NEW JERSEY RESOURCES CORP - FORM 10-Q

Attached files

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EX-31.2 - EXHIBIT 31.2 DECEMBER 2015 - NEW JERSEY RESOURCES CORP	njrex312dec2015.htm
EX-31.1 - EXHIBIT 31.1 DECEMBER 2015 - NEW JERSEY RESOURCES CORP	njrex311dec2015.htm
EX-32.1 - EXHIBIT 32.1 DECEMBER 2015 - NEW JERSEY RESOURCES CORP	njrex321dec2015.htm
EX-32.2 - EXHIBIT 32.2 DECEMBER 2015 - NEW JERSEY RESOURCES CORP	njrex322dec2015.htm

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, 2015

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 1‑8359

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 1, 2016 was 85,923,516.

New Jersey Resources Corporation

TABLE OF CONTENTS



			Page
Glossary of Terms			1
Information Concerning Forward-Looking Statements			3
PART I. FINANCIAL INFORMATION
	ITEM 1.	Unaudited Condensed Consolidated Financial Statements	4
		Notes to Unaudited Condensed Consolidated Financial Statements	8
		Note 1. Nature of the Business	8
		Note 2. Summary of Significant Accounting Policies	8
		Note 3. Regulation	11
		Note 4. Derivative Instruments	13
		Note 5. Fair Value	18
		Note 6. Investments in Equity Investees	20
		Note 7. Earnings Per Share	20
		Note 8. Common Stock Equity	20
		Note 9. Debt	21
		Note 10. Employee Benefit Plans	22
		Note 11. Income Taxes	23
		Note 12. Commitments and Contingent Liabilities	23
		Note 13. Business Segment and Other Operations Data	25
		Note 14. Related Party Transactions	28
	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	55
	ITEM 4.	Controls and Procedures	58
PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings	59
	ITEM 1A.	Risk Factors	59
	ITEM 2.	Unregistered Sale of Equity Securities and Use of Proceeds	59
	ITEM 6.	Exhibits	60
		Signatures	61

GLOSSARY OF KEY TERMS



AFUDC	Allowance for Funds Used During Construction
AIP	Accelerated Infrastructure Program
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 Bonds
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
Iroquois	Iroquois Gas Transmission L.P.
ISDA	The International Swaps and Derivatives Association
ITC	Federal Investment Tax Credit
LNG	Liquefied Natural Gas
MetLife	Metropolitan Life Insurance Company
MetLife Facility	NJR's unsecured, uncommitted $100 million private placement shelf note agreement with MetLife, Inc. expiring in September 2016
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



GLOSSARY OF KEY TERMS (cont.)

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
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
Prudential	Prudential Investment Management, Inc.
Prudential Facility	NJR's unsecured, uncommitted private placement shelf note agreement with Prudential
PTC	Federal Production Tax Credit
RA	Remediation Adjustment
Retail Holdings	NJR Retail Holdings Corporation
S&P	Standard & Poor's Financial Services, LLC
SAFE	Safety Acceleration and Facility Enhancement
Sarbanes-Oxley	Sarbanes-Oxley Act of 2002
SAVEGREEN	The SAVEGREEN Project®
SBC	Societal Benefits Charge
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

New Jersey Resources Corporation

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report, including, without limitation, statements as to management expectations 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 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,” “intend,” “expect,” “believe,” “will” “plan,” “should,” or “continue” or comparable terminology and are made based upon management's current expectations and beliefs as of this date concerning future developments and their potential effect on the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management.

The Company cautions readers that the assumptions that form the basis for forward-looking statements regarding customer growth, customer usage, qualifications for ITCs, PTCs and SRECs, financial condition, results of operations, cash flows, capital requirements, future capital expenditures, market risk, effective tax rate and other matters for fiscal 2016 and thereafter include many factors that are beyond the Company's ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes in the debt and equity capital markets. The factors that could cause actual results to differ materially from NJR's expectations include, but are not limited to, those discussed in Item 1A. Risk Factors of NJR's Annual Report on Form 10-K for the year ended September 30, 2015, as well as the following:


•	weather and economic conditions;


•	demographic changes in the NJNG service territory and their effect on NJNG'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 the Company's risk management efforts;


•	changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to the 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 NJR's 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;


•	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;


•	regulatory approval of NJNG's planned infrastructure programs;


•	the ability to obtain governmental and regulatory approvals, land-use rights, electric grid connection (in the case of distributed power projects) and/or financing for the construction, development and operation of NJR's unregulated energy investments and NJNG's infrastructure projects in a timely manner;


•	risks associated with the management of the Company's joint ventures and partnerships;


•	risks associated with NJR's investments in distributed power projects, including the availability of regulatory and tax incentives, the availability of viable projects, NJR's eligibility for ITCs and PTCs, the future market for SRECs 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 are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process;


•	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;


•	risks related to changes in accounting standards;


•	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 could adversely affect our operations, financial conditions and results of operations.

While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its Quarterly and Annual Reports, the Company does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.

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)	2015		2014
OPERATING REVENUES
Utility	$	151,606	$	208,727
Nonutility	292,652		615,397
Total operating revenues	444,258		824,124
OPERATING EXPENSES
Gas purchases:
Utility	46,665		84,263
Nonutility	254,088		472,971
Related parties	2,074		3,264
Operation and maintenance	46,233		44,759
Regulatory rider expenses	9,628		21,463
Depreciation and amortization	16,482		14,386
Energy and other taxes	9,637		14,321
Total operating expenses	384,807		655,427
OPERATING INCOME	59,451		168,697
Other income (expense), net	1,924		(110		)
Interest expense, net of capitalized interest	6,777		7,195
INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES	54,598		161,392
Income tax provision	8,357		40,867
Equity in earnings of affiliates	2,406		2,795
NET INCOME	$	48,647	$	123,320

EARNINGS PER COMMON SHARE
Basic	$.57		$1.46
Diluted	$.56		$1.44
DIVIDENDS DECLARED PER COMMON SHARE	$.24		$.225
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	85,675		84,552
Diluted	86,676		85,574

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	Three Months Ended
	December 31,
(Thousands)	2015			2014
Net income	$	48,647		$	123,320
Other comprehensive income, net of tax
Unrealized gain on available for sale securities, net of tax of $(2,614) and $(455), respectively	3,701			659
Net unrealized (loss) on derivatives, net of tax of $19, and $18, respectively	(33		)	(31		)
Adjustment to postemployment benefit obligation, net of tax of $(174) and $(169), respectively	256			247
Other comprehensive income	3,924			875
Comprehensive income	$	52,571		$	124,195

See Notes to Unaudited Condensed Consolidated Financial Statements

New Jersey Resources Corporation

Part I

ITEM 1. FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	Three Months Ended
	December 31,
(Thousands)	2015			2014
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES
Net income	$	48,647		$	123,320
Adjustments to reconcile net income to cash flows from operating activities
Unrealized (gain) on derivative instruments	(1,135		)	(88,673		)
Depreciation and amortization	16,482			14,386
Allowance for equity used during construction	(1,215		)	(1,253		)
Allowance for bad debt expense	334			964
Deferred income taxes	46,166			35,897
Manufactured gas plant remediation costs	(1,520		)	(1,008		)
Equity in earnings of equity investees, net of distributions received	1,139			2,146
Cost of removal - asset retirement obligations	(33		)	(105		)
Contributions to postemployment benefit plans	(30,144		)	(69		)
Changes in:
Components of working capital	(102,068		)	(75,089		)
Other noncurrent assets	(20,270		)	13,489
Other noncurrent liabilities	4,401			16,844
Cash flows (used in) from operating activities	(39,216		)	40,849
CASH FLOWS (USED IN) INVESTING ACTIVITIES
Expenditures for:
Utility plant	(42,465		)	(34,114		)
Solar and wind equipment	(45,006		)	(55,345		)
Real estate properties and other	(797		)	(11		)
Cost of removal	(6,575		)	(2,634		)
Investments in equity investees	(2,846		)	(547		)
Other	2,304			445
Cash flows (used in) investing activities	(95,385		)	(92,206		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock	3,807			24,373
Tax benefit from stock options exercised	—			816
Proceeds from sale-leaseback transaction	7,107			7,216
Proceeds from long-term debt	—			100,000
Payments of long-term debt	(2,676		)	(1,723		)
Purchases of treasury stock	(1,008		)	(3,945		)
Payments of common stock dividends	(20,524		)	(18,993		)
Net proceeds from (payments of) short-term debt	144,650			(46,804		)
Cash flows from financing activities	131,356			60,940
Change in cash and cash equivalents	(3,245		)	9,583
Cash and cash equivalents at beginning of period	4,928			2,151
Cash and cash equivalents at end of period	$	1,683		$	11,734
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables	$	(27,784	)	$	(166,229	)
Inventories	(26,772		)	8,385
Recovery of gas costs	(11,882		)	2,015
Gas purchases payable	(7,071		)	65,563
Gas purchases payable - related parties	(406		)	184
Prepaid and accrued taxes	(27,794		)	14,108
Accounts payable and other	(22,489		)	(53,852		)
Restricted broker margin accounts	6,855			46,550
Customers' credit balances and deposits	10,056			14,345
Other current assets	5,219			(6,158		)
Total	$	(102,068	)	$	(75,089	)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for:
Interest (net of amounts capitalized)	$	5,403		$	1,376
Income taxes	$	202		$	2,228
Accrued capital expenditures	$	21,721		$	12,107

See Notes to Unaudited Condensed Consolidated Financial Statements

New Jersey Resources Corporation

Part I

ITEM 1. FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

ASSETS



(Thousands)	December 31, 2015			September 30, 2015
PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost	$	1,937,686		$	1,908,024
Construction work in progress	161,686			155,553
Solar and wind equipment, real estate properties and other, at cost	569,820			481,003
Construction work in progress	35,253			77,705
Total property, plant and equipment	2,704,445			2,622,285
Accumulated depreciation and amortization, utility plant	(446,133		)	(437,097		)
Accumulated depreciation and amortization, solar and wind equipment, real estate properties and other	(62,213		)	(56,927		)
Property, plant and equipment, net	2,196,099			2,128,261
CURRENT ASSETS
Cash and cash equivalents	1,683			4,928
Customer accounts receivable
Billed	168,729			155,273
Unbilled revenues	19,883			6,372
Allowance for doubtful accounts	(4,706		)	(5,189		)
Regulatory assets	26,739			24,258
Gas in storage, at average cost	189,907			163,905
Materials and supplies, at average cost	7,908			7,138
Prepaid and accrued taxes	64,616			36,810
Derivatives, at fair value	58,978			40,743
Restricted broker margin accounts	21,334			12,990
Other	33,868			40,987
Total current assets	588,939			488,215
NONCURRENT ASSETS
Investments in equity investees	134,280			132,002
Regulatory assets	423,332			410,155
Derivatives, at fair value	3,741			4,334
Available for sale securities	65,790			59,475
Other	65,057			61,915
Total noncurrent assets	692,200			667,881
Total assets	$	3,477,238		$	3,284,357

See Notes to Unaudited Condensed Consolidated Financial Statements

New Jersey Resources Corporation

Part I

ITEM 1. FINANCIAL STATEMENTS (Continued)

CAPITALIZATION AND LIABILITIES



(Thousands)	December 31, 2015			September 30, 2015
CAPITALIZATION
Common stock, $2.50 par value; authorized 150,000,000 shares; outstanding December 31, 2015 — 85,809,094; September 30, 2015 — 85,531,423	$	221,555		$	220,838
Premium on common stock	213,351			209,931
Accumulated other comprehensive (loss), net of tax	(5,470		)	(9,394		)
Treasury stock at cost and other; shares December 31, 2015 — 2,812,896; September 30, 2015 — 2,804,847	(91,290		)	(92,164		)
Retained earnings	805,798			777,745
Common stock equity	1,143,944			1,106,956
Long-term debt	848,206			843,595
Total capitalization	1,992,150			1,950,551
CURRENT LIABILITIES
Current maturities of long-term debt	10,958			11,138
Short-term debt	211,000			66,350
Gas purchases payable	144,349			151,375
Gas purchases payable to related parties	1,150			1,601
Accounts payable and other	69,563			99,651
Dividends payable	20,594			20,528
Accrued taxes	1,338			1,326
Regulatory liabilities	1,091			12,154
New Jersey clean energy program	12,907			14,293
Derivatives, at fair value	51,879			32,791
Broker margin accounts	19,307			4,103
Customers' credit balances and deposits	30,846			20,790
Total current liabilities	574,982			436,100
NONCURRENT LIABILITIES
Deferred income taxes	491,522			444,935
Deferred investment tax credits	4,859			4,940
Deferred revenue	29,130			29,334
Derivatives, at fair value	2,606			5,529
Manufactured gas plant remediation	180,400			180,400
Postemployment employee benefit liability	108,432			137,414
Regulatory liabilities	63,311			67,533
Asset retirement obligation	20,960			19,145
Other	8,886			8,476
Total noncurrent liabilities	910,106			897,706
Commitments and contingent liabilities (Note 12)
Total capitalization and liabilities	$	3,477,238		$	3,284,357

See Notes to Unaudited Condensed Consolidated Financial Statements

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 516,300 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 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;

NJR Clean Energy Ventures Corporation, the Company's distributed power subsidiary, comprises the Clean Energy Ventures segment and consists of the Company's capital investments in distributed power projects, including commercial and residential solar projects and onshore wind investments;

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, and NJR Pipeline Company, which holds the Company's 20 percent ownership interest in PennEast and 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 and Commercial Realty & Resources Corporation. Retail Holdings and NJR Energy Corporation are included in Home Services and Other operations.


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 Securities and Exchange Commission and Accounting Standards Generally Accepted in the United States of America. The September 30, 2015, 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 2015 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 ended September 30, 2016. 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, 2015				September 30, 2015
($ in thousands)	Gas in Storage			Bcf	Gas in Storage			Bcf
NJRES		$	119,401	62.0		$	93,696	44.6
NJNG		70,506		23.0		70,209		21.4
Total		$	189,907	85.0		$	163,905	66.0

Sales Tax Accounting

Sales tax, that is collected from customers and presented in both operating revenues and operating expenses on the Unaudited Condensed Consolidated Statements of Operations, was $7.2 million and $11.8 million during the three months ended December 31, 2015 and 2014, respectively.

New Jersey Resources Corporation

Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Available for Sale Securities

Included in available for sale securities on the Unaudited Condensed Consolidated Balance Sheets are certain investments in two publicly traded energy companies. Total unrealized gains associated with these investments are included as a part of accumulated other comprehensive income, a component of common stock equity. Reclassifications of realized gains out of other comprehensive income into income are determined based on average cost.

The Company has equity securities that had a fair value of $9.4 million and $10.1 million as of December 31, 2015 and September 30, 2015, respectively. Total unrealized gains associated with these equity securities were $6.8 million, $4 million after tax, and $7.5 million, $4.4 million after tax, as of December 31, 2015 and September 30, 2015, respectively. The Company also has 1.84 million DM Common Units that had a fair value of $56.4 million and $49.4 million as of December 31, 2015 and September 30, 2015, respectively. Total unrealized gains associated with these units were $10.3 million, $6.1 million after tax, and $3.3 million, $1.9 million after tax, as of December 31, 2015 and September 30, 2015, respectively.

Common Stock Split

On January 20, 2015, NJR’s Board of Directors approved a 2 for 1 stock split of the Company’s common stock for the Company’s common stock holders of record on February 6, 2015. The additional shares were issued on March 3, 2015, resulting in an increase in average shares outstanding from approximately 42.7 million to approximately 85.4 million. All share-related information for prior periods has been adjusted throughout this report on a retroactive basis to reflect the effects of the stock split. As well, common stock and premium on common stock amounts have been adjusted as of the earliest period presented on the Unaudited Condensed Consolidated Balance Sheets.

Customer Accounts Receivable

Customer accounts receivable include outstanding billings from the following subsidiaries as of:



(Thousands)	December 31, 2015				September 30, 2015
NJRES	$	113,332	67	%	$	107,461	69	%
NJNG ⁽¹⁾	49,664		29		41,130		26
NJRCEV	1,471		1		1,084		1
NJRHS and other	4,262		3		5,598		4
Total	$	168,729	100	%	$	155,273	100	%


(1)	Does not include unbilled revenues of $19.9 million and $6.4 million as of December 31, 2015 and September 30, 2015, respectively.

Loan Receivable

NJNG provides interest-free 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 $7 million and $6.2 million in other current assets and $39.2 million and $36.2 million in other noncurrent assets as of December 31, 2015 and September 30, 2015, respectively, on the Unaudited Condensed Consolidated Balance Sheets, related to the loans.

NJR'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, 2015 and September 30, 2015, there was no allowance for doubtful accounts established for the SAVEGREEN loans.

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,

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 fiscal years, and interim periods within those years, beginning after December 15, 2017. Upon adoption, the guidance will be applied on a full or modified retrospective basis. The Company is currently evaluating the provisions of ASC 606 to understand the impact, if any, to its financial position, results of operations and cash flows upon adoption.

Stock Compensation

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 new guidance will become effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company does not expect this standard to have any impact to its financial position, results of operations and 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 new guidance will become effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Upon adoption, the amendment will be applied on a full or modified retrospective basis. The Company is currently evaluating the provisions of ASU No. 2015-02 to understand the impact, if any, on its financial position, results of operations and 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 in 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 amended guidance becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Upon adoption, the amendment will be applied on a retrospective basis. The Company is currently evaluating the amendments to understand the impact on its financial position, results of operations and cash flows upon adoption.

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 amended guidance becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Upon adoption, the amendments can be applied on a prospective or retrospective basis. The Company is currently evaluating the amendment to understand the impact on its financial position, results of operations and cash flows upon adoption.

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 and 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 fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently evaluating the amendments to understand the impact on its financial position, results of operations and cash flows upon adoption.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income Taxes

In November 2015, the FASB issued ASU 2015-17, an amendment to ASC 740, Income Taxes, to simplify the balance sheet presentation of deferred income taxes. The update requires entities to present all deferred tax assets and liabilities as noncurrent. The Company elected to early adopt the amended guidance effective October 1, 2015, and applied the new provisions retrospectively. Accordingly, the following amounts on the Unaudited Condensed Consolidated Balance Sheets, as of September 30, 2015, have been adjusted:



(Thousands)	As Previously Reported		Effect of Change			As Adjusted
Assets
Deferred taxes (current)	$	56,296	$	(56,296	)	$	—
Total current assets	$	544,511	$	(56,296	)	$	488,215
Other noncurrent assets	$	60,300	$	1,615		$	61,915
Total noncurrent assets	$	666,266	$	1,615		$	667,881
Total assets	$	3,339,038	$	(54,681	)	$	3,284,357
Capitalization and Liabilities
Deferred income taxes	$	499,616	$	(54,681	)	$	444,935
Total noncurrent liabilities	$	952,387	$	(54,681	)	$	897,706
Total capitalization and liabilities	$	3,339,038	$	(54,681	)	$	3,284,357

There was no additional impact to the Unaudited Condensed Consolidated Statements of Operations or the Unaudited Condensed Consolidated Statements of Cash Flows.


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 investment 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 tariff rates, BGSS and other regulatory tariff riders. As recovery of regulatory assets is subject to BPU approval, if there are any changes in regulatory positions that indicate recovery is not probable, the related cost would be charged to income in the period of such determination.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Regulatory assets and liabilities included on the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:



(Thousands)	December 31, 2015		September 30, 2015
Regulatory assets-current
Conservation Incentive Program	$	819	$	—
New Jersey Clean Energy Program	12,907		14,293
Derivatives at fair value, net	13,013		9,965
Total current regulatory assets	$	26,739	$	24,258
Regulatory assets-noncurrent
Environmental remediation costs
Expended, net of recoveries	$	17,963	$	18,886
Liability for future expenditures	180,400		180,400
Deferred income taxes	18,233		17,460
Derivatives at fair value, net	1,861		5,153
SAVEGREEN	27,968		26,882
Postemployment and other benefit costs	138,491		140,636
Deferred Superstorm Sandy costs	15,201		15,201
Conservation Incentive Program	17,552		—
Other noncurrent regulatory assets	5,663		5,537
Total noncurrent regulatory assets	$	423,332	$	410,155
Regulatory liability-current
Conservation Incentive Program	$	—	$	5,167
Overrecovered gas costs	1,091		6,987
Total current regulatory liabilities	$	1,091	$	12,154
Regulatory liabilities-noncurrent
Cost of removal obligation	$	48,683	$	54,880
New Jersey Clean Energy Program	14,512		11,956
Other noncurrent regulatory liabilities	116		697
Total noncurrent regulatory liabilities	$	63,311	$	67,533

Regulatory filings and/or actions that occurred during the current fiscal year include the following:


•	On October 15, 2015, the BPU approved a base rate increase related to NJ RISE resulting in a .07 percent increase to the average residential heat customer's bill, effective November 1, 2015, to recover costs through July 31, 2015.


•	On October 15, 2015, the BPU issued an order approving the continuation of the BGSS Incentive Programs with modification to the storage incentive program, beginning with the 2015 storage injection period, and termination of the FRM Program, effective November 1, 2015.


•	On October 27, 2015, NJNG notified the BPU that the bill credits to residential and small commercial customers, which will be issued from November 2015 through February 2016, will be approximately $76 million and will result in an approximate 17 percent decrease to the average residential heat customer's bill.


•	On November 13, 2015, NJNG filed a base rate petition with the BPU to increase its base tariff rates in the amount of $147.6 million.


•	On December 24, 2015, NJNG filed an SBC petition with the BPU to increase the RA factor, to decrease the NJCEP factor and to request approval of its remediation expenses incurred through June 30, 2015, resulting in an overall decrease of .8 percent to the average residential heat customer's bill.


•	On January 27, 2016, the BPU approved NJNG’s July 2015 petition to maintain its existing SAVEGREEN recovery rate.

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•	On January 27, 2016, the BPU approved NJNG's proposed SRL pipeline installation, operation and route selection, as modified by NJNG, including specific requirements regarding permitting, safety and integrity assessment.


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 as cash flow hedges of Canadian dollar denominated gas purchases and/or sales. These contracts, with a few exceptions as described below, 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.

Since NJRES chooses not to designate its financial commodity and physical forward commodity derivatives as accounting hedges or to elect NPNS, changes in the fair value of these derivative instruments 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 currency translation 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 may be used to hedge future forecasted cash payments associated with transportation and storage contracts along with purchases of natural gas. The Company designates these foreign currency derivatives as cash flow hedges of that exposure, and expects the hedge relationship to be highly effective throughout the term. Since NJRES designates its foreign exchange contracts as cash flow hedges, changes in fair value of the effective portion of the hedge are recorded in OCI. When the foreign exchange contracts are settled and the related purchases are recognized in income, realized gains and (losses) are recognized in gas purchases on the Unaudited Condensed Consolidated Statements of Operations.

As a result of NJRES entering into transactions to borrow gas, commonly referred to as “park and loans,” an embedded derivative is created related 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.

Changes in fair value of NJNG's financial derivative instruments are recorded as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets. NJNG has received regulatory approval to defer and to recover these amounts through future BGSS rates as an increase or decrease to the cost of natural gas in NJNG's tariff for gas service.

The Company elects NPNS accounting treatment on all physical commodity contracts at NJNG. These contracts are accounted for on an accrual basis. Accordingly, physical 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 amortized in current period earnings based on the current BPU BGSS factor and therm sales.

NJRCEV hedges certain of its expected production of SRECs through forward and futures contracts. The contracts require the Company to physically deliver the SRECs upon settlement. The Company elects NPNS accounting treatment on all SREC forward and futures contracts it enters into during the period. NJRCEV recognizes the related revenue upon transfer of the SREC certificate to the counterparty.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 the 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 reflected in future rates. Upon settlement, any gain or loss will be amortized in earnings over the life of the future debt issuance.

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, 2015						September 30, 2015
(Thousands)	Balance Sheet Location	Asset Derivatives			Liability Derivatives			Asset Derivatives			Liability Derivatives
Derivatives designated as hedging instruments:
NJRES:
Foreign currency contracts	Derivatives - current		$	—		$	52		$	—		$	—
Fair value of derivatives designated as hedging instruments			$	—		$	52		$	—		$	—

Derivatives not designated as hedging instruments:
NJNG:
Financial commodity contracts	Derivatives - current		$	820		$	13,819		$	207		$	10,163
	Derivatives - noncurrent		—			—			—			925
Interest rate contracts	Derivatives - noncurrent		$	—		$	1,861		$	—		$	4,228
NJRES:
Physical forward commodity contracts	Derivatives - current		$	9,844		$	22,333		$	4,854		$	9,281
	Derivatives - noncurrent		3,045			650			1,718			—
Financial commodity contracts	Derivatives - current		48,314			15,675			35,682			13,347
	Derivatives - noncurrent		696			95			2,626			386
Fair value of derivatives not designated as hedging instruments			$	62,719		$	54,433		$	45,087		$	38,330
Total fair value of derivatives			$	62,719		$	54,485		$	45,087		$	38,330

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 on the Unaudited Condensed Consolidated Balance Sheets.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2015:
Derivative assets:
NJRES
Physical forward commodity contracts		$	12,889		$	(809	)		$	(1,000	)		$	11,080
Financial commodity contracts		49,010			(13,004		)		(25,136		)		10,870
Total NJRES		$	61,899		$	(13,813	)		$	(26,136	)		$	21,950
NJNG
Financial commodity contracts		$	820		$	(820	)		$	—			$	—
Total NJNG		820			(820		)		—				—
Derivative liabilities:
NJRES
Physical forward commodity contracts		$	22,983		$	(809	)		$	(1,200	)		$	20,974
Financial commodity contracts		15,770			(13,004		)		(2,766		)		—
Foreign currency contracts		52			—				—				52
Total NJRES		$	38,805		$	(13,813	)		$	(3,966	)		$	21,026
NJNG
Financial commodity contracts		$	13,819		$	(820	)		$	(12,999	)		$	—
Interest rate contracts		$	1,861		$	—			$	—			$	1,861
Total NJNG		$	15,680		$	(820	)		$	(12,999	)		$	1,861
As of September 30, 2015:
Derivative assets:
NJRES
Physical forward commodity contracts		$	6,562		$	(1,326	)		$	—			$	5,236
Financial commodity contracts		38,308			(13,734		)		3,841				28,415
Total NJRES		$	44,870		$	(15,060	)		$	3,841			$	33,651
NJNG
Financial commodity contracts		$	207		$	(207	)		$	—			$	—
Derivative liabilities:
NJRES
Physical forward commodity contracts		$	9,271		$	(1,326	)		$	(1,200	)		$	6,745
Financial commodity contracts		13,733			(13,733		)		—				—
Total NJRES		$	23,004		$	(15,059	)		$	(1,200	)		$	6,745
NJNG
Financial commodity contracts		$	11,088		$	(207	)		$	(10,881	)		$	—
Interest rate contracts		4,228			—				—				4,228
Total NJNG		$	15,316		$	(207	)		$	(10,881	)		$	4,228


(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)	Offsetting derivative instruments include: transactions with NAESB netting election, transactions held by FCM's 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.

NJRES utilizes financial derivatives to economically hedge the gross margin associated with the purchase of physical gas for injection into storage and the subsequent sale of physical gas 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 sold. 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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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:		2015			2014
NJRES:
Physical commodity contracts	Operating revenues	$	11,874		$	16,091
Physical commodity contracts	Gas purchases	(21,237		)	(19,856		)
Financial commodity contracts	Gas purchases	41,276			117,721
Total unrealized and realized gains		$	31,913		$	113,956

The table above does not include gains (losses) associated with NJNG's financial derivatives of $(5.6) million and $(19) million for the three months ended December 31, 2015 and 2014, respectively and the treasury rate lock of $2.4 million for the three months ended December 31, 2015. 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 guidance and at settlement the resulting gains and/or losses are payable to and/or recoverable from customers. Any changes in the value of NJNG's financial derivatives are deferred in regulatory assets or liabilities resulting in no impact to earnings.

NJRES previously designated its foreign exchange contracts as cash flow hedges, therefore, changes in fair value of the effective portion of the hedges are recorded in OCI and, upon settlement of the contracts, realized gains and (losses) are reclassified from OCI to gas purchases on the Unaudited Condensed Consolidated Statements of Operations. The following table reflects the effect of derivative instruments designated as cash flow hedges on OCI as of December 31:



(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)					Amount of Gain or (Loss) Recognized on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Three Months Ended						Three Months Ended					Three Months Ended
	December 31,						December 31,					December 31,
Derivatives in cash flow hedging relationships:	2015			2014			2015		2014			2015		2014
Foreign currency contracts	$	(64	)	$	(24	)	$	12	$	(25	)	$	—	$	—

NJNG and NJRES had the following outstanding long (short) derivatives as of:



		Volume (Bcf)
		December 31, 2015		September 30, 2015
NJNG	Futures⁽¹⁾	19.5		25.8
NJRES	Futures	(120.8	)	(91.1	)
	Options	5.8		1.2
	Physical	111.7		48.2


(1)	Not included is the notional amount of $125 million related to NJNG’s treasury lock agreement.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2015			September 30, 2015
NJNG	Broker margin - Current assets	$	17,487		$	12,990
NJRES	Broker margin - Current assets	$	3,847		$	—
	Broker margin - Current (liabilities)	$	(19,307	)	$	(4,103	)

Wholesale Credit Risk

NJNG and NJRES are exposed to credit risk as a result of their wholesale marketing activities. In addition, NJRCEV engages in sales of electricity, capacity and SRECs. As a result of the inherent volatility in the prices of natural gas commodities, derivatives 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 (e.g., failed to deliver or pay for natural gas or SRECs), then the Company could sustain a loss.

NJR monitors and manages the credit risk of its wholesale marketing 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.

Internally-rated exposure applies to counterparties that are not rated by S&P or Moody's. In these cases, the Company'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, 2015. 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		$	99,405
Noninvestment grade		9,693
Internally rated investment grade		22,507
Internally rated noninvestment grade		7,815
Total		$	139,420

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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2015 and September 30, 2015, was $1.9 million and $4.2 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, 2015 and September 30, 2015, the Company would have been required to post an additional $1.9 million and $4.2 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 temporary investments, 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, including current maturities and excluding capital leases is as follows:



(Thousands)	December 31, 2015		September 30, 2015
Carrying value ⁽¹⁾	$	807,845	$	807,845
Fair market value	$	809,107	$	817,319


(1)	Excludes capital leases of $51.3 million and $46.9 million as of December 31, 2015 and September 30, 2015, respectively.

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, 2015, 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 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 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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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:

1) The data is widely accepted and public

2) The data is non-proprietary and sourced from an independent third party

3) The data is 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.

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, 2015:
Assets:
Physical forward commodity contracts		$	—		$	12,889		$	—	$	12,889
Financial derivative contracts - natural gas		49,830			—			—		49,830
Available for sale equity securities - energy industry⁽¹⁾		65,790			—			—		65,790
Other ⁽²⁾		1,809			—			—		1,809
Total assets at fair value		$	117,429		$	12,889		$	—	$	130,318
Liabilities:
Physical forward commodity contracts		$	—		$	22,983		$	—	$	22,983
Financial commodity contracts - natural gas		29,589			—			—		29,589
Financial commodity contracts - foreign exchange		—			52			—		52
Interest rate contracts		—			1,861			—		1,861
Total liabilities at fair value		$	29,589		$	24,896		$	—	$	54,485
As of September 30, 2015:
Assets:
Physical forward commodity contracts		$	—		$	6,572		$	—	$	6,572
Financial derivative contracts - natural gas		38,515			—			—		38,515
Available for sale equity securities - energy industry⁽¹⁾		59,475			—			—		59,475
Other ⁽²⁾		1,572			—			—		1,572
Total assets at fair value		$	99,562		$	6,572		$	—	$	106,134
Liabilities:
Physical forward commodity contracts		$	—		$	9,281		$	—	$	9,281
Financial commodity contracts - natural gas		24,821			—			—		24,821
Interest rate contracts		—			4,228			—		4,228
Total liabilities at fair value		$	24,821		$	13,509		$	—	$	38,330


(1)	Included in other noncurrent assets on the Unaudited Condensed Consolidated Balance Sheets.


(2)	Includes various money market funds in Level 1.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


6.	INVESTMENTS IN EQUITY INVESTEES

NJR's investments in equity investees includes the following investments as of:



(Thousands)	December 31, 2015		September 30, 2015
Steckman Ridge ⁽¹⁾	$	125,058	$	125,649
PennEast	9,222		6,353
Total	$	134,280	$	132,002


(1)	Includes loans with a total outstanding principal balance of $70.4 million for both December 31, 2015 and September 30, 2015. 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 118-mile pipeline that will extend from northeast Pennsylvania to western New Jersey.

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 with an estimated service date of November 2017. 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)	2015		2014
Net income, as reported	$	48,647	$	123,320
Basic earnings per share
Weighted average shares of common stock outstanding-basic	85,675		84,552
Basic earnings per common share	$0.57		$1.46
Diluted earnings per share
Weighted average shares of common stock outstanding-basic	85,675		84,552
Incremental shares ⁽¹⁾	1,001		1,022
Weighted average shares of common stock outstanding-diluted	86,676		85,574
Diluted earnings per common share ⁽²⁾	$0.56		$1.44


(1)	Incremental shares consist primarily of 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, 2015, and 2014.


8.	COMMON STOCK EQUITY

Changes in common stock equity during the three months ended December 31, 2015, are 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, 2015	85,531		$	220,838	$	209,931			$	(9,394	)	$	(92,164	)	$	777,745		$	1,106,956
Net income															48,647			48,647
Other comprehensive income									3,924									3,924
Common stock issued:
Incentive plan	286		717		4,782													5,499
Dividend reinvestment plan	127				(1,339		)					5,144						3,805
Cash dividend declared ($.24 per share)															(20,594		)	(20,594		)
Treasury stock and other	(135	)			(23		)					(4,270		)				(4,293		)
Balance at December 31, 2015	85,809		$	221,555	$	213,351			$	(5,470	)	$	(91,290	)	$	805,798		$	1,143,944

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. On December 14, 2015, NJR registered 5 million shares of NJR common stock for issuance under the DRP. NJR raised $3.8 million of equity through the DRP for both the three months ended December 31, 2015 and 2014, by issuing approximately 127,000 and 148,000 shares, respectively. NJR also raised approximately $19.8 million of equity by issuing approximately 688,000 new shares through the waiver discount feature of the DRP during the three months ended December 31, 2014. NJR issued no new shares through the waiver discount feature of the DRP during the three months ended December 31, 2015. All fiscal 2015 share data has been adjusted for the March 2015 stock split.

Accumulated Other Comprehensive Income

The following table presents the changes in the components of accumulated other comprehensive income, net of related tax effects:



(Thousands)	Available for Sale Securities		Cash Flow Hedges				Postemployment Benefit Obligation				Total
Balance at September 30, 2015	$	6,385	$	—			$	(15,779	)		$	(9,394	)
Other comprehensive income, 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 at December 31, 2015	$	10,086	$	(33	)		$	(15,523	)		$	(5,470	)

Balance at September 30, 2014	$	4,782	$	(93	)		$	(10,283	)		$	(5,594	)
Other comprehensive income (loss), net of tax
Other comprehensive income (loss), before reclassifications, net of tax of $(455), $9, $0, $(446)	659		(15		)		—				644
Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $9, $(169), $(160)	—		(16		)	⁽¹⁾	247			⁽²⁾	231
Net current-period other comprehensive income (loss), net of tax of $(455), $18, $(169), $(606)	659		(31		)		247				875
Balance at December 31, 2014	$	5,441	$	(124	)		$	(10,036	)		$	(4,719	)


(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.

New Jersey Resources Corporation

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit Facilities

A summary of NJR's credit facility and NJNG's commercial paper program and credit facility are as follows:



(Thousands)	December 31, 2015			September 30, 2015			Expiration Dates
NJR
Bank revolving credit facilities⁽¹⁾	$	425,000		$	425,000		September 2020
Notes outstanding at end of period	$	135,000		$	39,350
Weighted average interest rate at end of period	1.24		%	1.17		%
Amount available at end of period ⁽²⁾	$	267,055		$	369,176
Bank revolving credit facilities⁽³⁾	$	—		$	100,000		October 2015
Amount available at end of period	$	—		$	100,000
NJNG
Bank revolving credit facilities ⁽¹⁾	$	250,000		$	250,000		May 2019
Commercial paper outstanding at end of period	$	76,000		$	27,000
Weighted average interest rate at end of period	.28		%	.20		%
Amount available at end of period ⁽⁴⁾	$	173,269		$

NEW JERSEY RESOURCES CORP - FORM 10-Q - February 3, 2016

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