NEW JERSEY RESOURCES CORP - FORM 10-Q

NEW JERSEY RESOURCES CORP - FORM 10-Q - February 8, 2017

Attached files

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex322dec2016.htm
EX-32.1 - EXHIBIT 32.1 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex321dec2016.htm
EX-31.2 - EXHIBIT 31.2 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex312dec2016.htm
EX-31.1 - EXHIBIT 31.1 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex311dec2016.htm
EX-10.6 - EXHIBIT 10.6 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex106formofrestrictedst.htm
EX-10.5 - EXHIBIT 10.5 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex105fy2017performance-.htm
EX-10.4 - EXHIBIT 10.4 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex104fy2017performances.htm
EX-10.3 - EXHIBIT 10.3 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex103fy2017deferredstoc.htm
EX-10.2 - EXHIBIT 10.2 DECEMBER 30, 2016 - NEW JERSEY RESOURCES CORP	njrex102fy17performancesha.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, 2016

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
Glossary of Key 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	12
		Note 4. Derivative Instruments	13
		Note 5. Fair Value	19
		Note 6. Investments in Equity Investees	21
		Note 7. Earnings Per Share	22
		Note 8. Common Stock Equity	22
		Note 9. Debt	23
		Note 10. Employee Benefit Plans	24
		Note 11. Income Taxes	24
		Note 12. Commitments and Contingent Liabilities	25
		Note 13. Business Segment and Other Operations Data	27
		Note 14. Related Party Transactions	30
	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	56
	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
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



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

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.

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

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

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

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

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

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.

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

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

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.

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.

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.

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

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.

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:

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	)

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.

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.

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.

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.

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.

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

(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