Document


 

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
)
Treasury stock and other
(229
)


 

 
(8,908
)

(8,908
)
Balance at December 31, 2016
86,196

$
222,153

$
218,476

 
$
(9,323
)
 
$
(84,450
)
$
838,505

$
1,185,361

(1)
The DRP allows NJR, at its option, to use newly issued shares to raise capital. There were no new shares issued through the waiver discount feature during fiscal 2017.

NJR satisfies its external common equity requirements, if any, through issuances of its common stock, including the proceeds from stock issuances under its DRP. The DRP allows NJR, at its option, to use treasury shares or newly issued shares to raise capital. In December 2015, NJR registered 5 million shares of NJR common stock for issuance under the DRP. NJR raised $4.6 million and $3.8 million of equity through the DRP, by issuing approximately 139,000 and 127,000 shares of treasury stock, during the three months ended December 31, 2016 and 2015, respectively.


22

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in the components of accumulated other comprehensive income (loss), net of related tax effects:
(Thousands)
Available for Sale Securities
Cash Flow Hedges
Postemployment Benefit Obligation
Total
Balance at September 30, 2016
$
4,198

 
$

 
$
(19,353
)
 
$
(15,155
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
Other comprehensive income, before reclassifications, net of tax of $(4,840), $0, $0, $(4,840)
7,042

 

 

 
7,042

Amounts reclassified from accumulated other comprehensive income, net of tax of $1,054, $0, $(217), $837
(1,527
)
 


317

(2) 
(1,210
)
Net current-period other comprehensive income, net of tax of $(3,786), $0, $(217), $(4,003)
5,515

 

 
317

 
5,832

Balance at December 31, 2016
$
9,713

 
$

 
$
(19,036
)
 
$
(9,323
)
 
 
 
 
 
 
 
 
Balance as of September 30, 2015
$
6,385

 
$

 
$
(15,779
)
 
$
(9,394
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Other comprehensive income (loss), before reclassifications, net of tax of ($2,614), $23, $0, ($2,591)
3,701

 
(41
)
 

 
3,660

Amounts reclassified from accumulated other comprehensive income, net of tax of $0, ($4), ($174), ($178)

 
8

(1) 
256

(2) 
264

Net current-period other comprehensive income, net of tax of ($2,614), $19, $(174), $(2,769)
3,701

 
(33
)
 
256

 
3,924

Balance as of December 31, 2015
$
10,086

 
$
(33
)
 
$
(15,523
)
 
$
(5,470
)
(1)
Consists of realized losses related to foreign currency derivatives, which are reclassified to gas purchases on the Unaudited Condensed Consolidated Statements of Operations.
(2)
Included in the computation of net periodic pension cost, a component of operations and maintenance expense on the Unaudited Condensed Consolidated Statements of Operations.

9.
DEBT

NJR and NJNG finance working capital requirements and capital expenditures through various short-term debt and long-term financing arrangements, including a commercial paper program, committed unsecured credit facilities and private placement debt shelf facilities.

Credit Facilities

A summary of NJR's credit facility and NJNG's commercial paper program and credit facility are as follows:
(Thousands)
December 31,
2016
 
September 30,
2016
 
Expiration Dates
NJR
 
 
 
 
 
Bank revolving credit facilities (1)
$
425,000

 
$
425,000

 
September 2020
Notes outstanding at end of period
$
284,600

 
$
121,700

 
 
Weighted average interest rate at end of period
1.54
%
 
1.43
%
 
 
Amount available at end of period (2)
$
126,010

 
$
288,910

 
 
NJNG
 
 
 
 
 
Bank revolving credit facilities (1)
$
250,000

 
$
250,000

 
May 2019
Commercial paper outstanding at end of period
$

 
$

 
 
Weighted average interest rate at end of period
%
 
%
 
 
Amount available at end of period (4)
$
249,269

 
$
249,269

 
 
(1)
Committed credit facilities, which require commitment fees on the unused amounts.
(2)
Letters of credit outstanding total $14.4 million for both December 31, 2016 and September 30, 2016, which reduces amount available by the same amount.
(3)
Uncommitted credit facilities, which require no commitment fees.
(4)
Letters of credit outstanding total $731,000 for both December 31, 2016 and September 30, 2016, which reduces the amount available by the same amount.

23

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Amounts available under credit facilities are reduced by bank or commercial paper borrowings, as applicable, and any outstanding letters of credit. Neither NJNG nor the results of its operations are obligated or pledged to support the NJR credit or debt shelf facilities.

Long-term Debt

NJNG

In December 2016, the Company decided to call and purchase, in lieu of redemption, three FMBs. As a result, the $10.3 million, 4.5 percent Series II, the $10.5 million, 4.6 percent Series JJ and the $15 million, 4.9 percent Series KK bonds have been reclassified to current maturities of long-term debt on the Unaudited Condensed Consolidated Balance Sheets as of December 31, 2016. On January 17, 2017, the Company completed the purchase of the three FMBs.

NJNG received $9.6 million and $7.1 million in December 2016 and 2015, respectively, in connection with the sale-leaseback of its natural gas meters. NJNG records a capital lease obligation that is paid over the term of the lease and has the option to purchase the meters back at fair value upon expiration of the lease. During the first quarter of fiscal 2017, NJNG exercised early purchase options with respect to meter leases by making final principal payments of $1 million. NJNG did not exercise early purchase options during the first quarter of fiscal 2016.

10.
EMPLOYEE BENEFIT PLANS

Pension and Other Postemployment Benefit Plans

The components of the net periodic cost for pension benefits, including the Company's Pension Equalization Plan, and OPEB costs (principally health care and life insurance) for employees and covered dependents were as follows:
 
Pension
OPEB
 
Three Months Ended
Three Months Ended
 
December 31,
December 31,
(Thousands)
2016
2015
2016
2015
Service cost
$
2,087

$
1,898

$
1,095

$
1,130

Interest cost
2,443

2,836

1,386

1,564

Expected return on plan assets
(4,828
)
(5,029
)
(1,192
)
(1,211
)
Recognized actuarial loss
2,207

1,820

1,093

819

Prior service cost amortization
27

28

(91
)
(91
)
Net periodic benefit cost
$
1,936

$
1,553

$
2,291

$
2,211


The Company made a discretionary contribution of $30 million during the first quarter of fiscal 2016, to improve the funded status of the pension plans based on then current actuarial assumptions, which included the adoption of the most recent mortality table. The Company does not expect to be required to make additional contributions to fund the pension plans during fiscal 2017 or 2018 based on current actuarial assumptions; however, funding requirements are uncertain and can depend significantly on changes in actuarial assumptions, returns on plan assets and changes in the demographics of eligible employees and covered dependents. In addition, as in the past, the Company may elect to make contributions in excess of the minimum required amount to the plans. There were no discretionary contributions made during the three months ended December 31, 2016.

11.
INCOME TAXES

NJR evaluates its tax positions to determine the appropriate accounting and recognition of potential future obligations associated with unrecognized tax benefits. During the three months ended December 31, 2016 and 2015, based on its analysis, the Company determined there was no need to recognize any liabilities associated with uncertain tax positions.


24

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


To calculate the estimated annual effective tax rate, NJR considers forecasted pre-tax book income and estimated permanent book versus tax differences, as well as tax credits associated with solar and wind projects. For investment tax credits the estimate is based on solar projects that are probable of being completed and placed in service during the current fiscal year based on the best information available at each reporting period. For production tax credits the estimate is based on the forecast of electricity produced during the current fiscal year based on the best information available at each reporting period. Adjustments to the effective tax rate and management's estimates will occur as information and assumptions change.

The forecasted effective tax rates for the three months ended December 31, 2016 and 2015, were 8.7 percent and 14.7 percent, respectively. The decreased effective tax rate is due primarily to a decrease in forecasted pre-tax income along with an increase in forecasted tax credits for the fiscal year ended September 30, 2017, compared with the prior fiscal year. Forecasted tax credits, net of deferred taxes, were $34.1 million and $26.8 million for fiscal 2017 and 2016, respectively.

To the extent there are discrete tax items that are not included in the forecasted effective tax rate, the actual effective tax rate will differ from the estimated annual effective tax rate. The Company recognized $1.2 million and $1.6 million during the three months ended December 31, 2016 and 2015, respectively, in excess tax benefits associated with the vesting of share-based awards, as a component of income tax provision in its Unaudited Condensed Consolidated Statements of Operations. Since the tax effects of the awards are treated as a discrete item, NJR’s actual effective tax rate was 5.5 percent and 11.8 percent as of December 31, 2016 and 2015, respectively.

As of December 31, 2016, the Company has federal and state income tax net operating losses of approximately $78.7 million and $323.9 million, respectively, which generally have a life of 20 years. The Company has recorded federal and state deferred tax assets of approximately $27.5 million and $19 million, respectively, on the Unaudited Condensed Consolidated Balance Sheets, reflecting the tax benefits associated with these net operating losses. As of September 30, 2016, the Company had federal and state income tax net operating losses of approximately $78.7 million and $310.6 million, respectively, deferred federal and state tax assets of approximately $27.5 million and $18.2 million, respectively. As of December 31, 2016 and September 30, 2016, the Company recorded a valuation allowance in the amount of $108,000 and $262,000, respectively, because it believes that it is more likely than not that the state net operating losses related to CR&R will expire unused. The Company expects to utilize all of the net operating losses not related to CR&R.

In addition, as of December 31, 2016 and September 30, 2016, the Company had an ITC/PTC carryforward of approximately $79.1 million and $74 million, respectively, which has a life of 20 years. The Company expects to utilize this entire carryforward, which would begin to expire in fiscal 2034.

In December 2015, the Consolidated Appropriations Act extended the 30 percent ITC for solar property that is under construction on or before December 31, 2019. The credit will decline to 26 percent for property under construction during 2020 and to 22 percent for property under construction during 2021. For any property that is under construction before 2022, but not placed in service before 2024 the ITC will be reduced to 10 percent. In addition, the PTC was extended for five years through December 31, 2019, with a gradual three year phase out for any project for which construction of the facility begins after December 31, 2016.

12.
COMMITMENTS AND CONTINGENT LIABILITIES

Cash Commitments

NJNG has entered into long-term contracts, expiring at various dates through October 2033, for the supply, storage and transportation of natural gas. These contracts include annual fixed charges of approximately $60.9 million at current contract rates and volumes, which are recoverable through BGSS.

For the purpose of securing storage and pipeline capacity, NJRES enters into storage and pipeline capacity contracts, which require the payment of certain demand charges by NJRES to maintain the ability to access such natural gas storage or pipeline capacity, during a fixed time period, which generally ranges from one to 10 years. Demand charges are established by interstate storage and pipeline operators and are regulated by FERC. These demand charges represent commitments to pay storage providers or pipeline companies for the right to store and/or transport natural gas utilizing their respective assets.

25

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Commitments as of December 31, 2016, for natural gas purchases and future demand fees for the next five fiscal year periods are as follows:
(Thousands)
2017
2018
2019
2020
2021
Thereafter
NJRES:
 
 
 
 
 
 
Natural gas purchases
$
239,269

$
101,247

$
51,731

$

$

$

Storage demand fees
25,935

19,079

12,064

9,248

5,914

3,734

Pipeline demand fees
56,144

28,853

6,761

2,931

2,412

1,416

Sub-total NJRES
$
321,348

$
149,179

$
70,556

$
12,179

$
8,326

$
5,150

NJNG:
 
 
 
 
 
 
Natural gas purchases
$
75,679

$
4,511

$

$

$

$

Storage demand fees
21,865

25,766

19,864

12,802

7,023

10,535

Pipeline demand fees
39,065

90,931

91,906

90,998

88,295

732,579

Sub-total NJNG
$
136,609

$
121,208

$
111,770

$
103,800

$
95,318

$
743,114

Total (1)
$
457,957

$
270,387

$
182,326

$
115,979

$
103,644

$
748,264

(1)
Does not include amounts related to intercompany asset management agreements between NJRES and NJNG.

Legal Proceedings

Manufactured Gas Plant Remediation

NJNG is responsible for the remedial cleanup of five MGP sites, dating back to gas operations in the late 1800s and early 1900s, which contain contaminated residues from former gas manufacturing operations. NJNG is currently involved in administrative proceedings with the NJDEP, and participating in various studies and investigations by outside consultants, to determine the nature and extent of any such contaminated residues and to develop appropriate programs of remedial action, where warranted, under Administrative Consent Orders or Memoranda of Agreement with the NJDEP.

NJNG may recover its remediation expenditures, including carrying costs, over rolling seven-year periods pursuant to a RA approved by the BPU. In June 2016, the BPU approved NJNG’s December 2015 filing, which requested approval of its MGP expenditures incurred through June 30, 2015, with recovery of $9.4 million annually related to the SBC RA factor with rates effective July 9, 2016. As of December 31, 2016, $20 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in regulatory assets on the Unaudited Condensed Consolidated Balance Sheets.

NJNG periodically, and at least annually, performs an environmental review of the MGP sites, including a review of potential liability for investigation and remedial action. NJNG estimated at the time of the most recent review that total future expenditures to remediate and monitor the five MGP sites for which it is responsible, including potential liabilities for Natural Resource Damages that might be brought by the NJDEP for alleged injury to groundwater or other natural resources concerning these sites, will range from approximately $143.9 million to $231.6 million. NJNG's estimate of these liabilities is based upon known facts, existing technology and enacted laws and regulations in place when the review was completed. Where it is probable that costs will be incurred, and the information is sufficient to establish a range of possible liability, NJNG accrues the most likely amount in the range. If no point within the range is more likely than the other, it is NJNG's policy to accrue the lower end of the range. Accordingly, NJNG recorded an MGP remediation liability and a corresponding regulatory asset on the Unaudited Condensed Consolidated Balance Sheets of $172 million as of September 30, 2016, based on the most likely amount at year end and $168.5 million as of December 31, 2016, which includes adjustments for actual expenditures. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and any insurance recoveries.

NJNG will continue to seek recovery of MGP-related costs through the RA. If any future regulatory position indicates that the recovery of such costs is not probable, the related non-recoverable costs would be charged to income in the period of such determination.

General

In February 2015, a natural gas fire and explosion occurred in Stafford Township, New Jersey as a result of a natural gas leak emanating from an underground pipe. There were no fatalities, although several employees of NJNG were injured and several homes were damaged. NJNG notified its insurance carrier and believes that any costs associated with the incident, including

26

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


attorneys’ fees, property damage and other losses, will be substantially covered by insurance. The Company believes the resolution of any potential claims associated with the incident will not have a material effect on its financial condition, results of operations or cash flows. As of December 31, 2016, NJNG estimates that liabilities associated with claims will range between $600,000 and $3.2 million and has accrued the lower end of the range.

The Company is party to various other claims, legal actions and complaints arising in the ordinary course of business. In the Company's opinion, the ultimate disposition of these matters will not have a material effect on its financial condition, results of operations or cash flows.

13.
BUSINESS SEGMENT AND OTHER OPERATIONS DATA

NJR organizes its businesses based on a combination of factors, including its products and its regulatory environment. As a result, the Company manages its businesses through the following reportable segments and other operations: the Natural Gas Distribution segment consists of regulated energy and off-system, capacity and storage management operations; the Clean Energy Ventures segment consists of capital investments in clean energy projects; the Energy Services segment consists of unregulated wholesale energy operations; the Midstream segment consists of NJR's investments in natural gas transportation and storage facilities; the Home Services and Other operations consist of heating, cooling and water appliance sales, installations and services, commercial real estate development, other investments and general corporate activities.

Information related to the Company's various business segments and other operations is detailed below:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Operating revenues
 
 
Natural Gas Distribution
 
 
External customers
$
185,556

$
151,606

Clean Energy Ventures
 
 
External customers
7,567

7,794

Energy Services
 
 
External customers (1)
338,930

276,182

Intercompany
(1,749
)
2,511

Subtotal
530,304

438,093

Home Services and Other
 
 
External customers
8,975

8,676

Intercompany
1,031

897

Eliminations
718

(3,408
)
Total
$
541,028

$
444,258

Depreciation and amortization
 
 
Natural Gas Distribution
$
12,030

$
11,238

Clean Energy Ventures
7,041

5,110

Energy Services
16

23

Midstream
1

1

Subtotal
19,088

16,372

Home Services and Other
221

227

Eliminations
(49
)
(117
)
Total
$
19,260

$
16,482

Interest income (2)
 
 
Natural Gas Distribution
$
75

$
68

Energy Services

72

Midstream
462

264

Subtotal
537

404

Home Services and Other
121

37

Eliminations
(583
)
(371
)
Total
$
75

$
70

(1)
Includes sales to Canada, which accounted for 1.9 and 3.5 percent of total operating revenues during the three months ended December 31, 2016 and 2015.
(2)
Included in other income, net on the Unaudited Condensed Consolidated Statements of Operations.

27

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Interest expense, net of capitalized interest
 
 
Natural Gas Distribution
$
6,824

$
4,588

Clean Energy Ventures
3,324

2,053

Energy Services
571

208

Midstream
56

42

Subtotal
10,775

6,891

Home Services and Other
74


Eliminations
(234
)
(114
)
Total
$
10,615

$
6,777

Income tax provision (benefit)
 
 
Natural Gas Distribution
$
14,887

$
13,507

Clean Energy Ventures
(11,887
)
(11,734
)
Energy Services
(3,176
)
4,905

Midstream
1,649

1,640

Subtotal
1,473

8,318

Home Services and Other
(245
)
(1,130
)
Eliminations
790

(466
)
Total
$
2,018

$
6,722

Equity in earnings of affiliates
 
 
Midstream
$
3,331

$
3,545

Eliminations
(1,020
)
(1,139
)
Total
$
2,311

$
2,406

Net financial earnings
 
 
Natural Gas Distribution
$
30,348

$
30,926

Clean Energy Ventures
2,842

7,652

Energy Services
3,487

10,304

Midstream
2,387

2,344

Subtotal
39,064

51,226

Home Services and Other
1,542

259

Eliminations
(223
)
(218
)
Total
$
40,383

$
51,267

Capital expenditures
 
 
Natural Gas Distribution
$
38,855

$
49,040

Clean Energy Ventures
46,785

45,006

Subtotal
85,640

94,046

Home Services and Other
171

797

Total
$
85,811

$
94,843

Investments in equity investees
 
 
Midstream
$
4,636

$
2,846

Total
$
4,636

$
2,846


28

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


The Chief Executive Officer, who uses NFE as a measure of profit or loss in measuring the results of the Company's segments and operations, is the chief operating decision maker of the Company. A reconciliation of consolidated NFE to consolidated net income is as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Net financial earnings
$
40,383

$
51,267

Less:
 
 
Unrealized loss (gain) on derivative instruments and related transactions
28,302

(1,135
)
Tax effect
(9,757
)
413

Effects of economic hedging related to natural gas inventory
(17,939
)
3,813

Tax effect
6,204

(1,385
)
Net income to NFE tax adjustment
(1,356
)
(721
)
Net income
$
34,929

$
50,282


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

Unrealized gains and losses on derivatives are recognized in reported earnings in periods prior to physical gas inventory flows; and

Unrealized gains and losses of prior periods are reclassified as realized gains and losses when derivatives are settled in the same period as physical gas inventory movements occur.

NFE is a measure of the earnings based on eliminating these timing differences, to effectively match the earnings effects of the economic hedges with the physical sale of gas, SRECs and foreign currency contracts. Consequently, to reconcile between net income and NFE, current period unrealized gains and losses on the derivatives are excluded from NFE as a reconciling item. Additionally, realized derivative gains and losses are also included in current period net income. However, NFE includes only realized gains and losses related to natural gas sold out of inventory, effectively matching the full earnings effects of the derivatives with realized margins on physical gas flows. NJR also calculates a quarterly tax adjustment based on an estimated annual effective tax rate for NFE purposes.

The Company's assets for the various business segments and business operations are detailed below:
(Thousands)
December 31,
2016
September 30,
2016
Assets at end of period:
 
 
Natural Gas Distribution
$
2,554,928

$
2,517,401

Clean Energy Ventures
677,978

665,696

Energy Services
470,282

327,626

Midstream
201,128

186,259

Subtotal
3,904,316

3,696,982

Home Services and Other
132,427

109,487

Intercompany assets (1)
(87,237
)
(87,899
)
Total
$
3,949,506

$
3,718,570

(1)
Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation.


29

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


14.
RELATED PARTY TRANSACTIONS

In January 2010, NJNG entered into a 10-year agreement effective April 1, 2010, for 3 Bcf of firm storage capacity with Steckman Ridge. Under the terms of the agreement, NJNG incurs demand fees, at market rates, of approximately $9.3 million annually, a portion of which is eliminated in consolidation. These fees are recoverable through NJNG's BGSS mechanism and are included in regulatory assets.

NJRES may periodically enter into storage or park and loan agreements with its affiliated FERC-regulated natural gas storage facility, Steckman Ridge. As of December 31, 2016, NJRES has entered into storage and park and loan transactions with Steckman Ridge for varying terms, all of which expire by October 2020.

Demand fees, net of eliminations, associated with Steckman Ridge were as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
NJNG
$
1,410

$
1,389

NJRES
701

685

Total
$
2,111

$
2,074


The following table summarizes demand fees payable to Steckman Ridge as of:
(Thousands)
December 31,
2016
September 30,
2016
NJNG
$
778

$
775

NJRES
377

375

Total
$
1,155

$
1,150


NJNG and NJRES have entered into various asset management agreements, the effects of which are eliminated in consolidation. Under the terms of these agreements, NJNG releases certain transportation and storage contracts to NJRES. NJNG retains the right to purchase market priced gas or fixed price storage gas from NJRES. As of December 31, 2016, NJNG and NJRES had three asset management agreements with expiration dates ranging from March 2017 through March 2018.

NJNG has entered into a 15 year transportation precedent agreement for committed capacity of 180,000 Dths per day with PennEast, which is estimated to be in service by the first quarter of fiscal 2019.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                                                                                                                                                                                   

Critical Accounting Policies

A summary of our critical accounting policies is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended September 30, 2016. Our critical accounting policies have not changed from those reported in the 2016 Annual Report on Form 10-K.

Recently Issued Accounting Standards

Refer to Note 2. Summary of Significant Accounting Policies for discussion of recently issued accounting standards.

Management's Overview

Consolidated
 
NJR is an energy services holding company providing retail natural gas service in New Jersey and wholesale natural gas and related energy services to customers in the United States and Canada, through its subsidiaries NJNG and NJRES. In addition, we invest in clean energy projects, midstream assets and provide various repair, sales and installations services. A more detailed description of our organizational structure can be found in Item 1. Business of our 2016 Annual Report on Form 10-K.

30

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Business Segments

We have four primary business segments as presented in the chart below:

segmentorgchart13.jpg

In addition to the four business segments noted above, we have non-utility operations that either provide corporate support services or do not meet management's criteria to be treated as a separate business segment. These operations, which comprise Home Services and Other, include: appliance repair services, sales and installations at NJRHS; and commercial real estate holdings at CR&R.

Net income (loss) by business segment and operations are as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
 
2015
Net Income (Loss)
 
 
 
 
 
Natural Gas Distribution
$
30,348

87
 %
 
$
30,926

61
 %
Clean Energy Ventures
4,198

12

 
8,373

17

Energy Services
(4,790
)
(14
)
 
9,396

18

Midstream
2,387

7

 
2,344

5

Home Services and Other
1,542

4

 
259

1

Eliminations (1)
1,244

4

 
(1,016
)
(2
)
Total
$
34,929

100
 %
 
$
50,282

100
 %
(1)
Consists of transactions between subsidiaries that are eliminated in consolidation.

The decrease in net income during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, was driven primarily by unrealized derivative losses and higher O&M at NJRES, as well as increased operating and interest expense at NJRCEV. The decreases were partially offset by an increase at Home Services and Other due primarily to the sale of available-for-sale securities at CR&R, which resulted in a pre-tax gain. The primary drivers of the changes noted above are described in more detail in the individual segment discussions.

31

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Assets by business segment and operations are as follows:
(Thousands)
December 31,
2016
 
September 30,
2016
Assets
 
 
 
 
 
Natural Gas Distribution
$
2,554,928

65
 %
 
$
2,517,401

68
 %
Clean Energy Ventures
677,978

17

 
665,696

18

Energy Services
470,282

12

 
327,626

9

Midstream
201,128

5

 
186,259

5

Home Services and Other
132,427

3

 
109,487

3

Intercompany assets (1)
(87,237
)
(2
)
 
(87,899
)
(3
)
Total
$
3,949,506

100
 %
 
$
3,718,570

100
 %
(1)
Consists of transactions between subsidiaries that are eliminated in consolidation.

The increase in assets during the three months ended December 31, 2016, was due primarily to increases in accounts receivable, broker margin and gas in storage at NJRES, as well as additional utility plant expenditures at NJNG.

Non-GAAP Financial Measures

Management of the Company uses NFE, a non-GAAP financial measure, when evaluating the operating results of the Company. NJRES economically hedges its natural gas inventory with financial derivative instruments. NFE is a measure of the earnings based on eliminating timing differences surrounding the recognition of certain gains or losses, to effectively match the earnings effects of the economic hedges with the physical sale of gas and, therefore, eliminates the impact of volatility to GAAP earnings associated with the derivative instruments. To the extent the Company utilizes forwards, futures, or other derivatives to hedge forecasted SREC production, unrealized gains and losses are also eliminated for NFE purposes.

GAAP requires us, during the interim periods, to estimate our annual effective tax rate and use this rate to calculate the year-to-date tax provision. We also determine an annual estimated effective tax rate for NFE purposes and calculate a quarterly tax adjustment based on the differences between our forecasted net income and our forecasted NFE for the fiscal year. Since the annual estimated effective tax rate is based on certain forecasted assumptions, including estimates surrounding completion of NJRCEV projects, the rate and resulting NFE are subject to change. Since this adjustment is made to reflect the forecasted tax rate, no adjustment is needed at year end.

Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for or a replacement of, the comparable GAAP measure and should be read in conjunction with those GAAP results. The following is a reconciliation of consolidated net (loss) income, the most directly comparable GAAP measure, to NFE:
 
Three Months Ended
 
December 31,
($ in Thousands)
2016
2015
Net income
$
34,929

$
50,282

Add:
 
 
Unrealized loss (gain) on derivative instruments and related transactions
28,302

(1,135
)
Tax effect
(9,757
)
413

Effects of economic hedging related to natural gas inventory
(17,939
)
3,813

Tax effect
6,204

(1,385
)
NFE tax adjustment
(1,356
)
(721
)
Net financial earnings
$
40,383

$
51,267

Basic earnings per share
$
0.41

$
0.59

Add:
 
 
Unrealized loss (gain) on derivative instruments and related transactions
0.33

(0.01
)
Tax effect
(0.11
)
0.01

Effects of economic hedging related to natural gas inventory
(0.21
)
0.04

Tax effect
0.07

(0.02
)
NFE tax adjustment
(0.02
)
(0.01
)
Basic NFE per share
$
0.47

$
0.60

(1)
Effects of hedging natural gas inventory transactions where the economic impact is realized in a future period.

32

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

NFE by business segment and other operations, discussed in more detail within the operating results sections of each segment, is summarized as follows:
 
Three Months Ended
 
December 31,
($ in Thousands)
2016
 
2015
Net Financial Earnings
 
 
 
 
 
Natural Gas Distribution
$
30,348

75
 %
 
$
30,926

59
%
Clean Energy Ventures
2,842

7

 
7,652

15

Energy Services
3,487

9

 
10,304

20

Midstream
2,387

6

 
2,344

5

Home Services and Other
1,542

4

 
259

1

Eliminations (1)
(223
)
(1
)
 
(218
)

Total
$
40,383

100
 %
 
$
51,267

100
%
(1)
Consists of transactions between subsidiaries that are eliminated in consolidation.

The decrease in NFE during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, was due primarily to a decrease at NJRES due to lower financial margin, partially offset by the related decrease in income tax expense, as well as a decrease at NJRCEV related primarily to increased operating and interest expense. The decreases were partially offset by an increase at Home Services and Other due primarily to the sale of available-for-sale securities as previously discussed.

Natural Gas Distribution Segment

Overview

Our Natural Gas Distribution segment is comprised of NJNG, a natural gas utility that provides regulated retail natural gas service in central and northern New Jersey to approximately 525,500 residential and commercial customers in its service territory and also participates in the off-system sales and capacity release markets. The business is subject to various risks, which can negatively impact customer growth, operating and financing costs, fluctuations in commodity prices and customer conservation efforts. These risks include, but are not limited to, adverse economic conditions, customer usage, certain regulatory actions, environmental remediation and severe weather conditions. It is often difficult to predict the impact of events or trends associated with these risks.

In addition, NJNG's business is seasonal by nature, as weather conditions directly influence the volume of natural gas delivered. Specifically, customer demand substantially increases during the winter months when natural gas is used for heating purposes. As a result, NJNG receives most of its natural gas distribution revenues during the first and second fiscal quarters and is subject to variations in earnings and working capital during the year.

As a regulated company, NJNG is required to recognize the impact of regulatory decisions on its financial statements. See Note 3. Regulation in the accompanying Unaudited Condensed Consolidated Financial Statements for a more detailed discussion on regulatory actions, including filings related to programs and associated expenditures, as well as rate requests related to recovery of capital investments and operating costs.

NJNG's operations are managed with the goal of providing safe and reliable service, growing its customer base, diversifying its gross margin, promoting clean energy programs and mitigating the risks discussed above through several key initiatives, including:

earning a reasonable rate of return on the investments in its natural gas distribution and transmission businesses, as well as timely recovery of all prudently incurred costs to provide safe and reliable service throughout NJNG's territory:

continuing to invest in the safety and integrity of its infrastructure;

managing its customer growth rate, which NJNG expects will be approximately 1.6 percent annually through fiscal 2019;

maintaining a collaborative relationship with the BPU on regulatory initiatives, including:

-    planning and authorization of infrastructure investments;

33

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

-    pursuing rate and regulatory strategies to stabilize and decouple margin, including CIP;

-    utilizing BGSS incentive programs through BPU-approved mechanisms to reduce gas costs and generate margin; and

-    administering and promoting NJNG's BPU-approved SAVEGREEN Project;

managing the volatility of wholesale natural gas prices through a hedging program designed to keep customers' BGSS rates as stable as possible; and

working with the NJDEP and BPU to manage its financial obligations related to remediation activities associated with its former MGP sites.

Base Rate Case

In September 2016, the BPU approved NJNG's base rate case, effective October 1, 2016, which included the following:

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 an increase in the overall depreciation rate from 2.34 percent to 2.4 percent;

the five-year extension of SAFE II and estimated cost, excluding AFUDC, is approximately $200 million and related costs to be recovered on an accelerated basis are approximately $157.5 million. The remaining $42.5 million in capital expenditures will be requested for recovery in a future base rate case. As a condition of the extension approval, NJNG is required to file a base rate case no later than November 2019;

rate recovery of NJ RISE capital investment costs through June 30, 2016, and the filing for recovery of future NJ RISE capital investment costs to be recovered, will occur in conjunction with SAFE II, commencing with the rate recovery filing to be submitted in March 2017;

recovery of NJNG’s NGV and LNG plant investments; and

recovery of other costs previously deferred in regulatory assets over seven years.

Infrastructure projects

NJNG has significant annual capital expenditures associated with the management of its natural gas distribution and transmission system, including new utility plant associated with customer growth and its associated PIM and infrastructure programs.

Below is a summary of NJNG's capital expenditures, including accruals, for the three months ended December 31, 2016, and estimates of expected investments for fiscal 2017 and 2018:
njr10qdec20_chart-20796a04.jpg

34

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory oversight, environmental regulations, unforeseen events and the ability to access capital.

SAFE and NJ RISE

NJNG continues to implement BPU-approved infrastructure projects that are designed to enhance the reliability and integrity of NJNG's gas distribution system.

The BPU approved recovery of SAFE I capital investments through September 30, 2016, and approved the extension of SAFE II for an additional five years to replace the remaining unprotected steel mains and services from its natural gas distribution system at an estimated cost of approximately $200 million, excluding AFUDC. The cost recovery methodology for the $157.5 million associated with the extension of SAFE II was approved in NJNG’s new base rates. The remaining $42.5 million in capital expenditures will be requested for recovery in a future base rate case.

The BPU approved the recovery of NJNG's NJ RISE capital infrastructure program, which consists of six capital investment projects estimated to cost $102.5 million, excluding AFUDC, for gas distribution storm hardening and mitigation projects, along with associated depreciation expense. These system enhancements are intended to minimize service impacts during extreme weather events to customers that live in the most storm prone areas of NJNG's service territory. Recovery of NJ RISE investments through June 30, 2016, is included in NJNG’s base rates.

Requests for recovery of future NJ RISE and SAFE II capital investment costs will be in conjunction, commencing with the rate recovery filing to be submitted in March 2017 with a weighted cost of capital of 6.9 percent including a return on equity of 9.75 percent.

Southern Reliability Link

The SRL is an approximate 30-mile, 30-inch transmission main designed to support improved system reliability and integrity in the southern portion of NJNG's service territory, estimated to cost between $175 million and $180 million. In January 2016, the BPU issued an order approving NJNG's proposed SRL pipeline installation, operation and route selection, as modified by NJNG, including specific requirements regarding permitting, safety and integrity assessment. In March 2016, the BPU issued an order designating the SRL route and exempting the SRL from municipal land use ordinances, regulations, permits and license requirements. The two BPU orders have been appealed by third parties. As construction has not yet commenced, rate treatment for SRL was not included in NJNG’s new base rates. NJNG expects to request rate treatment in a future rate proceeding.

Customer growth

In conducting NJNG's business, management focuses on factors it believes may have significant influence on its future financial results. NJNG's policy is to work with all stakeholders, including customers, regulators and policymakers, to achieve favorable results. These factors include the rate of NJNG's customer growth in its service territory, which can be influenced by political and regulatory policies, the delivered cost of natural gas compared with competing fuels, interest rates and general economic and business conditions.

NJNG's total customers include the following:
 
December 31,
2016
December 31,
2015
Firm customers
 
 
Residential
451,587

441,464

Commercial, industrial & other
27,995

27,240

Residential transport
35,698

37,352

Commercial transport
10,149

10,184

Total firm customers
525,429

516,240

Other
64

62

Total customers
525,493

516,302


During the three months ended December 31, 2016 and 2015, respectively, NJNG added 1,866 and 2,046 new customers and converted 196 and 77 existing customers to natural gas heat and other services. This customer growth, as well as commercial customers who switched from interruptible to firm natural gas service, will contribute approximately $1.3 million annually to utility gross margin.

35

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

In addition, NJNG currently expects to add approximately 24,000 to 27,000 new customers during the three-year period of fiscal 2017 to 2019. Based on information from municipalities and developers, as well as external industry analysts and management's experience, NJNG estimates that approximately 53 percent of the growth will come from new construction markets and 47 percent from customer conversions to natural gas from other fuel sources. This new customer and conversion growth would increase utility gross margin under NJNG's base rates by approximately $5 million annually, as calculated under NJNG's CIP tariff. See the Natural Gas Distribution Operating Results section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations that follows for a definition and further discussion of utility gross margin.

SAVEGREEN

SAVEGREEN conducts home energy audits and provides various grants, incentives and financing alternatives, that are designed to encourage the installation of high efficiency heating and cooling equipment and other energy efficiency upgrades. Depending on the specific incentive or approval, NJNG recovers costs associated with the programs over a two to 10-year period through a tariff rider mechanism.

Since inception, the BPU has approved total SAVEGREEN investments of approximately $219.3 million, of which $140.3 million in grants, rebates and loans has been provided to customers, with a total annual recovery of approximately $20 million. In June 2016, the BPU approved NJNG's extension of SAVEGREEN through December 31, 2018. On October 31, 2016, the BPU approved NJNG’s filing to maintain the existing SAVEGREEN recovery rate. The recovery includes a weighted average cost of capital that ranges from 6.69 percent, with a return on equity of 9.75 percent, to 7.76 percent, with a return on equity of 10.3 percent.

Conservation Incentive Program

The CIP facilitates normalizing NJNG's utility gross margin for variances not only due to weather but also for other factors affecting customer usage, such as conservation and energy efficiency. Recovery of utility gross margin for the non-weather variance through the CIP is limited to the amount of certain gas supply cost savings achieved and is subject to an annual earnings test. An annual review of the CIP must be filed by June 1, coincident with NJNG's annual BGSS filing, during which NJNG can request rate changes to the CIP. In May 2014, the BPU approved the continuation of the CIP program with no expiration date; however, it is subject to review in the 2017 rate filing. In June 2016, NJNG filed a petition with the BPU to increase its CIP rates effective October 1, 2016, resulting in an 8.2 percent increase to the average residential heat customer’s bill.

NJNG's total utility firm gross margin includes the following adjustments related to the CIP mechanism:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Weather (1)
$
2,985

$
18,162

Usage
(125
)
4,292

Total
$
2,860

$
22,454

(1)
Compared with the CIP 20-year average, weather was 6 percent and 33.6 percent warmer-than-normal during the three months ended December 31, 2016 and 2015, respectively.

As of December 31, 2016, NJNG has $28.7 million in regulatory assets related to CIP to be collected from customers in future periods on the Unaudited Condensed Consolidated Balance Sheets. As of September 30, 2016, NJNG had $37 million in regulatory assets related to CIP to be collected from customers in future periods on the Unaudited Condensed Consolidated Balance Sheets.

Commodity prices

Our Natural Gas Distribution segment is affected by the price of natural gas, which can have a significant impact on our cash flows, short-term financing costs, the price of natural gas charged to our customers through the BGSS clause, our ability to collect accounts receivable, which impacts our bad debt expense, and our ability to maintain a competitive advantage over other fuel sources.


36

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

The graph below, which illustrates the daily natural gas prices,(1) shows the change in natural gas commodity prices for the three months ended December 31, 2016 and 2015 in the Northeast market region, also known as Tetco M-3:
njr10qdec20_chart-22801a04.jpg
(1) Data source from Platts, a division of McGraw Hill Financial.

The maximum daily price at Tetco M-3 was $8.71 and $1.88 and the minimum daily price was $0.36 and $0.74 for the three months ended December 31, 2016 and 2015, respectively. A more detailed discussion of the impacts of the price of natural gas on operating revenues, gas purchases and cash flows can be found in the Results of Operations and Cash Flow sections of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

BGSS

Recovery of natural gas costs

NJNG's cost of natural gas is passed through to our customers, without markup, by applying NJNG's authorized BGSS rate to actual therms delivered. There is no utility gross margin associated with BGSS costs; therefore, changes in such costs do not impact NJNG's earnings. NJNG monitors its actual gas costs in comparison to its rates to manage its cash flows associated with its allowed recovery of natural gas costs, which is facilitated through BPU-approved deferred accounting and the BGSS pricing mechanism. Accordingly, NJNG occasionally adjusts its periodic BGSS rates or can issue credits or refunds, as appropriate, for its residential and small commercial customers when the commodity cost varies from the existing BGSS rate. BGSS rates for its large commercial customers are adjusted monthly based on NYMEX prices.

In June 2016, NJNG filed a petition to decrease its BGSS rate for residential and small commercial customers effective October 1, 2016, resulting in a 5.5 percent decrease to the average residential heat customer’s bill. When combined with the proposed CIP increase, the impact of these rate changes would result in an approximate 2.7 percent increase to the average residential heat customer's bill. This petition included proposed bill credits to be issued during the months of November 2016 through February 2017, as a result of a decline in the wholesale price of natural gas. In September 2016, NJNG notified the BPU that the estimated bill credits will be approximately $48 million. Approximately $19.3 million and $19.6 million in bill credits were issued as of December 31, 2016 and 2015, respectively.


37

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

BGSS Incentive Programs

NJNG is eligible to receive financial incentives for reducing BGSS costs through a series of utility gross margin-sharing programs that include off-system sales, capacity release and storage incentive programs. These programs are designed to encourage better utilization and hedging of its natural gas supply, transportation and storage assets. Depending on the program, NJNG shares 80 or 85 percent of utility gross margin generated by these programs with firm customers. Should performance of the existing incentives or market conditions warrant, NJNG is permitted to propose a process to re-evaluate and discuss alternative incentive programs annually. Utility gross margin from incentive programs was $3.8 million and $4.5 million during the three months ended December 31, 2016 and 2015, respectively. A more detailed discussion of the impacts to utility gross margin can be found in the Natural Gas Distribution Operating Results section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Hedging

In order to provide relative price stability to its natural gas supply portfolio, NJNG employs a hedging strategy with the goal of having at least 75 percent of the Company's projected winter periodic BGSS gas sales volumes hedged by each November 1 and at least 25 percent of the projected BGSS gas sales hedged for the following April through March period. This is accomplished with the use of various financial instruments including futures, swaps and options used in conjunction with commodity and/or weather-related hedging activity.

Due to the capital-intensive nature of NJNG's operations, significant changes in interest rates can impact NJNG's results. NJNG entered into a treasury lock transaction to fix a benchmark treasury rate associated with debt issuance expected in May 2018. The 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 the Company believes that the market value upon settlement will be reflected in future rates. Upon settlement, any gain or loss will be amortized in earnings over the life of the future debt issuance.

A more detailed discussion of NJNG's debt can be found in the Liquidity and Capital Resources and Cash Flow sections of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Societal Benefits Charge

USF

On September 23, 2016, the BPU approved NJNG's annual USF compliance filing proposing to increase the statewide USF rate, resulting in a .2 percent increase to the average residential heat customer’s bill, effective October 1, 2016.

Environmental Remediation

NJNG is responsible for the environmental remediation of five MGP sites, which contain contaminated residues from former gas manufacturing operations that ceased operating at these sites by the mid-1950s and, in some cases, had been discontinued many years earlier. Actual MGP remediation costs may vary from management's estimates due to the developing nature of remediation requirements, regulatory decisions by the NJDEP and related litigation. NJNG reviews these costs quarterly and adjusts its liability and corresponding regulatory asset as necessary to reflect its expected future remediation obligation. Accordingly, NJNG recognized a regulatory asset and an obligation of $168.5 million as of December 31, 2016, a decrease of $3.5 million, compared with September 30, 2016.


38

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Operating Results

NJNG's operating results are as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Operating revenues
$
185,556

$
151,606

Less:
 
 
Gas purchases (1)
64,186

45,243

Energy and other taxes
12,149

8,162

Regulatory rider expense
12,601

9,628

Operation and maintenance
33,218

29,628

Depreciation and amortization
12,030

11,238

Operating income
51,372

47,707

Other income, net
687

1,314

Interest expense, net of capitalized interest
6,824

4,588

Income tax provision
14,887

13,507

Net income
$
30,348

$
30,926

(1)
Includes related party transactions of approximately $2.9 million and $1.4 million for the three months ended December 31, 2016 and 2015, respectively, a portion of which is eliminated in consolidation.

Operating Revenues and Gas Purchases

Operating revenues increased by 22.4 percent and gas purchases increased 41.9 percent during the three months ended December 31, 2016, compared with the three months ended December 31, 2015. The factors contributing to the increases (decreases) in operating revenues and gas purchases are as follows:
 
Three Months Ended
 
December 31,
 
2016 v. 2015
(Millions)
Operating
revenues
Gas
purchases
Firm sales
$
42.5

$
19.4

Base rate impact
8.1


Off-system sales
5.2

5.2

CIP adjustments
(19.6
)

Average BGSS rates (1)
(6.5
)
(6.1
)
Other (2)
4.3

0.4

Total increase
$
34.0

$
18.9

(1)
Operating revenues includes an increase in sales tax of $(400,000) during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, respectively.
(2)
Other includes changes in rider rates, including those related to NJCEP and other programs.

The increases in operating revenues and gas purchases was due primarily to:

increased firm sales due primarily to higher usage related to weather being 38.1 percent colder;

higher off-system sales due primarily to a 49.9 percent increase in the average price of gas sold, partially offset by a 17.7 percent reduction in volumes; partially offset by

a decrease in CIP due primarily to weather, as well as changes in the CIP as a result of the settlement of the base rate case.


39

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Non-GAAP Financial Measures

Management uses utility gross margin, a non-GAAP financial measure, when evaluating the operating results of NJNG. NJNG's utility gross margin is defined as natural gas revenues less natural gas purchases, sales tax, and regulatory rider expenses, and may not be comparable to the definition of gross margin used by others in the natural gas distribution business and other industries. Management believes that utility gross margin provides a meaningful basis for evaluating utility operations since natural gas costs, sales tax and regulatory rider expenses are included in operating revenue and passed through to customers and, therefore, have no effect on utility gross margin. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure.

Utility Gross Margin

A reconciliation of operating revenues, the closest GAAP financial measure, to NJNG's utility gross margin is as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Operating revenues
$
185,556

$
151,606

Less:
 
 
Gas purchases
64,186

45,243

Energy and other taxes
10,882

6,908

Regulatory rider expense
12,601

9,628

Utility gross margin
$
97,887

$
89,827


Utility gross margin consists of three components:

utility firm gross margin generated from only the delivery component of either a sales tariff or a transportation tariff from residential and commercial customers who receive natural gas service from NJNG;

BGSS incentive programs, where revenues generated or savings achieved from BPU-approved off-system sales, capacity release, FRM or storage incentive programs are shared between customers and NJNG; and

utility gross margin generated from off-tariff customers, as well as interruptible customers.

The following provides more information on the components of utility gross margin and associated throughput (Bcf) of natural gas delivered to customers:

 
Three Months Ended
 
December 31,
 
2016
 
2015
($ in thousands)
Margin
Bcf
 
Margin
Bcf
Utility gross margin/throughput
 
 
 
 
 
Residential
$
62,498

12.6

 
$
55,076

8.9

Commercial, industrial and other
13,696

2.4

 
13,279

1.7

Firm transportation
16,285

4.5

 
15,547

3.4

Total utility firm gross margin/throughput
92,479

19.5

 
83,902

14.0

BGSS incentive programs
3,784

43.6

 
4,535

55.9

Interruptible/off-tariff agreements
1,624

13.3

 
1,390

16.0

Total utility gross margin/throughput
$
97,887

76.4

 
$
89,827

85.9


Utility Firm Gross Margin

The increase of $8.6 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, was due primarily to the base rate increase of $7.5 million and customer growth of $1.1 million.


40

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

BGSS Incentive Programs

The decrease of $751,000 during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, was due primarily to a decrease in the value of capacity as well as decreased margins in the storage incentive program due primarily to the timing of storage injections.

Operation and Maintenance Expense

The factors contributing to the increases in O&M expense is as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016 v. 2015
Compensation and benefits
 
$
1,294

 
Shared corporate costs
 
1,191

 
Base rate impact
 
745

 
Other
 
360

 
Total increase
 
$
3,590

 

The increase in O&M expense during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, was due primarily to:

increased compensation costs due primarily to increases in headcount, incentives, as well as the timing of capitalized labor, healthcare premiums and increased pension/OPEB benefit costs related to changes in actuarial assumptions, partially offset by implementation of the spot rate method to measure interest and service cost components;

increased shared corporate costs resulting primarily from increases in headcount, incentives and healthcare premiums; and

an increase due to the amortization of regulatory assets resulting from the settlement of the base rate case.

Depreciation Expense

Depreciation expense increased $792,000 during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, as a result of additional utility plant being placed into service, as well as an increase in the overall depreciation rate from 2.34 percent to 2.4 percent resulting from the settlement of the base rate case.

Operating Income

Operating income increased $3.7 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to the increase in total utility gross margin of $8.1 million, partially offset by the increases in O&M and depreciation as previously discussed.

Income Tax Provision

Income tax provision increased $1.4 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to an increase in actual pre-tax income, as well as an increase in the forecasted effective tax rate resulting from an increase in forecasted pre-tax income.

Net Income

Net income remained relatively flat during the three months ended December 31, 2016, compared with the three months ended December 31, 2015. The changes include the increase in operating income and tax provision, as previously discussed, along with a decrease in other income related to AFUDC interest earned on infrastructure projects and an increase in interest expense associated with higher long-term debt outstanding.


41

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Clean Energy Ventures Segment

Overview

Our Clean Energy Ventures segment actively pursues opportunities in the clean energy markets, including solar and onshore wind. Clean Energy Ventures has entered into various agreements to install solar net-metered systems for residential and commercial customers, as well as large commercial grid-connected projects. In addition, Clean Energy Ventures has entered into various long-term agreements, including PPAs, to supply energy from wind and solar projects.

Solar

Since its inception, Clean Energy Ventures has placed a total of 152.5 MW of solar capacity into service and as of December 31, 2016, had 3.9 MW under construction. We estimate total solar-related capital expenditures for ITC eligible projects during fiscal 2017 to be between $90 million and $110 million. There were no commercial projects placed into service during the three months ended December 31, 2016 or 2015.

As part of its solar investment portfolio, NJRCEV operates a residential solar program, The Sunlight Advantage®, that provides qualifying homeowners the opportunity to have a solar system installed at their home with no installation or maintenance expenses. NJRCEV owns, operates and maintains the system over the life of the contract in exchange for monthly lease payments. NJRCEV's residential solar leasing program installed approximately 2.8 MW of capacity on 314 homes, and .7 MW of capacity on 84 homes during the three months ended December 31, 2016 and 2015, respectively.

Once a solar installation has received the proper certifications and commences operations, each MWh of electricity produced creates an SREC that represents the renewable energy attribute of the solar-electricity generated that can be sold to third parties, predominantly load-serving entities that are required to comply with the solar requirements under New Jersey's renewable portfolio standard. NJRCEV hedges a portion of its expected SREC production through the use of forward sales contracts. In addition, under the recently updated federal tax guidelines, projects that are placed in service through December 31, 2019, qualify for a 30 percent federal ITC. The credit will decline to 26 percent for property under construction during 2020 and to 22 percent for property under construction during 2021. The ITC will be reduced to 10 percent for any property that is under construction before 2022, but not placed in service before 2024.

Onshore Wind

Clean Energy Ventures invests in small to mid-size onshore wind projects that fit its investment profile and has a total of 126.6 MW of wind capacity as of December 31, 2016. The wind projects are eligible for PTCs for a 10-year period following commencement of operations and have PPAs of various terms in place, which typically govern the sale of energy, capacity and/or renewable energy credits. A $88.9 million, 39.9 MW wind project in Somerset County, Pennsylvania was completed in December 2016.

Clean Energy Ventures' investments are subject to a variety of factors, such as timing of construction schedules, permitting and regulatory processes, volatility of energy prices, the ability to secure PPAs, delays related to electric grid interconnection, which can affect our ability to commence operations on a timely basis or, at all, economic trends, the ability to access capital or allocation of capital to other investments or business opportunities and other unforeseen events. Solar projects not placed in service, as originally planned prior to the end of a reporting period, may result in a failure to qualify for ITCs and changes in prices on the unhedged portion of SREC production could have a significant adverse impact on earnings with some offset expected from higher wind energy market prices due to the PTC phase out and/or improved efficiencies from lower costs for related turbine technology. Wind projects for which construction of a facility begins after December 31, 2016 through December 31, 2019, will be subject to reduced PTCs, and could have a significant adverse impact on 10 years of forward earnings. PTCs will be phased out from 100 percent in 2016 to 80 percent in 2017, 60 percent in 2018, 40 percent in 2019 and zero thereafter. In addition, since the primary contributors toward the value of qualifying clean energy projects are tax incentives and SRECs, changes in the federal statutes related to the ITC or PTC or in the marketplace and/or relevant legislation surrounding renewable clean energy credits, could also significantly affect earnings.


42

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Operating Results

The financial results of NJRCEV are summarized as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Operating revenues
$
7,567

$
7,794

Less:
 
 
Operation and maintenance
4,404

3,857

Depreciation and amortization
7,041

5,110

Other taxes
415

253

Operating (loss)
(4,293
)
(1,426
)
Other (expense) income, net
(72
)
118

Interest expense, net
3,324

2,053

Income tax (benefit)
(11,887
)
(11,734
)
Net income
$
4,198

$
8,373


Operating Revenues

Operating revenues consist of the following:
njr10qmar20_chart-43423a03.jpg
Operating revenues remained relatively flat during the three months ended December 31, 2016, compared with the three months ended December 31, 2015. SREC sales decreased due to the timing of the delivery of the SRECs, which was partially offset by increased electricity sales due primarily to additional wind generation.

SREC activity consisted of the following:
 
Three Months Ended
 
December 31,
 
2016
2015
Beginning balance as of October 1,
24,135

33,203

SRECs generated
41,443

35,014

SRECs delivered
(10,319
)
(21,182
)
Ending balance as of December 31,
55,259

47,035


During the three months ended December 31, 2016, SRECs generated increased 18.4 percent, compared with the three months ended December 31, 2015. The average SREC sales price was $241 and $217 during the three months ended December 31, 2016, and 2015, respectively.

The following table reflects the hedged percentage of SREC inventory and projected SREC production related to its in-service commercial and residential assets:
Fiscal Year
Percent of SRECs Hedged
2017
92%
2018
72%

43

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

There are no direct costs associated with the production of SRECs/RECs by our solar and wind assets. All related costs are included as a component of O&M expenses on the Unaudited Condensed Consolidated Statements of Operations, including such expenses as facility maintenance and various fees.

Operation and Maintenance Expense

O&M expense increased $547,000 during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to additional maintenance and administrative costs associated with wind and solar projects placed in service.

Depreciation Expense

Depreciation expense increased $1.9 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, as a result of increases in solar and wind capital additions.

Income Tax (Benefit)

Our effective tax rate is significantly impacted by the amount of tax credits forecast to be earned during the fiscal year. GAAP requires us to estimate our annual effective tax rate and use this rate to calculate its year-to-date tax provision. Based on NJRCEV’s forecast of solar projects to be completed and wind production during the fiscal year, our estimated annual effective tax rate for fiscal 2017 is 8.7 percent and $7.4 million related to tax credits, net of deferred taxes, were recognized during the three months ended December 31, 2016. The annual effective tax rate as of December 31, 2015, was 14.7 percent and $10.1 million related to tax credits, net of deferred taxes, were recognized during the three months ended December 31, 2015.

Net Income

Net income decreased $4.2 million, during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to increased costs related to depreciation and O&M as discussed above, an increase in interest expense due to higher debt associated with capital expenditures and the decreases in the income tax benefit and SREC sales described above.

Non-GAAP Financial Measures

Management of the Company uses NFE, a non-GAAP financial measure, when evaluating the operating results of Clean Energy Ventures. GAAP requires us, during the interim periods, to estimate our annual effective tax rate and use this rate to calculate the year-to-date tax provision. We also determine an annual estimated effective tax rate for NFE purposes and calculate a quarterly tax adjustment based on the differences between our forecasted net income and our forecasted NFE for the fiscal year. This adjustment is applied to NJRCEV, as such adjustment is primarily related to tax credits generated by NJRCEV. Since this adjustment is made to reflect the forecasted tax rate, no adjustment is needed at year end.

Accordingly, for NFE purposes, the annual estimated effective tax rate for fiscal 2017 is 14.7 percent and $7.1 million of tax credits, net of deferred taxes, were recognized during the three months ended December 31, 2016. During the three months ended December 31, 2015, the annual estimated effective tax rate for fiscal 2016 was 16.4 percent and $9.6 million of tax credits, net of deferred taxes, were recognized during the three months ended December 31, 2015.

Since the annual estimated effective tax rate is based on certain forecasted assumptions, including estimates surrounding completion of projects, the rate and resulting NFE are subject to change. The details of such tax adjustments can be found in the table below. Non-GAAP financial measures are not in accordance with, or an alternative to GAAP, and should be considered in addition to, and not as a substitute for the comparable GAAP measure.


44

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

A reconciliation of NJRCEV's net income, the most directly comparable GAAP financial measure to NFE is as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Net income
$
4,198

$
8,373

Add:
 
 
Net income to NFE tax adjustment
(1,356
)
(721
)
Net financial earnings
$
2,842

$
7,652


Energy Services Segment

Overview

NJRES markets and sells natural gas to wholesale customers and manages natural gas storage and transportation assets throughout major market areas across North America. NJRES maintains a strategic portfolio of natural gas storage and transportation contracts that it utilizes in conjunction with its market expertise to provide service and value to its customers. Availability of these storage and transportation contracts from a time and location perspective allows NJRES to generate market opportunities by capturing price differentials over specific time horizons and between geographic market locations.

NJRES also provides management of storage and transportation assets for natural gas producers and regulated utilities. These management transactions typically involve the release of producer/utility owned storage and/or transportation capacity in combination with either an obligation to purchase and/or deliver physical natural gas. In addition to the contractual purchase and/or sale of physical natural gas, NJRES generates or pays fee-based margin in exchange for its active management and may provide the producer and/or utility with additional margin based on actual results.

In conjunction with the active management of these contracts, NJRES generates financial margin by identifying market opportunities and simultaneously entering into natural gas purchase/sale, storage or transportation contracts and financial derivative contracts. In cases where storage is utilized to fulfill these contracts, these forecast sales and/or purchases are economically hedged through the use of financial derivative contracts. The financial derivative contracts consist primarily of exchange-traded futures, options, and swap contracts, and are frequently used to lock in anticipated transactional cash flows and to help manage volatility in natural gas market prices. Generally, when its storage and transportation contracts are exposed to periods of increased market volatility, NJRES is able to implement strategies that allow them to capture margin by improving the respective time or geographic spreads on a forward basis.

NJRES accounts for its physical commodity contracts and its financial derivative instruments at fair value on the Unaudited Condensed Consolidated Balance Sheets. Changes in the fair value of physical commodity contracts and financial derivative instruments are included in earnings as a component of operating revenue and/or gas purchases, and gas purchases, respectively, on the Unaudited Condensed Consolidated Statements of Operations. Volatility in reported net income at NJRES can occur over periods of time due to changes in the fair value of derivatives as well as timing differences related to certain transactions. Unrealized gains and losses can fluctuate as a result of changes in the price of natural gas, SRECs and foreign currency from the original transaction price compared with the market price of natural gas at each reporting date. Volatility in earnings can also occur as a result of timing differences between the settlement of financial derivatives and the sale of the underlying physical commodity. For example, when a financial instrument settles and the physical natural gas is injected into inventory, the realized gains and losses associated with the financial instrument are recognized in earnings. However, the gains and losses associated with the physical natural gas are not recognized in earnings until the natural gas inventory is withdrawn, at which time NJRES realizes the entire margin on the transaction.


45

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Operating Results

NJRES' financial results are summarized as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Operating revenues (1)
$
337,181

$
278,693

Less:
 
 
Gas purchases (including demand charges (2)(3))
339,087

260,239

Operation and maintenance
5,018

3,757

Depreciation and amortization
16

23

Other taxes
455

237

Operating (loss) income
(7,395
)
14,437

Other income

72

Interest expense, net
571

208

Income tax (benefit) provision
(3,176
)
4,905

Net (loss) income
$
(4,790
)
$
9,396

(1)
Includes related party transactions of approximately $1.7 million and $2.5 million for the three months ended December 31, 2016 and 2015, respectively, which is eliminated in consolidation.
(2)
Costs associated with pipeline and storage capacity that are expensed over the term of the related contracts, which generally varies from less than one year to ten years.
(3)
Includes related party transactions of approximately $1.2 million and $6.2 million for the three months ended December 31, 2016 and 2015, respectively, a portion of which are eliminated in consolidation.

NJRES' portfolio of financial derivative instruments are composed of:
 
Three Months Ended
 
December 31,
(in Bcf)
2016
2015
Net short futures contracts
76.4

120.8

Net long options
0.5

5.8


Operating Revenues and Gas Purchases

Operating revenues increased $58.5 million and gas purchases increased $78.8 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to an approximate 31.3 percent increase in average gas prices and an increase of $33 million in unrealized losses on derivative instruments, partially offset by a 4.9 percent decrease in sales volumes and an increase of $21.8 million related to changes in the economic hedging of natural gas inventory.

Future results at NJRES are contingent upon natural gas market price volatility driven by variations in both the supply and demand balances caused by weather and other factors. As a result, variations in weather patterns in the key market areas served may affect earnings during the fiscal year. Changes in market fundamentals such as an increase in supply and decrease in demand due to milder temperatures, and reduced volatility can negatively impact NJRES' earnings. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Natural Gas Distribution Segment for Tetco M-3 Daily Prices, which illustrates the daily natural gas prices in the Northeast market region.

Operation and Maintenance Expense

O&M expense increased $1.3 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to increases in compensation and shared corporate costs.

Net Income

Net income decreased $14.2 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to lower gross margin and higher O&M as discussed above, partially offset by the related decrease in income tax expense.


46

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Non-GAAP Financial Measures

Management uses financial margin and NFE, non-GAAP financial measures, when evaluating the operating results of NJRES. Financial margin and NFE are based on removing timing differences associated with certain derivative instruments, as discussed above. Management views these measures as representative of the overall expected economic result and uses these measures to compare NJRES' results against established benchmarks and earnings targets as these measures eliminate the impact of volatility on GAAP earnings as a result of timing differences associated with the settlement of derivative instruments. To the extent that there are unanticipated impacts from changes in the market value related to the effectiveness of economic hedges, NJRES' actual non-GAAP results can differ from the results anticipated at the outset of the transaction. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure.

When NJRES reconciles the most directly comparable GAAP measure to both financial margin and NFE, the current period unrealized gains and losses on derivatives are excluded as a reconciling item. Financial margin and NFE also exclude the effects of economic hedging of the value of our natural gas in storage and, therefore, only include realized gains and losses related to natural gas withdrawn from storage, effectively matching the full earnings effects of the derivatives with realized margins on the related physical gas flows.

Financial Margin

The following table is a computation of NJRES' financial margin:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Operating revenues
$
337,181

$
278,693

Less: Gas purchases
339,087

260,239

Add:
 
 
Unrealized loss (gain) on derivative instruments and related transactions (1)
30,592

(2,387
)
Effects of economic hedging related to natural gas inventory (2)
(17,939
)
3,813

Financial margin
$
10,747

$
19,880

(1)
Includes unrealized (gains) related to an intercompany transaction between NJNG and NJRES that have been eliminated in consolidation of approximately $2.3 million and $1.3 million for the three months ended December 31, 2016 and 2015, respectively.
(2)
Effects of hedging natural gas inventory transactions where the economic impact is realized in a future period.

A reconciliation of operating income, the closest GAAP financial measure, to NJRES' financial margin is as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Operating (loss) income
$
(7,395
)
$
14,437

Add:
 
 
Operation and maintenance
5,018

3,757

Depreciation and amortization
16

23

Other taxes
455

237

Subtotal
(1,906
)
18,454

Add:
 
 
Unrealized loss (gain) on derivative instruments and related transactions
30,592

(2,387
)
Effects of economic hedging related to natural gas inventory
(17,939
)
3,813

Financial margin
$
10,747

$
19,880


Financial margin decreased $9.1 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to fewer market opportunities related to transportation assets and timing of certain transactions related to storage withdrawals.


47

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Net Financial Earnings

A reconciliation of NJRES' net (loss) income, the most directly comparable GAAP financial measure, to NFE is as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Net (loss) income
$
(4,790
)
$
9,396

Add:
 
 
Unrealized loss (gain) on derivative instruments and related transactions
30,592

(2,387
)
Tax effect (1)
(10,580
)
867

Effects of economic hedging related to natural gas inventory
(17,939
)
3,813

Tax effect
6,204

(1,385
)
Net financial earnings
$
3,487

$
10,304

(1)
Includes taxes related to an intercompany transaction between NJNG and NJRES that have been eliminated in consolidation of approximately $823,000 and $(454,000) for the three months ended December 31, 2016 and 2015, respectively.

NFE decreased $6.8 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to lower financial margin, partially offset by the related decrease in income tax expense as previously discussed.

Future results are subject to NJRES' ability to expand its wholesale sales and service activities and are contingent upon many other factors, including an adequate number of appropriate and credit qualified counterparties in an active and liquid natural marketplace, volatility in the natural gas market due to weather or other fundamental market factors impacting supply and/or demand, transportation, storage and/or other market arbitrage opportunities, sufficient liquidity in the overall energy trading market, and continued access to liquidity in the capital markets.

Midstream Segment

Overview

Our Midstream segment invests in natural gas assets, such as natural gas transportation and storage facilities. We believe that acquiring, owning and developing these midstream assets, which operate under a tariff structure that has either regulated or market-based rates, can provide a growth opportunity for us. To that end, we have a 50 percent ownership interest in Steckman Ridge, a storage facility that operates under market-based rates and a 20 percent ownership interest in PennEast, a natural gas pipeline, which we estimate will be completed and operational by the the first quarter of fiscal 2019. As of December 31, 2016, our net investments in Steckman Ridge and PennEast were $122.4 million and $22.7 million, respectively.

Operating Results

The financial results of our Midstream segment are summarized as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Equity in earnings of affiliates
$
3,331

$
3,545

Other income, net
$
917

$
632

Income tax provision
$
1,649

$
1,640

Net income
$
2,387

$
2,344


Equity in earnings of affiliates decreased $214,000 during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to a decrease in net income at Steckman Ridge related to increases in consulting, equipment repairs and interest expense, partially offset by increased storage service revenue.

48

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Other income increased $285,000 for the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due to increased dividend income from the DM Common Units.

Net income remained relatively flat during the three months ended December 31, 2016, compared with the three months ended December 31, 2015.

Home Services and Other Operations

Overview

The financial results of Home Services and Other consist primarily of the operating results of NJRHS and CR&R. NJRHS provides service, sales and installation of appliances to approximately 113,000 service contract customers and has been focused on growing its installation business and expanding its service contract customer base. CR&R seeks additional opportunities to enhance the value of its building and undeveloped land. Home Services and Other also includes organizational expenses incurred at NJR. NJR Energy, a subsidiary of CR&R, which invested in other energy-related ventures, was dissolved on November 28, 2016, and all assets were moved to CR&R during the first quarter of fiscal 2017.

Operating Results

The consolidated financial results of Home Services and Other are summarized as follows:
 
Three Months Ended
 
December 31,
(Thousands)
2016
2015
Operating revenues
$
10,006

$
9,573

Operation and maintenance
$
10,164

$
9,393

Energy and other taxes
$
1,076

$
983

Other income, net
$
2,827

$
159

Income tax benefit
$
(245
)
$
(1,130
)
Net income
$
1,542

$
259


Operating revenue increased $433,000 during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to increased installations at NJRHS related to colder weather and increased marketing promotions.

O&M expense increased $771,000 during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to increased labor costs resulting from higher headcount and incentives as well as increased healthcare premiums.

The income tax benefit decreased $885,000 during the three months ended December 31, 2016, compared with the three months ended December 31, 2015 due to increased pre-tax income due primarily to the sale of available-for-sale securities, which resulted in a pre-tax gain of $2.6 million, which is included in other income.

Net income increased $1.3 million during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, due primarily to the increase in other income, as well as the increase in operating revenue, partially offset by the increase in O&M as discussed above.

Liquidity and Capital Resources

Our objective is to maintain an efficient consolidated capital structure that reflects the different characteristics of each business segment and business operations and provides adequate financial flexibility for accessing capital markets as required.


49

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Our consolidated capital structure was as follows:
 
December 31,
2016
September 30,
2016
Common stock equity
46
%
48
%
Long-term debt
39

44

Short-term debt
15

8

Total
100
%
100
%

Common Stock Equity

We satisfy our external common equity requirements, if any, through issuances of our common stock, including the proceeds from stock issuances under our DRP. The DRP allows us, at our option, to use treasury shares or newly issued shares to raise capital. On December 14, 2015, we registered an additional 5 million shares of our common stock for issuance under the DRP. We raised $4.6 million and $3.8 million of equity through the DRP, by issuing approximately 139,000 and 127,000 shares of treasury stock, during the three months ended December 31, 2016 and 2015, respectively.

In 1996, the Board of Directors authorized us to implement a share repurchase program, which was expanded seven times since the inception of the program, authorizing a total of 19.5 million shares of common stock for repurchase. As of December 31, 2016, we have repurchased a total of approximately 17 million of those shares and may repurchase an additional 2.4 million shares under the approved program. There were 105,000 and 34,700 shares repurchased during the three months ended December 31, 2016 and 2015, respectively.

Debt

NJR and its unregulated subsidiaries generally rely on cash flows generated from operating activities and the utilization of committed credit facilities to provide liquidity to meet working capital and short-term debt financing requirements. NJNG also relies on the issuance of commercial paper for short-term funding. NJR and NJNG periodically access the capital markets to fund long-life assets through the issuance of long-term debt securities.

We believe that our existing borrowing availability, equity proceeds and cash flow from operations will be sufficient to satisfy our and our subsidiaries' working capital, capital expenditures and dividend requirements for the next 12 months. NJR, NJNG, NJRCEV and NJRES currently anticipate that each of their financing requirements for the next 12 months will be met primarily through the issuance of short and long-term debt, meter sale-leasebacks and proceeds from our DRP, including utilizing the waiver discount feature.

We believe that as of December 31, 2016, NJR and NJNG were, and currently are, in compliance with all existing debt covenants, both financial and non-financial.

Short-Term Debt

We use our short-term borrowings primarily to finance NJRES' short-term liquidity needs, Midstream segment's PennEast contributions, share repurchases and, on an initial basis, NJRCEV's investments. NJRES' use of high volume storage facilities and anticipated pipeline park-and-loan arrangements, combined with related economic hedging activities in the volatile wholesale natural gas market, create significant short-term cash requirements.

As of December 31, 2016, NJR had a revolving credit facility totaling $425 million, as described below, with $126 million available under the facility.

NJNG satisfies its debt needs by issuing short- and long-term debt based on its financial profile. The seasonal nature of NJNG's operations creates large short-term cash requirements, primarily to finance natural gas purchases and customer accounts receivable. NJNG obtains working capital for these requirements, and for the temporary financing of construction and MGP remediation expenditures and energy tax payments, based on its financial profile, through the issuance of commercial paper supported by the NJNG Credit Facility or through short-term bank loans under the NJNG Credit Facility.


50

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

NJNG’s commercial paper is sold through several commercial banks under an issuing and paying agency agreement and is supported by the $250 million NJNG Credit Facility. As of December 31, 2016, the unused amount available under the NJNG Credit Facility, including amounts allocated to the backstop under the commercial paper program and the issuance of letters of credit, was $249.3 million.

Due to the seasonal nature of natural gas prices and demand and because inventory levels are built up during its natural gas injection season (April through October), NJR and NJNG's short-term borrowings tend to peak in November and December.

Short-term borrowings were as follows:
 
Three Months Ended
(Thousands)
December 31, 2016
NJR
 
Notes Payable to banks:
 
Balance at end of period
$
284,600

Weighted average interest rate at end of period
1.54
%
Average balance for the period
$
201,164

Weighted average interest rate for average balance
1.47
%
Month end maximum for the period
$
284,600


NJR

As noted above, based on its average borrowings during the three months ended December 31, 2016, NJR's average interest rate was 1.47 percent, resulting in interest expense of $751,000.

As of December 31, 2016, NJR had seven letters of credit outstanding totaling $14.4 million, which reduced the amount available under the NJR Credit Facility by the same amount. NJR does not anticipate that these letters of credit will be drawn upon by the counterparties.

Neither NJNG nor its assets are obligated or pledged to support the NJR Credit Facility.

NJNG

NJNG had no outstanding short-term borrowings during the three months ended December 31, 2016.

As of December 31, 2016, NJNG had two letters of credit outstanding for $731,000, which reduced the amount available under NJNG's committed credit facility by the same amount. NJNG does not anticipate that these letters of credit will be drawn upon by the counterparties.

Short-Term Debt Covenants

Borrowings under the NJR Credit Facility and NJNG Credit Facility are conditioned upon compliance with a maximum leverage ratio (consolidated total indebtedness to consolidated total capitalization as defined in the applicable agreements), of not more than .65 to 1.00 at any time. These revolving credit facilities contain customary representations and warranties for transactions of this type. They also contain customary events of default and certain covenants that will limit NJR's or NJNG's ability, beyond agreed upon thresholds, to, among other things:

incur additional debt;

incur liens and encumbrances;

make dispositions of assets;

enter into transactions with affiliates; and

merge, consolidate, transfer, sell or lease all or substantially all of the borrower's or guarantors' assets.

These covenants are subject to a number of exceptions and qualifications set forth in the applicable agreements.

51

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Default Provisions

The agreements governing our long-term and short-term debt obligations include provisions that, if not complied with, could require early payment or similar actions. Default events include, but are not limited to, the following:

defaults for non-payment;

defaults for breach of representations and warranties;

defaults for insolvency;

defaults for non-performance of covenants;

cross-defaults to other debt obligations of the borrower; and

guarantor defaults.

The occurrence of an event of default under these agreements could result in all loans and other obligations of the borrower becoming immediately due and payable and the termination of the credit facilities or term loan.

Long-Term Debt

NJR

As of December 31, 2016, NJR has the following outstanding:

$50 million of 6.05 percent senior notes due September 2017;

$25 million of 2.51 percent senior notes due September 15, 2018;

$50 million of 3.25 percent senior notes due September 2022;

$100 million of 3.48 percent senior notes due November 7, 2024;

$50 million of 3.2 percent senior notes due August 18, 2023; and

$100 million of 3.54 percent senior notes due August 18, 2026.

NJR had an unsecured, uncommitted $100 million private placement shelf note agreement that expired September 26, 2016, and was not renewed. There were no notes outstanding under the expired facility.

Neither NJNG nor its assets are obligated or pledged to support NJR's long-term debt.

NJNG

As of December 31, 2016, NJNG's long-term debt consisted of $575 million in fixed-rate debt issuances secured by the Mortgage Indenture, with maturities ranging from 2018 to 2046, $97 million in secured variable rate debt with maturities ranging from 2027 to 2041 and $37 million in capital leases with various maturities ranging from 2017 to 2025.

In December 2016, the Company decided to call and purchase, in lieu of redemption, three FMBs. As a result, the $10.3 million, 4.5 percent Series II, the $10.5 million, 4.6 percent Series JJ and the $15 million, 4.9 percent Series KK bonds have been reclassified to current maturities of long-term debt on the Unaudited Condensed Consolidated Balance Sheets as of December 31, 2016. On January 17, 2017, the Company completed the purchase of the three FMBs.

NJR is not obligated directly or contingently with respect to the NJNG notes or the FMBs.


52

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

Long-Term Debt Covenants and Default Provisions

The NJR and NJNG long-term debt instruments contain customary representations and warranties for transactions of their type. They also contain customary events of default and certain covenants that will limit NJR or NJNG's ability beyond agreed upon thresholds to, among other things:

incur additional debt (including a covenant that limits the amount of consolidated total debt of the borrower at the end of a fiscal quarter to 65 percent of the consolidated total capitalization of the borrower, as those terms are defined in the applicable agreements, and a covenant limiting priority debt to 20 percent of the borrower's consolidated total capitalization, as those terms are defined in the applicable agreements);

incur liens and encumbrances;

make loans and investments;

make dispositions of assets;

make dividends or restricted payments;

enter into transactions with affiliates; and

merge, consolidate, transfer, sell or lease substantially all of the borrower's assets.

The aforementioned covenants are subject to a number of exceptions and qualifications set forth in the applicable note purchase agreements.

In addition, the FMBs issued by NJNG under the Mortgage Indenture are subject to certain default provisions. Events of Default, as defined in the Mortgage Indenture, consist mainly of:

failure for 30 days to pay interest when due;

failure to pay principal or premium when due and payable;

failure to make sinking fund payments when due;

failure to comply with any other covenants of the Mortgage Indenture after 30 days' written notice from the Trustee;

failure to pay or provide for judgments in excess of $30 million in aggregate amount within 60 days of the entry thereof; or

certain events that are or could be the basis of a bankruptcy, reorganization, insolvency or receivership proceeding.

Upon the occurrence and continuance of such an Event of Default, the Mortgage Indenture, subject to any provisions of law applicable thereto, provides that the Trustee may take possession and conduct the business of NJNG, may sell the trust estate, or proceed to foreclose the lien of the Mortgage Indenture. The interest rate on defaulted principal and interest, to the extent permitted by law, on the FMBs issued under the Mortgage Indenture is the rate stated in the applicable supplement or, if no such rate is stated, six percent per annum.

Sale-Leaseback

NJNG received $9.6 million and $7.1 million in December 2016 and 2015, respectively, in connection with the sale-leaseback of its natural gas meters. During the first quarter of fiscal 2017, NJNG exercised early purchase options with respect to meter leases by making final principal payments of $1 million. NJNG did not exercise early purchase options during the first quarter of fiscal 2016. NJNG continues to evaluate this sale-leaseback program based on current market conditions.

Contractual Obligations

NJNG's total capital expenditures are projected to be $177.6 million and $337.2 million, in fiscal 2017 and 2018, respectively. Total capital expenditures spent or accrued during the three months ended December 31, 2016 were $37.4 million. NJNG expects to fund its obligations with a combination of cash flow from operations, cash on hand, issuance of commercial paper, available

53

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

capacity under its revolving credit facility and the issuance of long-term debt. As of December 31, 2016, NJNG's future MGP expenditures are estimated to be $168.5 million. For a more detailed description of MGP see Note 12. Commitments and Contingent Liabilities in the accompanying Unaudited Condensed Consolidated Financial Statements.

Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory constraints, environmental regulations, unforeseen events, and the ability to access capital.

NJRCEV's expenditures include clean energy projects that support our goal to promote renewable energy. Accordingly, NJRCEV enters into agreements to install solar equipment involving both residential and commercial projects. During the three months ended December 31, 2016, capital expenditures related to the purchase and installation of solar equipment were $17.1 million. An additional $23.2 million has been committed for solar projects to be placed into service during fiscal 2017 and beyond. We estimate solar-related capital expenditures for ITC eligible projects in fiscal 2017 to be between $90 million and $110 million.

During the first quarter of fiscal 2017, NJRCEV completed construction of a $88.9 million, 39.9 MW onshore wind project in Somerset County, Pennsylvania. For fiscal 2017, NJRCEV estimates that its total capital expenditures related to this project will range between $30 million and $40 million. As of December 31, 2016, a total of $35.1 million has been spent or accrued.

Capital expenditures related to clean energy projects are subject to change due to a variety of factors that may affect our ability to commence operations at these projects on a timely basis or at all, including logistics associated with the start-up of residential and commercial solar projects, such as timing of construction schedules, the permitting and regulatory process, any delays related to electric grid interconnection, economic trends, unforeseen events and the ability to access capital or allocation of capital to other investments or business opportunities.

We expect our expenditures related to our investment in the PennEast pipeline project to total between $20 million and $30 million in fiscal 2017.

NJRES does not currently anticipate any significant capital expenditures in fiscal 2017 and 2018.

More detailed information regarding Contractual Obligations is contained in Liquidity and Capital Resources - Contractual Obligations section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended September 30, 2016.

Off-Balance-Sheet Arrangements

Our off-balance-sheet arrangements consist of guarantees covering approximately $287.8 million of natural gas purchases, SREC sales and demand fee commitments and outstanding letters of credit totaling $15.1 million, as previously noted.

Cash Flow

Operating Activities

Cash flows (used in) operating activities during the three months ended December 31, 2016, totaled $(46.1) million compared with $(36.2) million during the three months ended December 31, 2015. Operating cash flows are primarily affected by variations in working capital, which can be impacted by several factors, including:

seasonality of our business;

fluctuations in wholesale natural gas prices and other energy prices, including changes in derivative asset and liability values;

timing of storage injections and withdrawals;

the deferral and recovery of gas costs;

changes in contractual assets utilized to optimize margins related to natural gas transactions;

broker margin requirements;

impact of unusual weather patterns on our wholesale business;


54

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

timing of the collections of receivables and payments of current liabilities;

volumes of natural gas purchased and sold; and

timing of SREC deliveries.

The decrease of $9.9 million in operating cash flows during the three months ended December 31, 2016, compared with the three months ended December 31, 2015, was impacted by higher working capital requirements at NJNG due primarily to colder weather and increased customer usage and at NJRES due primarily to higher commodity prices and increased broker margin requirements. These increases were partially offset by a discretionary contribution of $30 million to our pension plan during fiscal 2016 that did not recur in fiscal 2017.

Investing Activities

Cash flows used in investing activities totaled $86.5 million during three months ended December 31, 2016, compared with $95.4 million during the three months ended December 31, 2015. The decrease of $8.9 million was due primarily to a decrease in utility plant expenditures of $10.2 million along with proceeds of $3.2 million from the sale of available for sale securities, partially offset by an additional $1.8 million for its investment in PennEast and increased solar expenditures of $2.2 million.

Financing Activities

Financing cash flows generally are seasonal in nature and are impacted by the volatility in pricing in the natural gas and other energy markets. NJNG's inventory levels are built up during its natural gas injection season (April through October) and reduced during withdrawal season (November through March) in response to the supply requirements of its customers. Changes in financing cash flows can also be impacted by gas management and marketing activities at NJRES and clean energy investments at NJRCEV.

Cash flows used in financing activities totaled $141.9 million during the three months ended December 31, 2016, compared with $128.3 million during the three months ended December 31, 2015. The increase of $13.6 million is due primarily to increased short-term borrowings at NJR, partially offset by an increase in treasury shares repurchased.

Credit Ratings

On January 30, 2014, Moody's upgraded NJNG's senior secured rating from Aa3 to Aa2, while maintaining a stable outlook. The rating upgrade was driven primarily by the overall credit supportiveness of the regulatory environment under which NJNG operates. In its review of NJNG's credit rating, Moody's considered the BPU's continued support of NJNG's rate mechanisms, which allows for timely recovery of costs, including those associated with NJNG's BGSS and CIP. In addition, the favorable recovery of investments related to NJNG's infrastructure and energy efficiency programs factored into the rating upgrade.

The table below summarizes NJNG's current credit ratings issued by two rating entities, S&P and Moody's:
 
Standard and Poor's
Moody's
Corporate Rating
A
N/A
Commercial Paper
A-1
P-1
Senior Secured
A+
Aa2
Ratings Outlook
Stable
Stable

These ratings were reaffirmed by S&P on July 19, 2016 and by Moody’s on October 4, 2016. NJNG's S&P and Moody's ratings are investment-grade ratings. NJR is not a rated entity.

Although NJNG is not party to any lending agreements that would accelerate the maturity date of any obligation caused by a failure to maintain any specific credit rating, if such ratings are downgraded below investment grade, borrowing costs could increase, as would the costs of maintaining certain contractual relationships and future financing and our access to capital markets would be reduced. Even if ratings are downgraded without falling below investment grade, NJR and NJNG could face increased borrowing costs under their credit facilities. A rating set forth above is not a recommendation to buy, sell or hold NJR's or NJNG's securities and may be subject to revision or withdrawal at any time. Each rating set forth above should be evaluated independently of any other rating.

55

New Jersey Resources Corporation
Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             

The timing and mix of any external financings will target a common equity ratio that is consistent with maintaining NJNG's current short-term and long-term credit ratings.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                              

Financial Risk Management

Commodity Market Risks

Natural gas is a nationally traded commodity. Its prices are determined effectively by the NYMEX, ICE and over-the-counter markets. The prices on the NYMEX, CME, ICE and over-the-counter markets generally reflect the national balance of natural gas supply and demand, but are also significantly influenced from time to time by other events.

Our regulated and deregulated businesses are subject to market risk due to fluctuations in the price of natural gas. To economically hedge against such fluctuations, we have entered into forwards, futures, options and swap agreements. To manage these derivative instruments, we have well-defined risk management policies and procedures that include daily monitoring of volumetric limits and monetary guidelines. Our natural gas businesses are conducted through three of our operating subsidiaries. NJNG is a regulated utility that uses futures, options and swaps to economically hedge against price fluctuations, and its recovery of natural gas costs is governed by the BPU. NJRES uses futures, options, swaps and physical contracts to economically hedge purchases and sales of natural gas. Financial derivatives have historically been transacted on an exchange and cleared through an FCM, thus requiring daily cash margining for a majority of NJRES' and NJNG's positions. As a result of the Dodd-Frank Act, certain NJRES and NJNG transactions that were previously executed in the over-the-counter markets are now cleared through an FCM, resulting in increased margin requirements. The related cash flow impact from the increased requirements is expected to be minimal. Non-financial (i.e., physical) derivatives utilized by us have received statutory exclusion from similar Dodd-Frank provisions due to the element of physical settlement.

The following table reflects the changes in the fair market value of financial derivatives related to natural gas purchases and sales:
 
Balance
Increase
Less
Balance
(Thousands)
September 30, 2016
(Decrease) in Fair
Market Value
Amounts
Settled
December 31,
2016
NJNG
 
$
(2,485
)
 
$
12,383

 
$
(1,114
)
 
$
11,012

NJRES
 
(21,742
)
 
(33,763
)
 
(1,951
)
 
(53,554
)
Total
 
$
(24,227
)
 
$
(21,380
)
 
$
(3,065
)
 
$
(42,542
)

There were no changes in methods of valuations during the three months ended December 31, 2016.

The following is a summary of fair market value of financial derivatives at December 31, 2016, excluding foreign exchange contracts discussed below, by method of valuation and by maturity for each fiscal year period:
(Thousands)
2017
2018
2019 - 2021
After 2021
Total
Fair Value
Price based on NYMEX/CME
$
(19,756
)
$
1,563

 
$

 
$

 
$
(18,193
)
Price based on ICE
(22,763
)
(1,698
)
 
112

 

 
(24,349
)
Total
$
(42,519
)
$
(135
)
 
$
112

 
$

 
$
(42,542
)

The following is a summary of financial derivatives by type as of December 31, 2016:
 
 
Volume Bcf
Price per MMBtu(1)
Amounts included in Derivatives (Thousands)
NJNG
Futures
24.3

$2.62 - $5.58
 
$
11,012

NJRES
Futures
(76.4
)
$2.06 - $6.47
 
(53,563
)
 
Options
0.5

$0.24 - $0.24
 
9

Total
 
 
 
 
$
(42,542
)
(1)
Million British thermal unit


56

New Jersey Resources Corporation
Part I

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)                         

The following table reflects the changes in the fair market value of physical commodity contracts:
 
Balance
Increase
Less
Balance
(Thousands)
September 30, 2016
(Decrease) in Fair
Market Value
Amounts
Settled
December 31,
2016
NJNG - Prices based on other external data
 
$
(919
)
 
764

 
(1,260
)
 
$
1,105

NJRES - Prices based on other external data
 
(2,891
)
 
(5,659
)
 
(9,048
)
 
498

Total
 
$
(3,810
)
 
(4,895
)
 
(10,308
)
 
$
1,603


The following table reflects the changes in the fair market value of interest rate contracts:
 
Balance
Increase
Less
Balance
(Thousands)
September 30, 2016
(Decrease) in Fair
Market Value
Amounts
Settled
December 31,
2016
NJNG - Prices based on other external data
 
$
(23,073
)
 
20,371

 

 
$
(2,702
)

Our market price risk is predominately related to changes in the price of natural gas at the Henry Hub, which is the delivery point for the NYMEX natural gas futures contracts. As the fair value of futures and fixed price swaps is linked to this location, the price sensitivity analysis has been prepared for all open Henry Hub natural gas futures and fixed swap positions. Based on this, an illustrative 10 percent movement in the natural gas futures contract price, for example, increases (decreases) the reported derivative fair value of all open, unadjusted Henry Hub natural gas futures and fixed swap positions by approximately $22.5 million. This analysis does not include potential changes to reported credit adjustments embedded in the $(51.1) million reported fair value.
Derivative Fair Value Sensitivity Analysis
 
(Thousands)
Henry Hub Futures and Fixed Price Swaps
Percent increase in NYMEX natural gas futures prices
0%
5%
10%
15%
20%
Estimated change in derivative fair value
$

$
(11,225
)
$
(22,451
)
$
(33,677
)
$
(44,903
)
Ending derivative fair value
$
(51,099
)
$
(62,324
)
$
(73,550
)
$
(84,776
)
$
(96,002
)
 
 
 
 
 
 
Percent decrease in NYMEX natural gas futures prices
0%
(5)%
(10)%
(15)%
(20)%
Estimated change in derivative fair value
$

$
11,225

$
22,451

$
33,677

$
44,903

Ending derivative fair value
$
(51,099
)
$
(39,874
)
$
(28,648
)
$
(17,422
)
$
(6,196
)

Wholesale Credit Risk

The following is a summary of gross and net credit exposures, grouped by investment and non-investment grade counterparties, as of December 31, 2016. Gross credit exposure is defined as the unrealized fair value of derivative and energy trading contracts plus any outstanding wholesale receivable for the value of natural gas or power delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received. Net credit exposure is defined as gross credit exposure reduced by collateral received from counterparties and/or payables, where netting agreements exist. The amounts presented below exclude accounts receivable for NJNG retail natural gas sales and services.

NJRES' & NJRCEV's counterparty credit exposure as of December 31, 2016, is as follows:
(Thousands)
Gross Credit Exposure
Net Credit Exposure
Investment grade
 
$
192,149

 
$
161,229

Noninvestment grade
 
40,057

 
12,358

Internally rated investment grade
 
14,497

 
6,435

Internally rated noninvestment grade
 
10,865

 
659

Total
 
$
257,568

 
$
180,681



57

New Jersey Resources Corporation
Part I

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)                         

NJNG's counterparty credit exposure as of December 31, 2016, is as follows:
(Thousands)
Gross Credit Exposure
Net Credit Exposure
Investment grade
 
$
7,876

 
$
7,480

Noninvestment grade
 
400

 
142

Internally rated investment grade
 
272

 
230

Internally rated noninvestment grade
 
12,217

 
50

Total
 
$
20,765

 
$
7,902


Due to the inherent volatility in the market price for natural gas, electricity and SRECs, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty failed to perform the obligations under its contract (for example, failed to make payment for natural gas received), we could sustain a loss. This loss would comprise the loss on natural gas delivered but not paid for and/or the cost of replacing natural gas not delivered or received at a price that exceeds the original contract price. Any such loss could have a material impact on our financial condition, results of operations or cash flows.

Information regarding NJR's interest rate risk can be found in Item 7A. Quantitative and Qualitative Disclosures About Market Risks and the Liquidity and Capital Resources - Debt section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended September 30, 2016.

Effects of Interest Rate and Foreign Currency Rate Fluctuations

We are also exposed to changes in interest rates on our debt hedges, variable rate debt and changes in foreign currency rates for our business conducted in Canada using Canadian dollars. We do not believe an immediate 10 percent increase or decrease in interest rates or foreign currency rates would have a material effect on our operating results or cash flows.

Effects of Inflation

Although inflation rates have been relatively low to moderate in recent years, including the three most recent fiscal years, any change in price levels has an effect on operating results due to the capital-intensive and regulated nature of our utility subsidiary. We attempt to minimize the effects of inflation through cost control, productivity improvements and regulatory actions, when appropriate.

ITEM 4. CONTROLS AND PROCEDURES                                                                                                                             

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of end of the period covered by this report, our disclosure controls and procedures are effective, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

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New Jersey Resources Corporation
Part II


ITEM 1. LEGAL PROCEEDINGS                                                                                                                                                

Information regarding reportable legal proceedings is contained in Part I, Item 3. Legal Proceedings in our Annual Report on Form 10-K for the year ended September 30, 2016, and is set forth in Part I, Item 1, Note 12. Commitment and Contingent Liabilities-Legal Proceedings on the Unaudited Condensed Consolidated Financial Statements. No legal proceedings became reportable during the quarter ended December 31, 2016, and there have been no material developments during such quarter regarding any previously reported legal proceedings, which have not been previously disclosed.


ITEM 1A. RISK FACTORS                                                                                                                                                             

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical, under the circumstances, some level of risk and uncertainty will always be present. Part I, Item 1A. Risk Factors of our 2016 Annual Report on Form 10-K includes a detailed discussion of our risk factors. Those risks and uncertainties have the potential to materially affect our financial condition and results of operations. There have been no material changes in our risk factors from those previously disclosed in Part I, Item 1A, of our 2016 Annual Report on Form 10-K.


ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS                                                  

The following table sets forth our repurchase activity for the quarter ended December 31, 2016:
Period
Total Number of Shares
(or Units) Purchased
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
10/01/16 - 10/31/16
105,000
$
31.70

105,000

 
2,431,053
11/01/16 - 11/30/16


 
2,431,053
12/01/16 - 12/31/16


 
2,431,053
Total
105,000
$
31.70

105,000

 
2,431,053

The stock repurchase plan, which was authorized by our Board of Directors, became effective in September 1996 and as of December 31, 2016, included 19.5 million shares of common stock for repurchase, of which, approximately 2.4 million shares remained available for repurchase. The stock repurchase plan will expire when we have repurchased all shares authorized for repurchase thereunder, unless the repurchase plan is earlier terminated by action of our Board of Directors or further shares are authorized for repurchase.


59

New Jersey Resources Corporation
Part II

ITEM 6. EXHIBITS                                                                                                                                                                         

Exhibit
Number
Exhibit Description
10.1
Summary of New Jersey Resources Corporation Non-Employee Director Compensation (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on November 18, 2016)
 
 
10.2+
New Jersey Resources Corporation 2007 Stock Award and Incentive Plan Performance Share Units Agreement - NFE
 
 
10.3+
New Jersey Resources Corporation Deferred Stock Retention Award Agreement
 
 
10.4+
New Jersey Resources Corporation 2007 Stock Award and Incentive Plan Performance Share Units Agreement - Total Shareholder Return
 
 
10.5+
New Jersey Resources Corporation 2007 Stock Award and Incentive Plan Performance Based Restricted Stock Units Agreement
 
 
10.6+
New Jersey Resources Corporation 2007 Stock Award and Incentive Plan Restricted Stock Units Agreement
 
 
31.1+
Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2+
Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1+ †
Certification of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
 
32.2+ †
Certification of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
 
101+
Interactive Data File (Form 10-Q, for the fiscal period ended December 31, 2016, furnished in XBRL (eXtensible Business Reporting Language)).
_______________________________

+
Filed herewith.
†    This certificate accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of Section 18 or any other provision of the Securities Exchange Act of 1934, as amended.


60

New Jersey Resources Corporation
Part II

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
 
 
(Registrant)
Date:
February 8, 2017
 
 
 
By:/s/ Patrick Migliaccio
 
 
Patrick Migliaccio
 
 
Senior Vice President and
 
 
Chief Financial Officer


61