7 million as of December 31, 2016 and September 30, 2016 , respectively.

Loans Receivable

NJNG provides loans, with terms ranging from two to 10 years, to customers that elect to purchase and install certain energy efficient equipment in accordance with its BPU-approved SAVEGREEN program. The loans are recognized at net present value on the Unaudited Condensed Consolidated Balance Sheets. The Company has recorded $8.1 million and $7.8 million in other current assets and $40.3 million and $39.5 million in other noncurrent assets as of December 31, 2016 and September 30, 2016 , respectively, on the Unaudited Condensed Consolidated Balance Sheets, related to the loans.

NJNG's policy is to establish an allowance for doubtful accounts when loan balances are in arrears for more than 60 days . As of December 31, 2016 and September 30, 2016 , there was no allowance for doubtful accounts established for the SAVEGREEN loans.


9

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


Recently Adopted Updates to the Accounting Standards Codification

Stock Compensation

In March 2016, the FASB issued ASU 2016-09, an amendment to ASC 718, Compensation - Stock Compensation , which simplifies several aspects of the accounting for employee share-based compensation, including the accounting for income taxes and forfeitures. The new guidance also increased the threshold for tax withholding to the maximum statutory rate, as applicable, to maintain equity classification and amended the classification of certain tax transactions within the statement of cash flows.

The Company elected to early adopt the amended guidance during the third quarter of fiscal 2016 and applied the new provisions as of the beginning of the year of adoption on a retrospective or prospective basis depending on each amendment’s transition requirements. As such, effective October 1, 2015, NJR is recognizing forfeitures as they occur and is recognizing excess tax benefits (deficiencies) as a component of income tax (benefit) provision in its Unaudited Condensed Consolidated Statements of Operations on a prospective basis. All related information for prior periods has been adjusted throughout this report on a retrospective basis to reflect the effects of the adoption. See Note 11. Income Taxes for more information on these transactions.

In addition, the following amounts on the Unaudited Condensed Consolidated Financial Statements have been adjusted retrospectively, for the three months ended December 31, 2015:
(Thousands)
As Previously Reported
 
Effect of Change
 
As Adjusted
Statements of Operations
 
 
 
 
 
Income tax provision
$
8,357

 
$
(1,635
)
 
$
6,722

Net income
$
48,647

 
$
1,635

 
$
50,282

Earnings per common share
 
 
 
 
 
Basic
$
0.57

 
$
0.02

 
$
0.59

Diluted
$
0.56

 
$
0.02

 
$
0.58

Cash flows (used in) operating activities
 
 
 
 
 
Net income
$
48,647

 
$
1,635

 
$
50,282

Tax benefit from stock based compensation
$

 
$
1,635

 
$
1,635

Other noncurrent liabilities
$
4,401

 
$
(228
)
 
$
4,173

Net cash flows (used in) operating activities
$
(39,216
)
 
$
3,042

 
$
(36,174
)
Cash flows from financing activities
 
 
 
 
 
Tax withholding payments related to net settled stock compensation
$

 
$
(3,042
)
 
$
(3,042
)
Cash flows from financing activities
$
131,356

 
$
(3,042
)
 
$
128,314


There was no impact to the Unaudited Condensed Consolidated Balance Sheets upon adoption of the new guidance.

In June 2014, the FASB issued ASU No. 2014-12, an amendment to ASC 718, Compensation - Stock Compensation , which clarifies the accounting for performance awards when the terms of the award provide that a performance target could be achieved after the requisite service period. The Company adopted the new guidance in the first quarter of fiscal 2017 and applied the new provisions on a prospective basis which did not impact its financial position, results of operations or cash flows upon adoption.

Consolidation

In February 2015, the FASB issued ASU No. 2015-02, an amendment to ASC 810, Consolidation , which changes the consolidation analysis required under GAAP and reevaluates whether limited partnerships and similar entities must be consolidated. The Company adopted the new guidance in the first quarter of fiscal 2017 and applied the new provisions on a full retrospective basis, which did not impact its financial position, results of operations or cash flows upon adoption.

Interest

In April 2015, the FASB issued ASU No. 2015-03, an amendment to ASC 835, Interest - Imputation of Interest, which simplifies the presentation of debt issuance costs by requiring them to be presented on the balance sheet as a deduction from the carrying amount of the liability. The amendments do not affect the recognition and measurement guidance for debt issuance costs. In August 2015, the FASB issued ASU No. 2015-15, which clarified that the amendments contained within ASU No. 2015-03 do not require companies to modify their accounting for costs incurred in obtaining revolving credit facilities. The Company adopted

10

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


the new guidance in the first quarter of fiscal 2017 and applied the new provisions on a full retrospective basis. Accordingly, as of December 31, 2016 , the Company reclassified $7.4 million and $949,000 from other non-current assets to long-term debt and current maturities of long-term debt, respectively.

In addition, the following amounts on the Unaudited Condensed Consolidated Balance sheets have been adjusted, retrospectively, as of September 30, 2016.
(Thousands)
As Previously Reported
 
Effect of Change
 
As Adjusted
Assets
 
 
 
 
 
Other noncurrent assets
$
68,708

 
$
(8,512
)
 
$
60,196

Total noncurrent assets
$
712,166

 
$
(8,512
)
 
$
703,654

Total assets
$
3,727,082

 
$
(8,512
)
 
$
3,718,570

Capitalization and Liabilities
 
 
 
 
 
Long-term debt
$
1,063,550

 
$
(8,512
)
 
$
1,055,038

Total capitalization
$
2,230,141

 
$
(8,512
)
 
$
2,221,629

Total capitalization and liabilities
$
3,727,082

 
$
(8,512
)
 
$
3,718,570


Intangibles

In April 2015, the FASB issued ASU No. 2015-05, an amendment to ASC 350, Intangibles - Goodwill and Other - Internal-Use Software, which clarifies the accounting for fees in a cloud computing arrangement. The amendments provide guidance on how an entity should evaluate the accounting for fees paid in a cloud computing arrangement to determine whether an arrangement includes the sale or license of software. The Company adopted the new guidance in the first quarter of fiscal 2017 and applied the new provisions on a prospective basis, which did not impact its financial position, results of operations or cash flows upon adoption.

Other Recent Updates to the Accounting Standards Codification

Revenue

In May 2014, the FASB issued ASU No. 2014-09, and added Topic 606, Revenue from Contracts with Customers , to the ASC. ASC 606 supersedes ASC 605, Revenue Recognition , as well as most industry-specific guidance, and prescribes a single, comprehensive revenue recognition model designed to improve financial reporting comparability across entities, industries, jurisdictions and capital markets. In August 2015, the FASB issued ASU No. 2015-14, which defers the implementation of the new guidance for one year. The new guidance will become effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year. The Company continues to evaluate the provisions of ASC 606 and monitor industry specific developments and interpretations, however, based on the review of customer contracts to date, it is not anticipating a material impact to its financial position, results of operations or cash flows upon adoption. Accordingly, the Company expects to transition to the new guidance using the modified retrospective approach.

Inventory

In July 2015, the FASB issued ASU No. 2015-11, an amendment to ASC 330, Inventory , which requires entities to measure most inventory “at the lower of cost or net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The guidance is effective for the Company’s fiscal year ending September 30, 2018, and interim periods within that year. Upon adoption, the amendments will be applied on a prospective basis. The Company is currently evaluating the amendment to understand the impact on its financial position, results of operations and cash flows upon adoption.

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, an amendment to ASC 825, Financial Instruments , to address certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The standard affects investments in equity securities that do not result in consolidation and are not accounted for under the equity method and the presentation of certain fair value changes for financial liabilities measured at fair value. It also simplifies the impairment assessment of equity investments without a readily determinable fair value by requiring a qualitative assessment. The guidance is effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year. Upon adoption, the amendments will be

11

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


applied on a modified-retrospective basis. The Company has evaluated the amendments and noted that, upon adoption, subsequent changes to the fair value of the Company’s available for sale securities will be recorded in the statement of operations as opposed to other comprehensive income. The Company does not expect any other material impacts to its financial position, results of operations or cash flows upon adoption.

In June 2016, the FASB issued ASU 2016-13, an amendment to ASC 326, Financial Instruments - Credit Losses, which changes the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model requires recognition based upon an estimation of expected credit losses rather than recognition of losses when it is probable that they have been incurred. The guidance is effective for the Company’s fiscal year ending September 30, 2021, and interim periods within that year, with early adoption permitted. The Company is currently evaluating the amendments to understand the impact on its financial position, results of operations and cash flows upon adoption and will apply the new guidance to its trade and loan receivables on a modified retrospective basis.

Leases

In February 2016, the FASB issued ASU 2016-02, an amendment to ASC 842, Leases , which provides for a comprehensive overhaul of the lease accounting model and changes the definition of a lease within the accounting literature. Under the new standard, all leases with a term greater than one year will be recorded on the balance sheet. Amortization of the related asset will be accounted for using one of two approaches prescribed by the guidance. Additional disclosures will be required to allow the user to assess the amount, timing and uncertainty of cash flows arising from leasing activities. A modified retrospective transition approach is required for leases existing at the time of adoption. The guidance is effective for the Company’s fiscal year ending September 30, 2020, and interim periods within that year, with early adoption permitted. The Company is currently evaluating the amendments to understand the impact on its financial position, results of operations and cash flows upon adoption.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, an amendment to ASC 230, Statement of Cash Flows, which addresses eight specific cash flow issues for which there has been diversity in practice. The guidance is effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year with early adoption permitted. Upon adoption, the amendments will be applied on a retrospective basis. The Company is currently evaluating the amendments to understand the impact on its consolidated statements of cash flows upon adoption.

Restricted Cash

In November 2016, the FASB issued ASU No. 2016-18, an amendment to ASC 230, Statement of Cash Flows, which requires that any amounts that are deemed to be restricted cash or restricted cash-equivalents be included in cash and cash-equivalent balances on the cash flow statement. Transfers between cash and restricted cash accounts will no longer be recognized within the statement of cash flows. The guidance is effective for the Company’s fiscal year ending September 30, 2019, with early adoption permitted. Upon adoption, the amendments will be applied on a retrospective basis. Based on the Company's historical restricted cash balances, it does not expect any material impacts to its financial position, results of operations or cash flows upon adoption.

3.
REGULATION

NJNG is subject to cost-based regulation, therefore, it is permitted to recover authorized operating expenses and earn a reasonable return on its utility capital investments based on the BPU's approval. The impact of the ratemaking process and decisions authorized by the BPU allows NJNG to capitalize or defer certain costs that are expected to be recovered from its customers as regulatory assets and to recognize certain obligations representing amounts that are probable future expenditures as regulatory liabilities in accordance with accounting guidance applicable to regulated operations.

NJNG's recovery of costs is facilitated through its base rates, BGSS and other regulatory tariff riders. NJNG is required to make an annual filing to the BPU by June 1 of each year for review of its BGSS, CIP and various other programs and related rates. Annual rate changes are requested to be effective at the beginning of the following fiscal year. In addition, NJNG is also permitted to request approval of certain rate or program changes on an interim basis. All rate and program changes are subject to proper notification and BPU review and approval.


12

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


In September 2016 , the BPU approved NJNG's base rate case, effective October 1, 2016, which included an increase in base rates in the amount of $45 million . The base rate increase includes a return on common equity of 9.75 percent , a common equity ratio of 52.5 percent and a depreciation rate of 2.4 percent . The approval also included the five -year extension of SAFE II, rate recovery of NJ RISE capital investment costs through June 30, 2016, recovery of NJNG’s SAFE I, NGV and LNG capital investments and recovery of other costs previously deferred in regulatory assets.

Regulatory assets and liabilities included on the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:
(Thousands)
December 31,
2016
September 30,
2016
Regulatory assets-current
 
 
Conservation Incentive Program
$
28,662

$
36,957

New Jersey Clean Energy Program
13,180

14,232

Underrecovered gas costs
1,298


Derivatives at fair value, net

3,097

Total current regulatory assets
$
43,140

$
54,286

Regulatory assets-noncurrent
 
 
Environmental remediation costs
 
 
Expended, net of recoveries
$
20,025

$
19,595

Liability for future expenditures
168,506

172,000

Deferred income taxes
20,599

20,273

Derivatives at fair value, net
2,702

23,384

SAVEGREEN
22,060

25,208

Postemployment and other benefit costs
154,221

157,027

Deferred Superstorm Sandy costs
14,659

15,201

Other noncurrent regulatory assets
5,709

8,606

Total noncurrent regulatory assets
$
408,481

$
441,294

Regulatory liability-current
 
 
Overrecovered gas costs
$

$
9,469

Derivatives at fair value, net
12,120


Total current regulatory liabilities
$
12,120

$
9,469

Regulatory liabilities-noncurrent
 
 
Cost of removal obligation
$
25,318

$
30,549

New Jersey Clean Energy Program
12,659

10,657

Other noncurrent regulatory liabilities
749

205

Total noncurrent regulatory liabilities
$
38,726

$
41,411


4.
DERIVATIVE INSTRUMENTS

The Company is subject to commodity price risk due to fluctuations in the market price of natural gas, SRECs and electricity. To manage this risk, the Company enters into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial options and swaps to economically hedge the commodity price risk associated with its existing and anticipated commitments to purchase and sell natural gas, SRECs and electricity. In addition, the Company may utilize foreign currency derivatives to hedge Canadian dollar denominated gas purchases and/or sales. Therefore, the Company's primary underlying risks include commodity prices, interest rates and foreign currency. These contracts are accounted for as derivatives. Accordingly, all of the financial and certain of the Company's physical derivative instruments are recorded at fair value on the Unaudited Condensed Consolidated Balance Sheets. For a more detailed discussion of the Company's fair value measurement policies and level disclosures associated with NJR's derivative instruments, see Note 5. Fair Value .


13

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


NJRES

Since NJRES chooses not to designate its financial commodity and physical forward commodity derivatives as accounting hedges or to elect NPNS, the changes in the fair value of these derivatives are recorded as a component of gas purchases or operating revenues, as appropriate for NJRES, on the Unaudited Condensed Consolidated Statements of Operations as unrealized gains or (losses). For NJRES at settlement, realized gains and (losses) on all financial derivative instruments are recognized as a component of gas purchases and realized gains and (losses) on all physical derivatives follow the presentation of the related unrealized gains and (losses) as a component of either gas purchases or operating revenues.

NJRES also enters into natural gas transactions in Canada and, consequently, is exposed to fluctuations in the value of Canadian currency relative to the U.S. dollar. NJRES may utilize foreign currency derivatives to lock in the exchange rate associated with natural gas transactions denominated in Canadian currency. The derivatives may include currency forwards, futures, or swaps and are accounted for as derivatives. These derivatives are typically used to hedge demand fee payments on pipeline capacity, storage and gas purchase agreements. Accordingly, changes in the fair value of foreign exchange contracts are recognized in gas purchases on the Unaudited Condensed Consolidated Statements of Operations. For transactions occurring on or before December 31, 2015, NJRES' foreign exchange contracts were designated as cash flow hedges, and the effective portion of the hedges were recorded in OCI.

As a result of NJRES entering into transactions to borrow natural gas, commonly referred to as “park and loans,” an embedded derivative is recognized relating to differences between the fair value of the amount borrowed and the fair value of the amount that will ultimately be repaid, based on changes in the forward price for natural gas prices at the borrowed location over the contract term. This embedded derivative is accounted for as a forward sale in the month in which the repayment of the borrowed gas is expected to occur, and is considered a derivative transaction that is recorded at fair value on the Unaudited Condensed Consolidated Balance Sheets, with changes in value recognized in current period earnings.

Expected production of SRECs is hedged through the use of forward and futures contracts. All contracts require the Company to physically deliver SRECs through the transfer of certificates as per contractual settlement schedules. The Company applies NPNS accounting to SREC forward and futures contracts entered into on or before December 31, 2015. Effective for contracts executed January 1, 2016, and on a prospective basis, NJRES no longer elects NPNS accounting treatment on all SREC forward sales contracts and recognizes changes in the fair value of these derivatives as a component of operating revenues. Upon settlement of the contract, the related revenue is recognized when the SREC is transferred to the counterparty.

NPNS is a contract-by-contract election and, where it makes sense to do so, we can and may elect certain contracts to be normal.

NJNG

Changes in fair value of NJNG's financial commodity derivatives are recorded as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets. The Company elects NPNS accounting treatment on all physical commodity contracts that NJNG entered into on or before December 31, 2015, and accounts for these contracts on an accrual basis. Accordingly, physical natural gas purchases are recognized in regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets when the contract settles and the natural gas is delivered. The average cost of natural gas is charged to expense in the current period earnings based on the BGSS factor times the therm sales. Effective for contracts executed January 1, 2016, and on a prospective basis, NJNG no longer elects NPNS accounting treatment on all physical forward commodity contracts. However, since NPNS is a contract-by-contract election, where it makes sense to do so, we can and may elect certain contracts to be normal. Because NJNG recovers these amounts through future BGSS rates as increases or decreases to the cost of natural gas in NJNG’s tariff for gas service, the changes in fair value of these contracts are deferred as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets.

In an April 2014 BPU Order, NJNG received regulatory approval to enter into interest rate risk management transactions related to long-term debt securities. On June 1, 2015, NJNG entered into a treasury lock transaction to fix a benchmark treasury rate of 3.26 percent associated with a forecasted $125 million debt issuance expected in May 2018. This forecasted debt issuance coincides with the maturity of NJNG's existing $125 million , 5.6 percent notes due May 15, 2018 . The change in fair value of NJNG's treasury lock agreement is recorded as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets since NJNG believes that the market value upon settlement will be recovered in future rates. Upon settlement, any gain or loss will be amortized into earnings over the life of the future underlying debt issuance.

14

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


Fair Value of Derivatives

The following table reflects the fair value of NJR's derivative assets and liabilities recognized on the Unaudited Condensed Consolidated Balance Sheets as of:
 
 
 
Fair Value
 
 
December 31, 2016
 
September 30, 2016
(Thousands)
Balance Sheet Location
Asset
Derivatives
Liability
Derivatives
Asset
Derivatives
Liability
Derivatives
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
NJNG:
 
 
 
 
 
 
 
 
 
Physical commodity contracts
Derivatives - current
 
$
1,181

 
$
76

 
$
235

 
$
1,154

Financial commodity contracts
Derivatives - current
 
13,931

 
2,919

 
805

 
2,979

 
Derivatives - noncurrent
 

 

 
75

 
386

Interest rate contracts
Derivatives - noncurrent
 

 
2,702

 

 
23,073

NJRES:
 
 
 
 
 
 
 
 
 
Physical commodity contracts
Derivatives - current
 
5,477

 
5,978

 
5,994

 
11,660

 
Derivatives - noncurrent
 
2,192

 
1,193

 
3,987

 
1,212

Financial commodity contracts
Derivatives - current
 
29,626

 
84,016

 
22,929

 
45,255

 
Derivatives - noncurrent
 
1,468

 
632

 
1,165

 
581

Foreign currency contracts
Derivatives - current
 

 
91

 
1

 
32

Fair value of derivatives not designated as hedging instruments
 
$
53,875

 
$
97,607

 
$
35,191

 
$
86,332

Total fair value of derivatives
 
 
$
53,875

 
$
97,607

 
$
35,191

 
$
86,332



15

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


Offsetting of Derivatives

NJR transacts under master netting arrangements or equivalent agreements that allow it to offset derivative assets and liabilities with the same counterparty. However, NJR's policy is to present its derivative assets and liabilities on a gross basis at the contract level unit of account on the Unaudited Condensed Consolidated Balance Sheets. The following table summarizes the reported gross amounts, the amounts that NJR has the right to offset but elects not to, financial collateral, as well as the net amounts NJR could present on the Unaudited Condensed Consolidated Balance Sheets but elects not to.
(Thousands)
Amounts Presented in Balance Sheets (1)
Offsetting Derivative Instruments (2)
Financial Collateral Received/Pledged (3)
Net Amounts (4)
As of December 31, 2016:
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
NJRES
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
7,669

 
$
(3,278
)
 
$
(200
)
 
$
4,191

Financial commodity contracts
 
31,094

 
(31,094
)
 

 

Total NJRES
 
$
38,763

 
$
(34,372
)
 
$
(200
)
 
$
4,191

NJNG
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
1,181

 
$
(4
)
 
$

 
$
1,177

Financial commodity contracts
 
13,931

 
(2,919
)
 
(4,205
)
 
6,807

Total NJNG
 
$
15,112

 
$
(2,923
)
 
$
(4,205
)
 
$
7,984

Derivative liabilities:
 
 
 
 
 
 
 
 
NJRES
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
7,171

 
$
(3,278
)
 
$

 
$
3,893

Financial commodity contracts
 
84,648

 
(31,093
)
 
(53,555
)
 

Foreign currency contracts
 
91

 

 

 
91

Total NJRES
 
$
91,910

 
$
(34,371
)
 
$
(53,555
)
 
$
3,984

NJNG
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
76

 
$
(4
)
 
$

 
$
72

Financial commodity contracts
 
2,919

 
(2,919
)
 

 

Interest rate contracts
 
2,702

 

 

 
2,702

Total NJNG
 
$
5,697

 
$
(2,923
)
 
$

 
$
2,774

As of September 30, 2016:
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
NJRES
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
9,981

 
$
(2,837
)
 
$
(755
)
 
$
6,389

Financial commodity contracts
 
24,094

 
(17,945
)
 
(6,149
)
 

Foreign currency contracts
 
1

 
(1
)
 

 

Total NJRES
 
$
34,076

 
$
(20,783
)
 
$
(6,904
)
 
$
6,389

NJNG
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
235

 
$
(31
)
 
$

 
$
204

Financial commodity contracts
 
880

 
(880
)
 

 

Total NJNG
 
$
1,115

 
$
(911
)
 
$

 
$
204

Derivative liabilities:
 
 
 
 
 
 
 
 
NJRES
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
12,872

 
$
(2,837
)
 
$
1,200

 
$
11,235

Financial commodity contracts
 
45,836

 
(17,945
)
 
(27,891
)
 

Foreign currency contracts
 
32

 
(1
)
 

 
31

Total NJRES
 
$
58,740

 
$
(20,783
)
 
$
(26,691
)
 
$
11,266

NJNG
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
1,154

 
$
(31
)
 
$

 
$
1,123

Financial commodity contracts
 
3,365

 
(880
)
 
(2,485
)
 

Interest rate contracts
 
23,073

 

 

 
23,073

Total NJNG
 
$
27,592

 
$
(911
)
 
$
(2,485
)
 
$
24,196

(1)
Derivative assets and liabilities are presented on a gross basis in the balance sheet as the Company does not elect balance sheet offsetting under ASC 210-20.
(2)
Includes transactions with NAESB netting election, transactions held by FCMs with net margining and transactions with ISDA netting.
(3)
Financial collateral includes cash balances at FCMs as well as cash received from or pledged to other counterparties.
(4)
Net amounts represent presentation of derivative assets and liabilities if the Company were to elect balance sheet offsetting under ASC 210-20.

16

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


NJRES utilizes financial derivatives to economically hedge the gross margin associated with the purchase of physical gas to be used for storage injection and its subsequent sale at a later date. The gains or (losses) on the financial transactions that are economic hedges of the cost of the purchased gas are recognized prior to the gains or (losses) on the physical transaction, which are recognized in earnings when the natural gas is delivered. Therefore, mismatches between the timing of the recognition of realized gains or (losses) on the financial derivative instruments and gains or (losses) associated with the actual sale of the natural gas that is being economically hedged along with fair value changes in derivative instruments creates volatility in the results of NJRES, although the Company's intended economic results relating to the entire transaction are unaffected.

The following table reflects the effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations as of:
(Thousands)
Location of gain (loss) recognized in income on derivatives
Amount of gain (loss) recognized
in income on derivatives
 
 
Three Months Ended
 
 
December 31,
Derivatives not designated as hedging instruments:
2016
 
2015
NJRES:
 
 
 
 
Physical commodity contracts
Operating revenues
$
1,743

 
$
11,874

Physical commodity contracts
Gas purchases
(8,799
)
 
(21,237
)
Financial commodity contracts
Gas purchases
(30,611
)
 
41,276

Foreign currency contracts
Gas purchases
(86
)
 

Total unrealized and realized (losses) gains
$
(37,753
)
 
$
31,913


NJRES designated its foreign exchange contracts entered into prior to January 1, 2016, as cash flow hedges and, as a result, changes in fair value of the effective portion of the hedges were recorded in OCI and, upon settlement of the contracts, realized gains and (losses) were reclassified from AOCI to gas purchases on the Unaudited Condensed Consolidated Statements of Operations. The following table reflects the effect of derivative instruments that were designated as cash flow hedges on OCI during the three months ended December 31, 2015 :
(Thousands)
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
Amount of Gain or (Loss) Reclassified from OCI into Income (Effective Portion)
Foreign currency contracts
$
(64
)
$
12


NJNG’s derivative contracts are part of the Company's risk management activities that relate to its natural gas purchases, BGSS incentive programs and debt financing. These transactions are entered into pursuant to regulatory approval. At settlement, the resulting gains and/or losses are payable to or recoverable from utility customers and are deferred in regulatory assets or liabilities resulting in no impact to earnings.

The following table reflects the gains (losses) associated with NJNG's derivative instruments as of:
 
Three Months Ended
 
December 31,
(Thousands)
2016
 
2015
NJNG:
 
 
 
Physical commodity contracts
$
1,050

 
$

Financial commodity contracts
11,178

 
(5,635
)
Interest rate contracts
20,371

 
2,366

Total unrealized and realized gains (losses)
$
32,599

 
$
(3,269
)

17

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


NJNG and NJRES had the following outstanding long (short) derivatives as of:
 
 
 
Volume (Bcf)
 
 
 
December 31,
2016
 
September 30,
2016
NJNG
Futures
 
24.3

 
23.6

 
Physical
 
4.4

 
9.2

NJRES
Futures
 
(76.4
)
 
(79.1
)
 
Options
 
0.5

 
1.2

 
Physical
 
70.4

 
94.6


Not included in the previous table are NJRES' gross notional amount of foreign currency transactions of approximately $3.7 million , NJNG’s treasury lock agreement as previously discussed and 179,000 SRECs at NJRES that are open as of December 31, 2016 .

Broker Margin

Generally, exchange-traded futures contracts require posted collateral, referred to as margin, usually in the form of cash. The amount of margin required is comprised of a fixed initial amount based on exchange requirements and a variable amount based on a daily mark-to-market. The Company maintains separate broker margin accounts for NJNG and NJRES. The balances by company, are as follows:
(Thousands)
Balance Sheet Location
December 31,
2016
September 30,
2016
NJNG
Broker margin - Current assets
$

$
4,822

 
Broker margin - Current (liabilities)
$
(5,294
)
$

NJRES
Broker margin - Current assets
$
79,118

$
42,822


We are assessing the impact of rulebook changes that became effective in January 2017 at the CME and other exchanges whereby contracts will now be referred to as settled-to-market, rather than collateralized-to-market contracts and may have different balance sheet presentation for the associated variation margin. Presently, variation margin is reported on the Unaudited Condensed Consolidated Balance Sheets as restricted broker margin accounts. The CME rulebook changes may require us to consider variation margin as a single unit of account, as a settlement payment on the derivative, to be reported on the Unaudited Condensed Consolidated Balance Sheets as derivatives, at fair value.

Wholesale Credit Risk

NJNG, NJRES and NJRCEV are exposed to credit risk as a result of their sales/wholesale marketing activities. As a result of the inherent volatility in the prices of natural gas commodities, derivatives, SRECs, electricity and RECs, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty fails to perform the obligations under its contract (e.g., failed to deliver or pay for natural gas, SRECs, electricity or RECs), then the Company could sustain a loss.

NJR monitors and manages the credit risk of its wholesale operations through credit policies and procedures that management believes reduce overall credit risk. These policies include a review and evaluation of current and prospective counterparties' financial statements and/or credit ratings, daily monitoring of counterparties' credit limits and exposure, daily communication with traders regarding credit status and the use of credit mitigation measures, such as collateral requirements and netting agreements. Examples of collateral include letters of credit and cash received for either prepayment or margin deposit. Collateral may be requested due to NJR's election not to extend credit or because exposure exceeds defined thresholds. Most of NJR's wholesale marketing contracts contain standard netting provisions. These contracts include those governed by ISDA and the NAESB. The netting provisions refer to payment netting, whereby receivables and payables with the same counterparty are offset and the resulting net amount is paid to the party to which it is due.


18

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


Internally-rated exposure applies to counterparties that are not rated by S&P or Moody's. In these cases, the counterparty's or guarantor's financial statements are reviewed, and similar methodologies and ratios used by S&P and/or Moody's are applied to arrive at a substitute rating. Gross credit exposure is defined as the unrealized fair value of physical and financial derivative commodity contracts, plus any outstanding wholesale receivable for the value of natural gas delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received.

The following is a summary of gross credit exposures grouped by investment and noninvestment grade counterparties, as of December 31, 2016 . The amounts presented below have not been reduced by any collateral received or netting and exclude accounts receivable for NJNG retail natural gas sales and services and NJRCEV residential solar installations.
(Thousands)
Gross Credit Exposure
Investment grade
 
$
200,025

 
Noninvestment grade
 
40,457

 
Internally rated investment grade
 
14,769

 
Internally rated noninvestment grade
 
23,082

 
Total
 
$
278,333

 

Conversely, certain of NJNG's and NJRES' derivative instruments are linked to agreements containing provisions that would require cash collateral payments from the Company if certain events occur. These provisions vary based upon the terms in individual counterparty agreements and can result in cash payments if NJNG's credit rating were to fall below its current level. NJNG's credit rating, with respect to S&P, reflects the overall corporate credit profile of NJR. Specifically, most, but not all, of these additional payments will be triggered if NJNG's debt is downgraded by the major credit agencies, regardless of investment grade status. In addition, some of these agreements include threshold amounts that would result in additional collateral payments if the values of derivative liabilities were to exceed the maximum values provided for in relevant counterparty agreements. Other provisions include payment features that are not specifically linked to ratings, but are based on certain financial metrics.

Collateral amounts associated with any of these conditions are determined based on a sliding scale and are contingent upon the degree to which the Company's credit rating and/or financial metrics deteriorate, and the extent to which liability amounts exceed applicable threshold limits. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on December 31, 2016 and September 30, 2016 , was $2.7 million and $23.1 million , respectively, for which the Company had not posted collateral. If all thresholds related to the credit-risk-related contingent features underlying these agreements had been invoked on December 31, 2016 and September 30, 2016 , the Company would have been required to post an additional $2.7 million and $23.1 million , respectively, to its counterparties. These amounts differ from the respective net derivative liabilities reflected on the Unaudited Condensed Consolidated Balance Sheets because the agreements also include clauses, commonly known as “Rights of Offset,” that would permit the Company to offset its derivative assets against its derivative liabilities for determining additional collateral to be posted, as previously discussed.

5.
FAIR VALUE

Fair Value of Assets and Liabilities

The fair value of cash and cash equivalents, accounts receivable, current loan receivables, accounts payable, commercial paper and borrowings under revolving credit facilities are estimated to equal their carrying amounts due to the short maturity of those instruments. Non-current loan receivables are recorded based on what the Company expects to receive, which approximates fair value. The Company regularly evaluates the credit quality and collection profile of its customers to approximate fair value.

The estimated fair value of long-term debt at NJNG and NJR, including current maturities, excluding capital leases and debt issuance costs, is as follows:
(Thousands)
December 31,
2016
September 30,
2016
Carrying value (1)
$
1,082,845

$
1,082,845

Fair market value
$
1,079,431

$
1,131,077

(1)
Excludes capital leases of $49 million and $42.2 million as of December 31, 2016 and September 30, 2016 , respectively.


19

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


NJR utilizes a discounted cash flow method to determine the fair value of its debt. Inputs include observable municipal and corporate yields, as appropriate for the maturity of the specific issue and the Company's credit rating. As of December 31, 2016 , NJR discloses its debt within Level 2 of the fair value hierarchy.

Fair Value Hierarchy

NJR applies fair value measurement guidance to its financial assets and liabilities, as appropriate, which include financial derivatives and physical commodity contracts qualifying as derivatives, available for sale securities and other financial assets and liabilities. In addition, authoritative accounting literature prescribes the use of a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on the source of the data used to develop the price inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to inputs that are based on unobservable market data and include the following:

Level 1
Unadjusted quoted prices for identical assets or liabilities in active markets. NJR's Level 1 assets and liabilities include exchange traded natural gas futures and options contracts, listed equities and money market funds. Exchange traded futures and options contracts include all energy contracts traded on the NYMEX, CME and ICE that NJR refers internally to as basis swaps, fixed swaps, futures and financial options that are cleared through a FCM.

Level 2
Other significant observable inputs such as interest rates or price data, including both commodity and basis pricing that is observed either directly or indirectly from publications or pricing services. NJR's Level 2 assets and liabilities include over-the-counter physical forward commodity contracts and swap contracts, SREC forward sales or derivatives that are initially valued using observable quotes and are subsequently adjusted to include time value, credit risk or estimated transport pricing components for which no basis price is available. Level 2 financial derivatives consist of transactions with non-FCM counterparties (basis swaps, fixed swaps and/or options). NJNG's treasury lock is also considered Level 2 as valuation is based on quoted market interest and swap rates as inputs to the valuation model. Inputs are verifiable and do not require significant management judgment. For some physical commodity contracts the Company utilizes transportation tariff rates that are publicly available and that it considers to be observable inputs that are equivalent to market data received from an independent source. There are no significant judgments or adjustments applied to the transportation tariff inputs and no market perspective is required. Even if the transportation tariff input were considered to be a “model,” it would still be considered to be a Level 2 input as the data is:

widely accepted and public;

non-proprietary and sourced from an independent third party; and

observable and published.

These additional adjustments are generally not considered to be significant to the ultimate recognized values.

Level 3
Inputs derived from a significant amount of unobservable market data. These include NJR's best estimate of fair value and are derived primarily through the use of internal valuation methodologies.


20

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
 
(Thousands)
(Level 1)
(Level 2)
(Level 3)
Total
As of December 31, 2016:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$

 
 
$
8,850

 
 
$

 
$
8,850

Financial commodity contracts
 
45,025

 
 

 
 

 
45,025

Available for sale equity securities - energy industry
 
64,447

 
 

 
 

 
64,447

Other (1)
 
33,614

 
 

 
 

 
33,614

Total assets at fair value
 
$
143,086

 
 
$
8,850

 
 
$

 
$
151,936

Liabilities:
 
 
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$

 
 
$
7,247

 
 
$

 
$
7,247

Financial commodity contracts
 
87,567

 
 

 
 

 
87,567

Financial commodity contracts - foreign exchange
 

 
 
91

 
 

 
91

Interest rate contracts
 

 
 
2,702

 
 

 
2,702

Total liabilities at fair value
 
$
87,567

 
 
$
10,040

 
 
$

 
$
97,607

As of September 30, 2016:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$

 
 
$
10,216

 
 
$

 
$
10,216

Financial commodity contracts
 
24,974

 
 

 
 

 
24,974

Financial commodity contracts - foreign exchange
 

 
 
1

 
 

 
1

Available for sale equity securities - energy industry
 
55,789

 
 

 
 

 
55,789

Other (1)
 
35,516

 
 

 
 

 
35,516

Total assets at fair value
 
$
116,279

 
 
$
10,217

 
 
$

 
$
126,496

Liabilities:
 
 
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$

 
 
$
14,026

 
 
$

 
$
14,026

Financial commodity contracts
 
49,201

 
 

 
 

 
49,201

Financial commodity contracts - foreign exchange
 

 
 
32

 
 

 
32

Interest rate contracts
 

 
 
23,073

 
 

 
23,073

Total liabilities at fair value
 
$
49,201

 
 
$
37,131

 
 
$

 
$
86,332

(1)
Includes various money market funds.

6.
INVESTMENTS IN EQUITY METHOD INVESTEES

NJR's investments in equity method investees includes the following as of:
(Thousands)
December 31,
2016
September 30,
2016
Steckman Ridge (1)
$
122,431

$
123,155

PennEast
22,738

17,993

Total
$
145,169

$
141,148

(1)
Includes loans with a total outstanding principal balance of $70.4 million for both December 31, 2016 and September 30, 2016 . The loans accrue interest at a variable rate that resets quarterly and are due October 1, 2023.

NJR, through a subsidiary, NJR Pipeline Company, formed PennEast with five other investors, and plans to construct and operate a 120 -mile pipeline that will extend from northeast Pennsylvania to western New Jersey, which is estimated to be in service by the first quarter of fiscal 2019 .

21

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                                 


NJRES and NJNG have entered into storage and park and loan agreements with Steckman Ridge. In addition, NJNG has entered into a precedent capacity agreement with PennEast. See Note 14. Related Party Transactions for more information on these intercompany transactions.

7.
EARNINGS PER SHARE

The following table presents the calculation of the Company's basic and diluted earnings per share for:
 
Three Months Ended
 
December 31,
(Thousands, except per share amounts)
2016
2015
Net income, as reported
$
34,929

$
50,282

Basic earnings per share
 
 
Weighted average shares of common stock outstanding-basic
86,084

85,675

Basic earnings per common share
$0.41
$0.59
Diluted earnings per share
 
 
Weighted average shares of common stock outstanding-basic
86,084

85,675

Incremental shares (1)
771

1,001

Weighted average shares of common stock outstanding-diluted
86,855

86,676

Diluted earnings per common share (2)
$0.40
$0.58
(1)
Incremental shares consist primarily of unvested stock awards and performance shares.
(2)
There were no anti-dilutive shares excluded from the calculation of diluted earnings per share for the three months ended December 31, 2016 and 2015 .

8.
COMMON STOCK EQUITY

Changes in common stock equity during the three months ended December 31, 2016 , were as follows:
(Thousands)
Number of Shares
Common Stock
Premium on Common Stock
Accumulated Other Comprehensive (Loss) Income
Treasury Stock And Other
Retained Earnings
Total
Balance at September 30, 2016
86,086

$
221,654

$
215,580

 
$
(15,155
)
 
$
(81,044
)
$
825,556

$
1,166,591

Net income



 

 

34,929

34,929

Other comprehensive income



 
5,832

 


5,832

Common stock issued:
 
 
 
 
 
 
 
 
 
Incentive plan
200

499

3,779

 

 



4,278

Dividend reinvestment plan   (1)
139


(883
)
 

 
5,502


4,619

Cash dividend declared ($.255 per share)



 

 

(21,980
)
(21,980
)