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EX-32.2 - EXHIBIT 32.2 SEPTEMBER 30, 2018 - NEW JERSEY RESOURCES CORPnjrex322sep2018.htm
EX-32.1 - EXHIBIT 32.1 SEPTEMBER 30, 2018 - NEW JERSEY RESOURCES CORPnjrex321sep2018.htm
EX-31.2 - EXHIBIT 31.2 SEPTEMBER 30, 2018 - NEW JERSEY RESOURCES CORPnjrex312sep2018.htm
EX-31.1 - EXHIBIT 31.1 SEPTEMBER 30, 2018 - NEW JERSEY RESOURCES CORPnjrex311sep2018.htm
EX-23.1 - EXHIBIT 23.1 SEPTEMBER 30, 2018 - NEW JERSEY RESOURCES CORPnjrex231sep2018.htm
EX-21.1 - EXHIBIT 21.1 SEPTEMBER 30, 2018 - NEW JERSEY RESOURCES CORPnjrex211sep2018.htm
EX-10.24(A) - EXHIBIT 10.24(A) SEPTEMBER 30, 2018 - NEW JERSEY RESOURCES CORPnjrex1024ascheduleofemploy.htm


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

FORM 10‑K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001‑08359
 
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey
 
22‑2376465
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1415 Wyckoff Road, Wall, New Jersey 07719
 
732‑938‑1000
(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)
Securities registered pursuant to Section 12 (g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes        o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes        x No

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.    x Yes        o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    
x Yes        o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K(§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.         x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer: x
 
 
Accelerated filer: o
Non-accelerated filer: o
 
 
Smaller reporting company: o
 
 
 
Emerging growth company: o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

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

The aggregate market value of the registrant’s common stock held by non-affiliates was $3,451,945,383 based on the closing price of $40.10 per share on March 31, 2018, as reported on the New York Stock Exchange.

The number of shares outstanding of $2.50 par value common stock as of November 16, 2018 was 88,505,199.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareowners (Proxy Statement) to be held on January 23, 2019, are incorporated by reference into Part I and Part III of this report.
 


New Jersey Resources Corporation

TABLE OF CONTENTS

 
 
 
Page
PART I
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1A.
 
ITEM 1B.
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
ITEM 4A.
PART II
 
 
ITEM 5.
 
ITEM 6.
 
ITEM 7.
 
ITEM 7A.
 
ITEM 8.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 9.
 
ITEM 9A.
 
ITEM 9B.
PART III*
 
 
ITEM 10.
 
ITEM 11.
 
ITEM 12.
 
ITEM 13.
 
ITEM 14.
PART IV
 
 
ITEM 15.
 
 
 
 
 
 
* Portions of Item 10 and Items 11-14 are Incorporated by Reference from the Proxy Statement.

i

New Jersey Resources Corporation



GLOSSARY OF KEY TERMS                                                                                                                                                        
Adelphia
Adelphia Gateway, LLC
AFUDC
Allowance for Funds Used During Construction
ARO
Asset Retirement Obligations
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.
Degree-day
The measure of the variation in the weather based on the extent to which the average daily temperature falls below 65 degrees Fahrenheit
DM
Dominion Energy Midstream Partners, L.P., a master limited partnership
DM Common Units
Common units representing limited partnership interests in DM
DRP
NJR Direct Stock Purchase and Dividend Reinvestment Plan
Dths
Dekatherms
EDA
New Jersey Economic Development Authority
EDA Bonds
Collectively, Series 2011A, Series 2011B and Series 2011C Bonds issued to NJNG by the EDA
EDECA
Electric Discount and Energy Competition Act
EE
Energy Efficiency
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
GAAP
Generally Accepted Accounting Principles of the United States
HCCTR
Health Care Cost Trend Rate
Home Services and Other
Home Services and Other Operations (formerly Retail and Other Operations)
ICE
Intercontinental Exchange
IEC
Interstate Energy Company, LLC
Iroquois
Iroquois Gas Transmission L.P.
IRS
Internal Revenue Service
ISDA
The International Swaps and Derivatives Association
ITC
Investment Tax Credit
LIBOR
London Inter-Bank Offered Rate
LNG
Liquefied Natural Gas
Loan Agreement
Loan Agreement between the EDA and NJNG
MGP
Manufactured Gas Plant
MLP
Master Limited Partnership
MMBtu
Million British Thermal Units
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
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 or Natural Gas Distribution segment
NJNG Credit Facility
The $250 million unsecured committed credit facility expiring in May 2019
NJR Credit Facility
The $425 million unsecured committed credit facility expiring in September 2020
NJR or The Company
New Jersey Resources Corporation

Page 1

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
NJRRS
NJR Retail 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
OPEB
Other Postemployment Benefit Plans
PBO
Projected Benefit Obligation
PennEast
PennEast Pipeline Company, LLC
PEP
Pension Equalization Plan
PIM
Pipeline Integrity Management
PPA
Power Purchase Agreement
Prudential Facility
NJR’s unsecured, uncommitted private placement shelf note agreement with Prudential Investment Management, Inc.
PTC
Production Tax Credit
RAC
Remediation Adjustment Clause
REC
Renewable Energy Certificate
S&P
Standard & Poor’s Financial Services, LLC
SAFE I
Safety Acceleration and Facility Enhancement Program, Phase I
SAFE II
Safety Acceleration and Facility Enhancement Program, Phase II
Sarbanes-Oxley
Sarbanes-Oxley Act of 2002
SAVEGREEN
The SAVEGREEN Project®
Savings Plan
Employees’ Retirement Savings Plan
SBC
Societal Benefits Charge
SEC
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
Talen
Talen Energy Marketing, LLC or Talen Generation, LLC
Tetco
Texas Eastern Transmission
The Exchange Act
The Securities Exchange Act of 1934, as amended
The Tax Act
An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as The Tax Cuts and Jobs Act of 2017
Trustee
U.S. Bank National Association
TSR
Total Shareholder Return
U.S.
The United States of America
Union
International Brotherhood of Electrical Workers Local 1820
USF
Universal Service Fund

Page 2

New Jersey Resources Corporation

TABLE OF CONTENTS

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 1. Business and Item 3. Legal Proceedings, and in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, 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 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 2019 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 Part I, Item 1A. Risk Factors, as well as the following:

risks associated with our investments in clean energy projects, including the availability of regulatory incentives and federal tax credits, the availability of viable projects, our eligibility for ITCs, the future market for SRECs and electricity prices, and operational risks related to projects in service;
our ability to obtain governmental and regulatory approvals, 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, pipeline transportation systems and NJNG and Midstream infrastructure projects, including NJ RISE, SRL, PennEast and Adelphia, in a timely manner;
risks associated with acquisitions and the related integration of acquired assets with our current operations, including our planned Adelphia acquisition;
volatility of natural gas and other commodity prices and their impact on NJNG customer usage, NJNGs BGSS incentive programs, our Energy Services segment operations and our risk management efforts;
our ability to comply with current and future regulatory requirements;
the level and rate at which NJNGs costs and expenses are incurred and the extent to which they are approved for recovery from customers through the regulatory process, including through future base rate case filings;
the impact of a disallowance of recovery of environmental-related expenditures and other regulatory changes;
the performance of our subsidiaries;
operating risks incidental to handling, storing, transporting and providing customers with natural gas;
access to adequate supplies of natural gas and dependence on third-party storage and transportation facilities for natural gas supply;
the regulatory and pricing policies of federal and state regulatory agencies;
timing of qualifying for ITCs due to delays or failures to complete planned solar projects and the resulting effect on our effective tax rate and earnings;
the results of legal or administrative proceedings with respect to claims, rates, environmental issues, gas cost prudence reviews and other matters;
changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to our Company;
risks related to cyberattacks or failure of information technology systems;
the impact of volatility in the equity and credit markets on our access to capital;
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;
commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties, and liquidity in the wholesale energy trading market;
accounting effects and other risks associated with hedging activities and use of derivatives contracts;
our ability to optimize our physical assets;
weather and economic conditions;
changes to tax laws and regulations;
any potential need to record a valuation allowance for our deferred tax assets;
our ability to comply with debt covenants;
demographic changes in our service territory and their effect on our customer growth;
the impact of natural disasters, terrorist activities and other extreme events on our operations and customers;
the costs of compliance with present and future environmental laws, including potential climate change-related legislation;
environmental-related and other uncertainties related to litigation or administrative proceedings;
risks related to our employee workforce; and
risks associated with the management of our joint ventures and partnerships, and investment in a master limited partnership.

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.

Page 3

New Jersey Resources Corporation
Part I


ITEM 1. BUSINESS                                                                                                                                                                         

ORGANIZATIONAL STRUCTURE

New Jersey Resources Corporation is a New Jersey corporation formed in 1981 pursuant to a corporate reorganization. We are an energy services holding company whose principal business is the distribution of natural gas through a regulated utility, providing other retail and wholesale energy services to customers and investing in clean energy projects and midstream assets. We are an exempt holding company under section 1263 of the Energy Policy Act of 2005.

Our primary subsidiaries include:

New Jersey Natural Gas Company provides regulated retail natural gas service to approximately 538,700 residential and commercial customers in central and northern New Jersey and participates in the off-system sales and capacity release markets. NJNG, a local natural gas distribution company, is regulated by the BPU and comprises the Companys Natural Gas Distribution segment and is referred to herein as NJNG or Natural Gas Distribution.


NJR Clean Energy Ventures Corporation includes the results of operations and assets related to the Company’s unregulated capital investments in clean energy projects, including commercial and residential solar projects and onshore wind investments. NJRCEV comprises the Company’s Clean Energy Ventures segment and is referred to herein as Clean Energy Ventures.


NJR Energy Services Company maintains and transacts around a portfolio of physical assets consisting of natural gas storage and transportation contracts in the U.S. and Canada. NJRES also provides unregulated wholesale energy management services to other energy companies and natural gas producers. NJRES comprises our Energy Services segment and is referred to herein as Energy Services. NJR Retail Services Company provided unregulated retail natural gas supply and transportation services to commercial and industrial customers in Delaware, Maryland, Pennsylvania and New Jersey from July 2017 through February 2018. NJRRS was sold to an unrelated third party on February 28, 2018, and was included as part of our Energy Services segment for fiscal 2018 and 2017.


NJR Midstream Holdings Corporation, which comprises the Midstream segment, invests in energy-related ventures through its subsidiaries. Investments include NJR Steckman Ridge Storage Company, which holds our 50 percent combined ownership interest in Steckman Ridge, located in Pennsylvania; NJNR Pipeline, which holds our DM Common Units; and NJR Pipeline Company, which includes Adelphia Gateway, LLC and our 20 percent ownership interest in PennEast. See Note 6. Investments in Equity Investees for more information.


NJR Home Services Company provides heating, ventilation and cooling service, sales and installation of appliances to approximately 110,000 service contract customers, as well as solar installation projects, and is the primary contributor to Home Services and Other operations.



Page 4

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

REPORTING SEGMENTS

We operate within four reporting segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services and Midstream.

The Natural Gas Distribution segment consists of regulated natural gas services, off-system sales, capacity and storage management operations. The Energy Services segment consists of unregulated wholesale and retail energy operations. The Clean Energy Ventures segment consists of capital investments in clean energy projects. The Midstream segment consists of investments in the midstream natural gas market, such as natural gas transportation and storage facilities.

Net income by reporting segment and other business operations for the years ended September 30, are as follows:
njr10k2017_chart-31596a04.jpg
* Energy Services’ net income for fiscal 2017 was $476,000 and does not show clearly in the above graph.

Assets composition by reporting segment and other business operations at September 30, are as follows:
njr10k2017_chart-35963a04.jpgchart-807959f094ee074db7aa04.jpg

Page 5

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

Management uses NFE, a non-GAAP financial measure, when evaluating our operating results. NFE is a measure of the earnings based on eliminating timing differences surrounding the recognition of certain gains or losses to effectively match the earnings effects of the economic hedges with the physical sale of gas and, therefore, eliminates the impact of volatility to GAAP earnings associated with the derivative instruments. Energy Services economically hedges its natural gas inventory with financial derivative instruments and calculates the related tax effect based on the statutory rate.

Non-GAAP financial measures are not in accordance with, or an alternative to GAAP, and should be considered in addition to, and not as a substitute for, the comparable GAAP measure. The following is a reconciliation of consolidated net income, the most directly comparable GAAP measure, to NFE:
(Thousands)
2018
2017
2016
Net income
$
233,436

$
132,065

$
131,672

Add:
 
 
 
Unrealized loss (gain) on derivative instruments and related transactions
26,770

(11,241
)
46,883

Tax effect
(4,512
)
4,062

(17,018
)
Effects of economic hedging related to natural gas inventory
(22,570
)
38,470

(36,816
)
Tax effect
7,362

(13,964
)
13,364

NFE (1)
$
240,486

$
149,392

$
138,085

Basic earnings per share
$
2.66

$
1.53

$
1.53

Add:
 
 
 
Unrealized loss (gain) on derivative instruments and related transactions
0.31

(0.13
)
0.55

Tax effect
(0.05
)
0.05

(0.20
)
Effects of economic hedging related to natural gas inventory
(0.26
)
0.45

(0.43
)
Tax effect
0.08

(0.17
)
0.16

Basic NFE per share
$
2.74

$
1.73

$
1.61

NFE during fiscal 2018 was $59.6 million, or $0.68 per share, higher due to the revaluation of deferred taxes resulting from the reduction in the federal corporate tax rate related to the Tax Act.

NFE by reporting segment and other business operations for the years ended September 30, are as follows:
njr10k2017_chart-37247a04.jpg

Page 6

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

Natural Gas Distribution

General

Our Natural Gas Distribution segment consists of regulated utility operations that provide natural gas service to approximately 538,700 customers. NJNG’s service territory includes New Jersey’s Monmouth and Ocean counties and parts of Burlington, Morris and Middlesex counties. It encompasses 1,516 square miles, covering 105 municipalities with an estimated population of 1.5 million people. It is primarily suburban, highlighted by approximately 100 miles of New Jersey coastline. It is in close proximity to New York City, Philadelphia and the metropolitan areas of northern New Jersey and is accessible through a network of major roadways and mass transportation.

NJNG’s business is subject to various risks, such as those associated with adverse economic conditions, which can negatively impact customer growth, operating and financing costs, fluctuations in commodity prices, which can impact customer usage, customer conservation efforts, certain regulatory actions and environmental remediation. It is often difficult to predict the impact of trends associated with these risks. NJNG employs strategies to manage the challenges it faces, including pursuing customer conversions from other fuel sources and monitoring new construction markets through contact with developers, utilizing incentive programs through BPU-approved mechanisms to reduce gas costs, pursuing rate and other regulatory strategies designed to stabilize and decouple gross margin, and working actively with consultants and the NJDEP to manage expectations related to its obligations associated with its former MGP sites.

Operating Revenues/Throughput

For the fiscal years ended September 30, operating revenues and throughput by customer class are as follows:
 
2018
 
2017
 
2016
($ in thousands)
Operating Revenue
Bcf
 
Operating Revenue
Bcf
 
Operating Revenue
Bcf
Residential
$
441,486

45.5

 
$
395,315

40.7

 
$
345,597

36.9

Commercial and other
95,351

8.9

 
98,777

8.7

 
80,994

7.3

Firm transportation
65,256

15.5

 
73,206

14.4

 
69,696

14.1

Total residential and commercial
602,093

69.9

 
567,298

63.8

 
496,287

58.3

Interruptible
7,522

46.2

 
7,970

55.0

 
8,867

61.5

Total system
609,615

116.1

 
575,268

118.8

 
505,154

119.8

BGSS incentive programs (1)
122,250

42.8

 
120,369

49.5

 
89,192

56.6

Total
$
731,865

158.9

 
$
695,637

168.3

 
$
594,346

176.4

(1)
Does not include 107.4, 128.9 and 160.1 Bcf for the capacity release program and related amounts of $5.7 million, $6.5 million and $8.1 million, which are recorded as a reduction of gas purchases on the Consolidated Statements of Operations for the fiscal years ended September 30, 2018, 2017 and 2016, respectively.

NJNG added 9,596 and 9,126 new customers and added natural gas heat and other services to another 613 and 662 existing customers in fiscal 2018 and 2017, respectively. NJNG expects its new customer annual growth rate to continue to be approximately 1.8 percent with projected additions in the range of approximately 28,000 to 30,000 new customers over the next three years. This anticipated customer growth represents approximately $5.5 million in new annual utility gross margin, a non-GAAP financial measure, as calculated under NJNG’s current CIP tariff. For a definition of utility gross margin see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations - Natural Gas Distribution Segment.

In fiscal 2018, no single customer represented more than 10 percent of consolidated operating revenues.

Seasonality of Gas Revenues

Therm sales are significantly affected by weather conditions, with customer demand being greatest during the winter months when natural gas is used for heating purposes. The relative measurement of the impact of weather is in degree-days. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each day’s average temperature. A degree-day is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65 degrees Fahrenheit. Each degree of temperature below 65 degrees Fahrenheit is counted as one heating degree-day. Normal heating degree-days are based on a 20-year average, calculated based on three reference areas representative of NJNG’s service territory.


Page 7

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

The CIP, a mechanism authorized by the BPU, stabilizes NJNG’s utility gross margin, regardless of variations in weather. In addition, the CIP decouples the link between utility gross margin and customer usage, allowing NJNG to promote energy conservation measures. Recovery of utility gross margin is subject to additional conditions, including an earnings test, a revenue test and an evaluation of BGSS-related savings achieved over a 12-month period. In May 2014, the BPU approved the continuation of the CIP program.

Concurrent with its annual BGSS filing, NJNG files for an annual review of its CIP, during which time it can request rate changes, as appropriate. For additional information regarding the CIP, including rate actions and impact to margin, see Note 3. Regulation in the accompanying Consolidated Financial Statements and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations - Natural Gas Distribution Segment.

Gas Supply

Firm Natural Gas Supplies

In fiscal 2018, NJNG purchased natural gas from approximately 79 suppliers under contracts ranging from one day to one year and purchased over 10 percent of its natural gas from one supplier. NJNG believes the loss of this supplier would not have a material adverse impact on its results of operations, financial position or cash flows, as an adequate number of alternative suppliers exist. NJNG believes that its supply strategy should adequately meet its expected firm load for the upcoming winter season.

Firm Transportation and Storage Capacity

NJNG maintains agreements for firm transportation and storage capacity with several interstate pipeline companies to take delivery of firm natural gas supplies, which ensures the ability to reliably service its customers. NJNG receives natural gas at 10 citygate stations located in Middlesex, Morris and Passaic counties in New Jersey.

The pipeline companies that provide firm transportation service to NJNG’s citygate stations, the maximum daily deliverability of that capacity and the contract expiration dates are as follows:
Pipeline
Dths(1)
Expiration
Texas Eastern Transmission, L.P.
300,738

 
Various dates between 2019 and 2023
Transcontinental Gas Pipe Line Corp.
202,531

 
Various dates between 2019 and 2032
Columbia Gas Transmission Corp.
50,000

 
Various dates between 2024 and 2030
Tennessee Gas Pipeline Co.
25,166

 
Various dates between 2023 and 2024
Algonquin Gas Transmission
12,000

 
2020
Total
590,435

 
 
(1)
Numbers are shown net of any capacity release contracted amounts.

Dominion Energy Transmission, Inc. provides NJNG firm contract transportation service and supplies the pipelines included in the table above.

In addition, NJNG has storage contracts that provide an additional 102,941 Dths of maximum daily deliverability to NJNG’s citygate stations from storage fields in its Northeast market area. The storage suppliers, the maximum daily deliverability of that storage capacity and the contract expiration dates are as follows:
Pipeline
Dths
Expiration
Texas Eastern Transmission, L.P.
94,557

 
2020
Transcontinental Gas Pipe Line Corp.
8,384

 
2028
Total
102,941

 
 

NJNG also has upstream storage contracts. The maximum daily deliverability and contract expiration dates are as follows:
Company
Dths
Expiration
Dominion Transmission Corporation
208,214

 
Various dates between 2021 and 2024
Steckman Ridge, L.P.
38,000

 
2020
Stagecoach Pipeline & Storage Company LLC
25,337

 
2023
Total
271,551

 
 

NJNG utilizes its transportation contracts to transport gas to NJNG’s citygates from the Dominion Transmission Corporation, Steckman Ridge and Stagecoach Pipeline & Storage Company LLC storage fields. NJNG has sufficient firm transportation, storage and supply capacity to fully meet its firm sales contract obligations.


Page 8

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

Citygate Supplies from Energy Services

NJNG has several citygate supply agreements with Energy Services. NJNG and Energy Services have an agreement where NJNG releases 10,000 Dths/day of Tetco capacity, 2,200 Dths/day of Dominion Energy Transmission, Inc. capacity, 10,728 Dths/day of Tennessee Gas Pipeline capacity and 1.6 million Dths of Stagecoach Pipeline & Storage Company LLC storage capacity to Energy Services for the period of April 1, 2018 to March 31, 2019. NJNG can call upon a supply of up to 20,000 Dths/day delivered to NJNG’s Texas Eastern citygate. Energy Services manages the storage inventory and NJNG can call on that storage supply as needed at NJNG’s Tennessee citygate or storage point.

NJNG also has agreements where it releases 160,000 Dths/day of its Tetco capacity to Energy Services for the period of April 1, 2016 to October 31, 2021. Under these agreements, NJNG can call upon a supply of up to 160,000 Dths/day delivered to its Texas Eastern citygate as needed. See Note 15. Related Party Transactions in the accompanying Consolidated Financial Statements for additional information regarding these transactions.

Peaking Supply

To manage its winter peak day demand, NJNG maintains two LNG facilities with a combined deliverability of approximately 170,000 Dths/day, which represents approximately 18 percent of its estimated peak day sendout. NJNG’s liquefaction facility allows NJNG to convert natural gas into LNG to fill NJNG’s existing LNG storage tanks. See Item 2. Properties-Natural Gas Distribution for additional information regarding the LNG storage facilities.

Basic Gas Supply Service

BGSS is a BPU-approved clause designed to allow for the recovery of natural gas commodity costs on an annual basis. The clause requires all New Jersey natural gas utilities to make an annual filing by each June 1 for review of BGSS rates and to request a potential rate change effective the following October 1. The BGSS also allows each natural gas utility to provisionally increase residential and small commercial customer BGSS rates on December 1 and February 1 for up to a five percent increase to the average residential heat customer’s bill on a self-implementing basis with proper notice. Such increases are subject to subsequent BPU review and final approval.

In addition to making periodic rate adjustments to reflect changes in commodity prices, NJNG is also permitted to refund or credit back a portion of the commodity costs to customers when the natural gas commodity costs decrease in comparison to amounts projected or to amounts previously collected from customers. Decreases in the BGSS rate and BGSS refunds can be implemented with five days’ notice to the BPU. Rate changes, as well as other regulatory actions related to BGSS, are discussed further in Note 3. Regulation in the accompanying Consolidated Financial Statements.

Wholesale natural gas prices are, by their nature, volatile. NJNG mitigates the impact of volatile price changes on customers through the use of financial derivative instruments, which are part of its storage incentive program and its BGSS clause.

Future Natural Gas Supplies

NJNG expects to meet the natural gas requirements for existing and projected firm customers. If NJNG’s long-term natural gas requirements change, NJNG expects to renegotiate and restructure its contract portfolio to better match the changing needs of its customers and changing natural gas supply landscape.

Regulation and Rates

State

NJNG is subject to the jurisdiction of the BPU with respect to a wide range of matters such as base rates and regulatory rider rates, the issuance of securities, the safety and adequacy of service, the manner of keeping its accounts and records, the sufficiency of natural gas supply, pipeline safety, environmental issues, compliance with affiliate standards and the sale or encumbrance of its properties. In September 2016, the BPU approved NJNG’s filing for an increase to base rates in the amount of $45 million, effective October 2016. See Note 3. Regulation in the accompanying Consolidated Financial Statements for additional information regarding NJNG’s rate proceedings.

Federal

FERC regulates rates charged by interstate pipeline companies for the transportation and storage of natural gas. This affects NJNG’s agreements with several interstate pipeline companies for the purchase of such services. Costs associated with these services are currently recoverable through the BGSS.

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

Competition

Although its franchises are nonexclusive, NJNG is not currently subject to competition from other natural gas distribution utilities with regard to the transportation of natural gas in its service territory. Due to significant distances between NJNG’s current large industrial customers and the nearest interstate natural gas pipelines, as well as the availability of its transportation tariff, NJNG currently does not believe it has significant exposure to the risk that its distribution system will be bypassed. Competition does exist from suppliers of oil, coal, electricity and propane. At the present time, however, natural gas is used in over 95 percent of new construction due to its efficiency, reliability and price advantage. Natural gas prices are a function of market supply and demand. Although NJNG believes natural gas will remain competitive with alternate fuels, no assurance can be given in this regard.

The BPU, within the framework of the EDECA, fully opened NJNG’s residential markets to competition, including third-party suppliers, and restructured rates to segregate its BGSS and delivery (i.e., transportation) prices. New Jersey’s natural gas utilities must provide BGSS in the absence of a third-party supplier. On September 30, 2018, NJNG had 26,490 residential and 9,636 commercial and industrial customers utilizing the transportation service.

Clean Energy Ventures

Our Clean Energy Ventures segment invests in, owns and operates clean energy projects, including commercial and residential solar installations located in New Jersey, and wind farms located in Iowa, Kansas, Wyoming and Pennsylvania.

As of September 30, 2018, Clean Energy Ventures has constructed a total of 231.3 MW of solar capacity in New Jersey that has qualified for ITCs, including a combination of residential and commercial net-metered and grid-connected solar systems. As part of its solar investment program, Clean Energy Ventures operates a residential lease program, The Sunlight Advantage®, which provides qualifying homeowners with the opportunity to have a solar system installed at their home with no installation or maintenance expenses. Clean Energy Ventures owns, operates and maintains the system over the life of the lease in exchange for monthly lease payments. The program is operated by Clean Energy Ventures using qualified contracting partners in addition to strategic suppliers for material standardization and sourcing. The residential solar lease and PPA market is highly competitive, with various companies operating in New Jersey. Clean Energy Ventures competes on price, quality and brand reputation, leveraging its partner network and customer referrals.

Clean Energy Ventures’ commercial solar projects are sourced through various channels and include both net-metered and grid-connected systems. Net-metered projects involve the sale of energy to a host and grid-connected systems into the wholesale energy markets. Project construction is competitively sourced through third parties. New Jersey has the sixth largest solar market in the U.S., according to the Solar Energy Industries Association®, with a large number of firms competing in all facets of the market including development, financing and construction.

Our solar systems are registered and certified with the BPU’s Office of Clean Energy and qualified to produce SRECs. One SREC is created for every MWh of electricity produced by a solar generator. Clean Energy Ventures sells the SRECs it generates to a variety of counterparties, including electric load-serving entities that serve electric customers in New Jersey and are required to comply with the solar carve-out of the Renewable Portfolio Standard, a regulation that requires the increased production of energy from renewable energy sources. Solar projects are also currently eligible for federal ITCs in the year that they are placed into service.

As of September 30, 2018, Clean Energy Ventures has a total of 116.9 MW of wind capacity. The wind projects are eligible for PTCs for a 10-year period following commencement of operations and have PPAs of various terms in place, which typically govern the sale of energy, capacity and/or renewable energy credits.

In March 2018, Clean Energy Ventures committed to a plan to sell its remaining wind assets and it is probable that the sale will be completed within the next 12 months. Accordingly, wind assets and related liabilities are classified as held for sale on the Consolidated Balance Sheets.

On June 1, 2018, Clean Energy Ventures completed the sale of its membership interest in its 9.7 MW wind farm in Two Dot, Montana to NorthWestern Energy for a total purchase price of $18.5 million. The transaction generated a pre-tax gain of approximately $951,000, which is recognized as a reduction to O&M on the Consolidated Statements of Operations.

Clean Energy Ventures is subject to various risks including those associated with adverse federal and state legislation and regulatory policies, construction delays that can impact the timing or eligibility of tax incentives, technological changes and the future market of SRECs. See Item 1A. Risk Factors for additional information regarding these risks.

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

Energy Services

Our Energy Services segment consists of unregulated wholesale and retail natural gas operations and provides producer and asset management services to a diverse customer base across North America. Energy Services has acquired contractual rights to natural gas storage and transportation assets it utilizes to implement its strategic and opportunistic market strategies. The rights to these assets were acquired in anticipation of delivering natural gas, performing asset management services for customers or identifying strategic opportunities that exist in or between the market areas that it serves. These opportunities are driven by price differentials between market locations and/or time periods. Energy Services’ activities are conducted in the market areas in which it has strong expertise, including the U.S. and Canada. Energy Services differentiates itself in the marketplace based on price, reliability and quality of service. Its competitors include wholesale marketing and trading companies, utilities, natural gas producers and financial institutions. Energy Services’ portfolio of customers includes regulated natural gas distribution companies, industrial companies, electric generators, natural gas/liquids processors, retail aggregators, wholesale marketers and natural gas producers.

While focusing on maintaining a low-risk operating and counterparty credit profile, Energy Services’ activities specifically consist of the following elements:

Providing natural gas portfolio management services to nonaffiliated and our affiliated natural gas utility, electric generation facilities and natural gas producers;

Managing strategies for new and existing natural gas storage and transportation assets to capture value from changes in price due to location or timing differences as a means to generate financial margin (as defined below);

Managing transactional logistics to minimize the cost of natural gas delivery to customers while maintaining security of supply. Transactions utilize the most optimal and advantageous natural gas supply transportation routing available within its contractual asset portfolio and various market areas; and

Managing economic hedging programs that are designed to mitigate the impact of changes in market prices on financial margin generated on its natural gas storage and transportation commitments.

From July 2017 through February 2018, NJRRS provided retail natural gas supply and transportation services to commercial and industrial customers in Delaware, Maryland, Pennsylvania and New Jersey. NJRRS was sold to an unrelated third party on February 28, 2018. See Note 17. Dispositions for more details.

In fiscal 2018, Energy Services purchased over 10 percent of its natural gas from one supplier. Energy Services believes the loss of this supplier would not have a material adverse impact on its results of operations, financial position or cash flows, as an adequate number of alternative suppliers exist.

Transportation and Storage Transactions

Energy Services focuses on creating value from the use of its physical assets, which are typically amassed through contractual rights to natural gas storage and transportation capacity. These assets become more valuable when favorable price changes occur that impact the value between or within market areas and across time periods. On a forward basis, Energy Services may hedge these price differentials through the use of financial instruments. In addition, Energy Services may seek to optimize these assets on a daily basis, as market conditions warrant, by evaluating natural gas supply and transportation availability within its portfolio. This enables Energy Services to capture geographic pricing differences across various regions, as delivered natural gas prices may change favorably as a result of market conditions. Energy Services may, for example, initiate positions when intrinsic financial margin is present, and then enhance that financial margin as prices change across regions or time periods.

Energy Services also engages in park-and-loan transactions with storage and pipeline operators, where Energy Services will either borrow (receive a loan of) natural gas with an obligation to repay the storage or pipeline operator at a later date or “park” natural gas with an obligation to withdraw at a later date. In these cases, Energy Services evaluates the economics of the transaction to determine if it can capture pricing differentials in the marketplace and generate financial margin. Energy Services evaluates deal attributes such as fixed fees, calendar spread value from deal inception until volumes are scheduled to be returned and/or repaid, as well as the time value of money. If this evaluation demonstrates that financial margin exists, Energy Services may enter into the transaction and hedge with natural gas futures contracts, thereby locking in financial margin.


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

Energy Services maintains inventory balances to satisfy existing or anticipated sales of natural gas to its counterparties and/or to create additional value, as described above. During fiscal 2018 and 2017, Energy Services managed and sold 662.4 Bcf and 521.6 Bcf of natural gas, respectively. In addition, as of September 30, 2018 and 2017, Energy Services had 34.1 Bcf or $90.2 million of gas in storage and 53.9 Bcf or $122.9 million of gas in storage, respectively.

Weather/Seasonality

Energy Services activities are typically seasonal in nature as a result of changes in the supply and demand for natural gas. Demand for natural gas is generally higher during the winter months when there may also be supply constraints; however, during periods of milder temperatures, demand can decrease. In addition, demand for natural gas can also be high during periods of extreme heat in the summer months, resulting from the need for additional natural gas supply for gas-fired electric generation facilities. Accordingly, Energy Services can be subject to variations in earnings and working capital throughout the year as a result of changes in weather.

Volatility

Energy Services’ activities are also subject to price volatility or supply/demand dynamics within its wholesale markets, including in the Northeastern, Appalachian, West Coast and Mid-Continent regions. Changes in natural gas supply can affect capacity values and Energy Services’ financial margin, described below, that is generated from the optimization of transportation and storage assets. With its focus on risk management, Energy Services continues to diversify its revenue stream by identifying new growth opportunities in producer and asset management services. Energy Services has added new counterparties and strategic storage and transportation assets to its portfolio, which currently includes an average of approximately 49.1 Bcf of firm storage and 1.5 Bcf/day of firm transportation capacity. Energy Services continues to expand its geographic footprint.

Financial Margin

To economically hedge the commodity price risk associated with its existing and anticipated commitments for the purchase and sale of natural gas, Energy Services enters into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial swaps and options. These derivative instruments are accounted for at fair value with changes in fair value recognized in earnings as they occur. Energy Services views “financial margin” as a key internal financial metric. Energy Services’ financial margin, which is a non-GAAP financial measure, represents revenues earned from the sale of natural gas less costs of natural gas sold including any storage and transportation costs, and excluding any accounting impact from changes in the fair value of certain derivative instruments. For additional information regarding financial margin, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations - Energy Services Segment.

Risk Management

In conducting its business, Energy Services mitigates risk by following formal risk management guidelines, including transaction limits, segregation of duties and formal contract and credit review approval processes. Energy Services continuously monitors and seeks to reduce the risk associated with its counterparty credit exposures. Our Risk Management Committee oversees compliance with these established guidelines.

Midstream

Our Midstream segment includes investments in FERC-regulated interstate natural gas transportation and storage assets and is comprised of the following subsidiaries:

NJR Steckman Ridge Storage Company, which holds our 50 percent equity investment in Steckman Ridge. Steckman Ridge is a Delaware limited partnership, jointly owned and controlled by our subsidiaries and subsidiaries of Enbridge Inc., that built, owns and operates a natural gas storage facility with up to 12 Bcf of working gas capacity in Bedford County, Pennsylvania. The facility has direct access to the Texas Eastern and Dominion Transmission pipelines and has access to the Northeast and Mid-Atlantic markets;

NJR Pipeline Company, which includes our 20 percent equity investment in PennEast. PennEast is expected to construct a 120-mile, FERC-regulated interstate natural gas pipeline system that will extend from northern Pennsylvania to western New Jersey. Adelphia, our wholly owned subsidiary of NJR Pipeline Company, was established in anticipation of acquiring the membership interests in IEC. Upon closing, Adelphia will include an existing 84-mile pipeline in southeastern Pennsylvania and related assets and rights of way; and

NJR Midstream Holdings Corporation, which, through its subsidiary NJNR Pipeline Company, holds approximately 1.84 million DM Common Units.

Page 12

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

OTHER BUSINESS OPERATIONS

Home Services and Other

Home Services and Other operations consist primarily of the following unregulated affiliates:

NJRHS, which provides heating, ventilation and cooling service, sales and installation of appliances to approximately 110,000 service contract customers, as well as installation of solar equipment;

NJR Plumbing Services, Inc., which provides plumbing repair and installation services;

CR&R, which holds commercial real estate; and

NJR Service Corporation, which provides shared administrative and financial services to the Company and all of its subsidiaries.

ENVIRONMENT

We along with our subsidiaries are subject to legislation and regulation by federal, state and local authorities with respect to environmental matters. We believe that we are, in all material respects, in compliance with all applicable environmental laws and regulations.

NJNG is responsible for the environmental remediation of five MGP sites, which contain contaminated residues from former gas manufacturing operations that ceased at these sites by the mid-1950s and, in some cases, had been discontinued many years earlier. NJNG periodically, and at least annually, performs an environmental review of the MGP sites, including a review of potential estimated liabilities related to the investigation and remedial action on these sites. Based on this review, NJNG has estimated that the total future expenditures to remediate and monitor the MGP sites for which it is responsible will range from approximately $117.7 million to $204.1 million.

NJNG’s estimate of these liabilities is based upon known and measurable facts, existing technology and enacted laws and regulations in place when the review was completed in fiscal 2018. Where it is probable that costs will be incurred, and the information is sufficient to establish a range of possible liability, NJNG accrues the most likely amount in the range. If no point within the range is more likely than the other, it is NJNG’s policy to accrue the lower end of the range. As of September 30, 2018, NJNG recorded an MGP remediation liability and a corresponding regulatory asset of $130.8 million on the Consolidated Balance Sheets, which represents its most likely possible liability and recoverable regulatory asset; however, actual costs may differ from these estimates.

EMPLOYEE RELATIONS

As of September 30, 2018, the Company and our subsidiaries employed 1,068 employees compared with 1,052 employees as of September 30, 2017. Of the total number of employees, NJNG had 446 and 444 and NJRHS had 97 and 104 Union or Represented employees as of September 30, 2018 and 2017, respectively. NJNG and NJRHS have collective bargaining agreements with the Union, which is affiliated with the American Federation of Labor and Congress of Industrial Organizations, that expire in December 2018 and April 2019, respectively. The labor agreements cover wage increases and other benefits, including the defined benefit pension (which was closed to all employees hired on or after January 1, 2012, with the exception of certain rehires who are eligible to resume active participation), the postemployment benefit plan (which was closed to all employees hired on or after January 1, 2012) and the enhanced 401(k) retirement savings plan. Collective bargaining negotiations with the Union for represented NJNG employees commenced in October 2018 and are expected to commence in February 2019 for represented NJRHS employees. We consider our relationship with employees, including those covered by collective bargaining agreements, to be in good standing.


Page 13

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

AVAILABLE INFORMATION AND CORPORATE GOVERNANCE DOCUMENTS

The following reports and any amendments to those reports are available free of charge on our website at http://investor.njresources.com/corporate-governance/sec-filings as soon as reasonably possible after filing or furnishing them with the SEC:

Annual reports on Form 10-K;

Quarterly reports on Form 10-Q; and

Current reports on Form 8-K.

The following documents are available free of charge on our website (http://investor.njresources.com/corporate-governance):

Bylaws;

Corporate Governance Guidelines;

Wholesale Trading Code of Conduct;

NJR Code of Conduct;

Charters of the following Board of Directors Committees: Audit, Leadership Development and Compensation and Nominating/Corporate Governance;

Audit Complaint Procedure;

Communicating with Non-Management Directors Procedure; and

Statement of Policy with Respect to Related Person Transactions.

In Part III of this Form 10-K, we incorporate certain information by reference from our Proxy Statement for our 2019 Annual Meeting of Shareowners. We expect to file that Proxy Statement with the SEC on or about December 13, 2018. We will make it available on our website as soon as reasonably possible following that filing date. Please refer to the Proxy Statement when it is available.

A printed copy of each document is available free of charge to any shareholder who requests it by contacting the Corporate Secretary at New Jersey Resources Corporation, 1415 Wyckoff Road, Wall, New Jersey 07719.

ITEM 1A. RISK FACTORS                                                                                                                                                             

When considering any investment in our securities, investors should consider the following risk factors, as well as the information contained under the caption “Information Concerning Forward-Looking Statements,” in analyzing our present and future business performance. While this list is not exhaustive, management also places no priority or likelihood based on their descriptions or order of presentation. Unless indicated otherwise or the content requires otherwise, references below to “we,” “us,” and “our” should be read to refer to the Company and its subsidiaries.

Our investments in solar energy projects are subject to substantial risks and uncertainties.

Our investments in commercial and residential solar energy projects are dependent, in part, upon current regulatory incentives and federal tax credits in order for the projects to be economically viable. Our return on investment for these solar projects is based substantially on our eligibility for ITCs and the future market value of SRECs that are traded in a competitive marketplace in the State of New Jersey. As a result, these projects face the risk that the current regulatory programs and tax laws may expire or be adversely modified. Furthermore, a sustained decrease in the value of SRECs could negatively impact the return on our investment and could result in our portfolio of solar assets becoming impaired. The market for such projects is also limited, which creates increased competition and higher investment costs that may result in fewer investment opportunities that meet our return requirements.


Page 14

New Jersey Resources Corporation
Part I
 
ITEM 1A. RISK FACTORS (Continued)                                                                                                                                        

In addition, there are risks associated with our ability to develop and manage such projects profitably, including logistical risks and potential delays related to construction, permitting, regulatory approvals (including any approvals by the BPU required pursuant to recently enacted solar energy legislation in the State of New Jersey) and electric grid interconnection, as well as the operational risk that the projects in service will not perform according to expectations due to equipment failure, suboptimal weather conditions or other economic factors beyond our control. All of the aforementioned risks could reduce the availability of viable solar energy projects for development. Furthermore, at the development or acquisition stage, our ability to predict actual performance results may be hindered or inaccurate and the projects may not perform as predicted.

We may be unable to obtain governmental approvals, property rights and/or financing for the construction, development and operation of our proposed energy investments and projects in a timely manner or at all.

Construction, development and operation of energy investments, such as natural gas storage facilities, NJNG infrastructure improvements, such as SRL and NJ RISE, pipeline transportation systems, such as PennEast, planned Adelphia acquisition and solar energy projects are subject to federal and state regulatory oversight and require certain property rights, such as easements and rights-of-way from public and private property owners, as well as regulatory approvals, including environmental and other permits and licenses for such facilities and systems. We or our joint venture partnerships may be unable to obtain, in a cost-efficient or timely manner, all such needed property rights, permits and licenses to successfully construct and develop our energy facilities and systems. Successful financing of our energy investments requires participation by willing financial institutions and lenders, as well as acquisition of capital at favorable interest rates. If we do not obtain the necessary regulatory approvals, property rights and financing, our equity investments could be impaired. Such impairment could have a materially adverse effect on our financial condition, results of operations and cash flows.

Uncertainties associated with our planned Adelphia acquisition could adversely affect our business, results of operations, financial condition and cash flows.

In October 2017, we announced our planned Adelphia acquisition, involving the future operation and maintenance of a natural gas transmission pipeline extending approximately 90 miles into eastern Pennsylvania. As part of the acquisition we expect to convert the remaining sections of the southern mainline of the pipeline utilized to transport oil to transport natural gas. The completion of the acquisition is subject to various closing conditions, including, but not limited to, receipt of necessary permits and regulatory actions, such as those from the FERC and the Pennsylvania Public Utility Commission, and other pending regulatory determinations, such as compliance with anti-trust laws. There can be no assurance that we will receive the necessary approvals for the transaction or receive them within the expected timeframe. The announcement and pendency of our planned Adelphia acquisition, as well as any delays in the expected timeframe, could cause disruption and create uncertainties, which could have an adverse effect on our business, results of operations and financial condition, regardless of whether the acquisition is completed.

Any acquisitions that we may undertake involve risks and uncertainties. We may not realize the anticipated synergies, cost savings and growth opportunities as a results of these transactions.

The integration of acquisitions requires significant time and resources. Investments of resources are required to support any acquisition, which could result in significant ongoing operating expenses and may experience challenges when combining separate business cultures, information technology systems and employees, and those challenges may divert senior management’s time and attention. If we fail to successfully integrate assets and liabilities through the entities which we acquire, we may not fully realize all of the growth opportunities, benefits expected from the transaction, cost savings and other synergies and, as a result, the fair value of assets acquired could be impaired. We assess long-lived assets, including intangible assets associated with acquisitions for impairment whenever events or circumstances indicate that an asset’s carrying amount may not be recoverable. To the extent the value of long-lived assets become impaired, the impairment charges could have a material impact on our financial condition and results of operations.

The benefits that we expect to achieve from acquisitions will depend, in part, on our ability to realize anticipated growth opportunities and other synergies with our existing businesses. The success of these transactions will depend on our ability to integrate these transactions within our existing businesses timely and seamlessly. We may experience challenges when combining separate business cultures, information technology systems and employees. Even if we are able to complete the integration successfully, we may not fully realize all of the growth opportunities, cost savings and other synergies that we expect.


Page 15

New Jersey Resources Corporation
Part I
 
ITEM 1A. RISK FACTORS (Continued)                                                                                                                                        

Major changes in the supply and price of natural gas may affect financial results.

While NJNG expects to meet its customers’ demand for natural gas for the foreseeable future, factors impacting suppliers and other third parties, including the inability to develop additional interstate pipeline infrastructure, lack of supply sources, increased competition, further deregulation, transportation costs, possible climate change legislation, transportation availability and drilling for new natural gas resources, may impact the supply and price of natural gas. In addition, any significant disruption in the availability of supplies of natural gas could result in increased supply costs, higher prices for customers and potential supply disruptions to customers.

NJNG actively hedges against the fluctuation in the price of natural gas by entering into forward and financial contracts with third parties. Should these third parties fail to perform and regulators not allow the pass-through of expended funds to customers, it may result in a loss that could have a material impact on our financial condition, results of operations and cash flows.

We are subject to governmental regulation. Compliance with current and future regulatory requirements and procurement of necessary approvals, permits and certificates may result in substantial costs to us.

We are subject to substantial regulation from federal, state and local authorities. We are required to comply with numerous laws and regulations and to obtain numerous authorizations, permits, approvals and certificates from governmental agencies. These agencies regulate various aspects of our business, including customer rates, services, construction and natural gas pipeline operations.

The FERC has regulatory authority over some of our operations, including sales of natural gas in the wholesale and retail markets and the purchase and sale of interstate pipeline and storage capacity. FERC will also have regulatory authority over Adelphia’s operations. Any Congressional legislation or agency regulation that would alter these or other similar statutory and regulatory structures in a way to significantly raise costs that could not be recovered in rates from customers, that would reduce the availability of supply or capacity or that would reduce our competitiveness could negatively impact our earnings. In addition, changes in and compliance with laws such as the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 could increase federal regulatory oversight and administrative costs that may not be recovered in rates from customers, which could have an adverse impact on our earnings.

We cannot predict the impact of any future revisions or changes in interpretations of existing regulations or the adoption of new laws and applicable regulations. Changes in regulations or the imposition of additional regulations could influence our operating environment and may result in substantial costs to us.

Significant regulatory assets recorded by NJNG could be disallowed for recovery from customers in the future.

NJNG records regulatory assets on its financial statements to reflect the ratemaking and regulatory decision-making authority of the BPU as allowed by GAAP. The creation of a regulatory asset allows for the deferral of costs, which, absent a mechanism to recover such costs from customers in rates approved by the BPU, would be charged to expense on its income statement in the period incurred. Primary regulatory assets that are subject to BPU approval include the recovery of BGSS and USF costs, remediation costs associated with NJNG’s MGP sites, CIP, NJCEP, economic stimulus plans, certain deferred income tax and pension and other postemployment benefit plans. If there were to be a change in regulatory positions surrounding the collection of these deferred costs there could be a material impact on NJNG’s existing tariff or a future base rate case, as well as our financial condition, results of operations and cash flows.

NJR is a holding company and depends on its operating subsidiaries to meet its financial obligations.

NJR is a holding company with no significant assets other than possible cash investments and the stock of its operating subsidiaries. We rely exclusively on dividends from our subsidiaries, on intercompany loans from our unregulated subsidiaries, and on the repayments of principal and interest from intercompany loans and reimbursement of expenses from our subsidiaries for our cash flows. Our ability to pay dividends on our common stock and to pay principal and interest on our outstanding debt depends on the payment of dividends to us by our subsidiaries or the repayment of loans to us by our subsidiaries. The extent to which our subsidiaries are unable to pay dividends or repay funds to us may adversely affect our ability to pay dividends to holders of our common stock and principal and interest to holders of our debt.


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New Jersey Resources Corporation
Part I
 
ITEM 1A. RISK FACTORS (Continued)                                                                                                                                        

Our regulated operations are subject to certain operating risks incidental to handling, storing, transporting and providing customers with natural gas.

Our regulated operations are subject to all operating hazards and risks incidental to handling, storing, transporting and providing customers with natural gas, including our natural gas vehicle refueling stations and LNG facilities. These risks include catastrophic failure of the interstate pipeline system, explosions, pollution, release of toxic substances, fires, storms, safety issues and other adverse weather conditions and hazards, each of which could result in damage to or destruction of facilities or damage to persons and property. We could suffer substantial losses should any of these events occur. Moreover, as a result, NJNG has been, and likely will be, a defendant in legal proceedings and litigation arising in the ordinary course of business. Although NJNG maintains insurance coverage, insurance may not be sufficient to cover all material expenses related to these risks.

NJNG and Energy Services rely on storage, transportation assets and suppliers, which they do not own or control, to deliver natural gas.

NJNG and Energy Services depend on natural gas pipelines and other storage and transportation facilities owned and operated by third parties to deliver natural gas to wholesale and retail markets and to provide retail energy services to customers. Their ability to provide natural gas for their present and projected sales will depend upon their suppliers’ ability to obtain and deliver additional supplies of natural gas, as well as NJNG’s ability to acquire supplies directly from new sources. Factors beyond the control of NJNG, its suppliers and the independent suppliers that have obligations to provide natural gas to certain NJNG customers may affect NJNG’s ability to deliver such supplies. These factors include other parties’ control over the drilling of new wells and the facilities to transport natural gas to NJNG’s citygate stations, development of additional interstate pipeline infrastructure, availability of supply sources, competition for the acquisition of natural gas, priority allocations, impact of severe weather disruptions to natural gas supplies and the regulatory and pricing policies of federal and state regulatory agencies, as well as the availability of Canadian reserves for export to the United States. Energy deregulation legislation may increase competition among natural gas utilities and impact the quantities of natural gas requirements needed for sales service. Energy Services also relies on a firm supply source to meet its energy management obligations to its customers. If supply, transportation or storage is disrupted, including for reasons of force majeure, the ability of NJNG and Energy Services to sell and deliver their products and services may be hindered. As a result, they may be responsible for damages incurred by their customers, such as the additional cost of acquiring alternative supply at then-current market rates. Particularly for Energy Services, these conditions could have a material impact on our financial condition, results of operations and cash flows.

Risks related to the regulation of NJNG could affect the rates it is able to charge, its costs and its profitability.

NJNG is subject to regulation by federal, state and local authorities. These authorities regulate many aspects of NJNG’s distribution and transmission operations, including construction and maintenance of facilities, operations, safety, tariff rates that NJNG can charge customers, rates of return, the authorized cost of capital, recovery of pipeline replacement, environmental remediation costs and relationships with its affiliates. NJNG’s ability to obtain rate increases, including base rate increases, extend its BGSS incentive and CIP programs and maintain its currently authorized rates of return may be impacted by events, including regulatory or legislative actions. There can be no assurance that NJNG will be able to obtain rate increases and continue its BGSS incentive, CIP, RAC and SAVEGREEN programs or continue to earn its currently authorized rates of return.

A change in our effective tax rate as a result of a failure to qualify for ITCs or being delayed in qualifying for ITCs due to delays or failures to complete planned solar energy projects within the safe harbor period may have a material impact on our earnings.

GAAP requires that we apply an effective tax rate to interim periods that is consistent with our estimated annual effective tax rate. As a result, we project quarterly the annual effective tax rate and then adjust the tax expense recorded in that quarter to reflect the projected annual effective tax rate. The amount of the quarterly adjustment is based on information and assumptions, which are subject to change and may have a material impact on our quarterly and annual NFE. Factors we consider in estimating the probability of projects being completed during the fiscal year include, but are not limited to, Board of Directors approval, construction logistics, permitting, interconnection completion and execution of various contracts, including PPAs. If we fail to qualify for ITCs or are delayed in qualifying for some ITCs during the fiscal year due to delays or failures to complete planned solar energy projects as scheduled, our quarterly and annual net income and NFE may be materially impacted. This could have a material adverse impact on our financial condition, results of operations and cash flows.



Page 17

New Jersey Resources Corporation
Part I
 
ITEM 1A. RISK FACTORS (Continued)                                                                                                                                        

We are involved in legal or administrative proceedings before various courts and governmental bodies that could adversely affect our results of operations, cash flows and financial condition.

In the ordinary conduct of business, we are involved in legal or administrative proceedings before various courts and governmental bodies with respect to general claims, rates, permitting, taxes, environmental issues, gas cost prudence reviews and other matters. Adverse decisions regarding these matters, to the extent they require us to make payments in excess of amounts provided for in our financial statements or are not covered by insurance or indemnity rights, could adversely affect our results of operations, cash flows and financial condition.

Credit rating downgrades could increase financing costs, limit access to the financial markets and negatively affect NJR and its subsidiaries.

Rating agencies Moody’s and S&P currently rate NJNG’s debt as investment grade. If such ratings are downgraded below investment grade, borrowing costs could increase, as will the costs of maintaining certain contractual relationships and obtaining future financing. Even if ratings are downgraded without falling below investment grade, NJR and NJNG could face increased borrowing costs under their current and future credit facilities. Our ability to borrow and costs of borrowing have a direct impact on our subsidiaries’ ability to execute their operating strategies, particularly in the case of NJNG, which relies heavily upon capital expenditures financed by its credit facility.

If we suffer a reduction in our credit and borrowing capacity or in our ability to issue parental guarantees, the business prospects of Energy Services, Clean Energy Ventures and Midstream, which rely on our creditworthiness, would be adversely affected. Energy Services could possibly be required to comply with various margin or other credit enhancement obligations under its trading and marketing contracts, and it may be unable to continue to trade or be able to do so only on less favorable terms with certain counterparties. Clean Energy Ventures could be required to seek alternative financing for its projects, and may be unable to obtain such financing or able to do so only on less favorable terms. In addition, NJNR Pipeline Company may not be able to finance its capital obligations to PennEast.

Additionally, lower credit ratings could adversely affect relationships with NJNG’s state regulators, who may be unwilling to allow NJNG to pass along increased costs to its natural gas customers.

Cyberattacks or failure of information technology systems could adversely affect our business operations, financial condition and results of operations.

We continue to place ever-greater reliance on technological tools that support our business operations and corporate functions, including tools that help us manage our natural gas distribution and energy trading operations and infrastructure. The failure of, or security breaches related to, these technologies could materially adversely affect our business operations, our financial position, results of operations and cash flows.

We rely on information technology to manage our natural gas distribution, energy trading and other corporate operations, maintain customer, employee, Company and vendor data, prepare our financial statements and perform other critical business processes. This technology may fail due to cyberattack, physical disruption, design and implementation defects or human error. Disruption or failure of business operations and information technology systems could harm our facilities or otherwise adversely impact our ability to safely deliver natural gas to our customers, serve our customers effectively or manage our assets. Additionally, an attack on, or failure of, information technology systems could result in the unauthorized release of customer, employee or other confidential or sensitive data. Any of the foregoing events could adversely affect our business reputation, diminish customer confidence, disrupt operations, subject us to financial liability or increased regulation, increase our costs and expose us to material legal claims and liability.

There is no guarantee that redundancies built into our networks and technology, or the procedures we have implemented to protect against cyberattack and other unauthorized access to secured data, are adequate to safeguard against all failures of technology or security breaches.

Adverse economic conditions, including inflation, increased natural gas costs, foreclosures and business failures, could adversely impact NJNGs customer collections and increase our level of indebtedness.


Page 18

New Jersey Resources Corporation
Part I
 
ITEM 1A. RISK FACTORS (Continued)                                                                                                                                        

Inflation may cause increases in certain operating and capital costs. We continually review the adequacy of NJNG’s base tariff rates in relation to the increasing cost of providing service and the inherent regulatory lag in adjusting those rates. The ability to control operating expenses is an important factor that will influence future results.

Rapid increases in the price of purchased gas may cause NJNG to experience a significant increase in short-term debt because it must pay suppliers for gas when it is purchased, which can be significantly in advance of when these costs may be recovered through the collection of monthly bills for gas delivered to customers. Increases in purchased gas costs also slow collection efforts as customers are more likely to delay the payment of their gas bills, leading to higher-than-normal accounts receivable.

If we are unable to access the financial markets or there are adverse conditions in the equity or credit markets, it could affect managements ability to execute our business plans.

We rely on access to both short-term and long-term credit markets as significant sources of liquidity for capital requirements not satisfied by our cash flow from operations. Any deterioration in our financial condition could hamper our ability to access the equity or credit markets or otherwise obtain debt financing on terms favorable to us or at all. In addition, because certain state regulatory approvals may be necessary for NJNG to incur debt, NJNG may be unable to access credit markets on a timely basis. External events could also increase the cost of borrowing or adversely affect our ability to access the financial markets. Such external events could include the following:

economic weakness and/or political instability in the United States or in the regions where we operate;

political conditions, such as a shutdown of the U.S. federal government;

financial difficulties of unrelated energy companies;

capital market conditions generally;

volatility in the equity markets;

market prices for natural gas;

the overall health of the natural gas utility industry; and

fluctuations in interest rates, particularly with respect to NJNG’s variable rate debt instruments.

Our ability to secure short-term financing is subject to conditions in the credit markets. A prolonged constriction of credit availability could affect management’s ability to execute our business plan. An inability to access capital may limit our ability to pursue improvements or acquisitions that we may otherwise rely on for both current operations and future growth.

Energy Services and NJNG execute derivative transactions with financial institutions as a part of their economic hedging strategy and could incur losses associated with the inability of a financial counterparty to meet or perform under its obligations as a result of adverse conditions in the credit markets or their ability to access capital or post collateral.

The cost of providing pension and postemployment health care benefits to eligible former employees is subject to changes in pension fund values, interest rates and changing demographics and may have a material adverse effect on our financial results.

We have two defined benefit pension plans and two OPEB plans for the benefit of eligible full-time employees and qualified retirees, which were closed to all employees hired on or after January 1, 2012. The cost of providing these benefits to eligible current and former employees is subject to changes in the market value of the pension and OPEB fund assets, changing discount rates and changing actuarial assumptions based upon demographics, including longer life expectancy of beneficiaries, an expected increase in the number of eligible former employees over the next five years, impacts from healthcare legislation and increases in health care costs.

Significant declines in equity markets and/or reductions in bond yields can have a material adverse effect on the funded status of our pension and OPEB plans. In these circumstances, we may be required to recognize increased pension and OPEB expenses and/or be required to make additional cash contributions into the plans.

The funded status of these plans, and the related cost reflected in our financial statements, are affected by various factors that are subject to an inherent degree of uncertainty. Under the Pension Protection Act of 2006, losses of asset values may necessitate increased funding of the plans in the future to meet minimum federal government requirements. A significant decrease in the asset values of these plans can result in funding obligations earlier than we had originally planned, which would have a negative impact on cash flows from operations, decrease our borrowing capacity and increase our interest expense.

Page 19

New Jersey Resources Corporation
Part I
 
ITEM 1A. RISK FACTORS (Continued)                                                                                                                                        

We are exposed to market risk and may incur losses in our wholesale business.

Our storage and transportation portfolios consist of contracts to transport and store natural gas. The value of our storage and transportation portfolio could be negatively impacted if the value of these contracts change in a direction or manner that we do not anticipate. In addition, upon expiration of these storage and transportation contracts, to the extent that they are renewed or replaced at less favorable terms, our results of operations and cash flows could be negatively impacted.

Our economic hedging activities that are designed to protect against commodity and financial market risks, including the use of derivative contracts in the normal course of our business, may cause fluctuations in reported financial results and financial losses that negatively impact results of operations and our stock price.

We use derivatives, including futures, forwards, options, swaps and foreign exchange contracts to manage commodity, financial market and foreign currency risks. The timing of the recognition of gains or losses associated with our economic hedges in accordance with GAAP does not always coincide with the gains or losses on the items being hedged. The difference in accounting can result in volatility in reported results, even though the expected profit margin is essentially unchanged from the dates the transactions were consummated.

In addition, we could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these financial instruments can involve management’s judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could adversely affect the value of the reported fair value of these contracts.

Energy Services’ earnings and cash flows are dependent upon optimization of its physical assets.

Energy Services’ earnings and cash flows are based, in part, on its ability to optimize its portfolio of contractually-based natural gas storage and pipeline assets. The optimization strategy involves utilizing its physical assets to take advantage of differences in natural gas prices between geographic locations and/or time periods. Any change among various pricing points could affect these differentials. In addition, significant increases in the supply of natural gas in Energy Services’ market areas, including as a result of increased production along the Marcellus Shale, can reduce Energy Services’ ability to take advantage of pricing fluctuations in the future. Changes in pricing dynamics and supply could have an adverse impact on Energy Services’ optimization activities, earnings and cash flows. Energy Services incurs fixed demand fees to acquire its contractual rights to storage and transportation assets. Should commodity prices at various locations or time periods change in such a way that Energy Services is not able to recoup these costs from its customers, the cash flows and earnings at Energy Services, and ultimately the Company, could be adversely impacted.

Changes in weather conditions may affect earnings and cash flows.

Weather conditions and other natural phenomena can have an adverse impact on our earnings and cash flows. Severe weather conditions can impact suppliers and the pipelines that deliver gas to NJNG’s distribution system. Extended mild weather, during either the winter period or summer period, can have a significant impact on demand for and the cost of natural gas. While we believe the CIP mitigates the impact of weather variations on NJNG’s margin, severe weather conditions may have an impact on the ability of suppliers and pipelines to deliver the natural gas to NJNG, which can negatively affect our earnings. The CIP does not mitigate the impact of severe weather conditions on our cash flows.

Future results at Energy Services are subject to volatility in the natural gas market due to weather. Variations in weather may affect earnings and working capital needs throughout the year. During periods of milder temperatures, demand and volatility in the natural gas market may decrease, which can negatively impact Energy Services’ earnings and cash flows.

Changes in tax laws or regulations may negatively affect our results of operations, net income, financial condition and cash flows.

We are subject to taxation by various taxing authorities at the federal, state and local levels. On December 22, 2017, the President signed into law the Tax Act. The newly enacted legislation included a broad range of tax reform initiatives, including a reduction to the federal statutory corporate tax rate from 35 percent to 21 percent, modification of bonus depreciation and changes to the deductibility of certain business-related expenses. Any future change in tax laws, including the Tax Act, or interpretation of such laws, could adversely affect our results of operations, net income, financial condition and cash flows. In addition, we cannot predict how our federal and state regulators will apply such tax change in our future rates.

Page 20

New Jersey Resources Corporation
Part I
 
ITEM 1A. RISK FACTORS (Continued)                                                                                                                                        

A valuation allowance may be required for our deferred tax assets.

As a result of the Tax Act’s decrease to the federal statutory corporate tax rate, we revalued our deferred tax assets and liabilities at the enactment date to reflect the rates expected to be in effect when the deferred tax assets and liabilities are realized or settled. Since these adjustments are based on assumptions we made with respect to our book versus tax differences and the timing of when those differences will reverse, the revaluation of our net deferred tax liabilities is subject to change as information and assumptions are updated. Our deferred tax assets are comprised primarily of investment tax credits and state net operating losses. Any further revaluation of our deferred tax assets that may be required in the future could have a material adverse impact on our financial condition and results of operations.

Failure by NJR and/or NJNG to comply with debt covenants may impact our financial condition.

Our long-term debt obligations contain financial covenants related to debt-to-capital ratios and, in the case of NJNG, an interest coverage ratio. These debt obligations also contain provisions that put limitations on our ability to finance future operations or capital needs or to expand or pursue certain business activities. For example, certain of these agreements contain provisions that, among other things, put limitations on our ability to make loans or investments, make material changes to the nature of our businesses, merge, consolidate or engage in asset sales, grant liens or make negative pledges. Furthermore, the debt obligations and our sale-leaseback agreements contain covenants and other provisions requiring us to provide timely delivery of accurate financial statements prepared in accordance with GAAP. The failure to comply with any of these covenants could result in an event of default, which, if not cured or waived, could result in the acceleration of outstanding debt obligations and/or the inability to borrow under existing revolving credit facilities. We have relied, and continue to rely, upon short-term bank borrowings or commercial paper supported by our revolving credit facilities to finance the execution of a portion of our operating strategies. NJNG is dependent on these capital sources to purchase its natural gas supply and maintain its properties. The acceleration of our outstanding debt obligations and our inability to borrow under the existing revolving credit facilities would cause a material adverse change in NJR’s and NJNG’s financial condition.

Changes in customer growth may affect earnings and cash flows.

NJNG’s ability to increase its utility firm gross margin is dependent upon the new construction housing market, as well as the conversion of customers to natural gas from other fuel sources. During periods of extended economic downturns, prolonged weakness in housing markets or slowdowns in the conversion market, there could be an adverse impact on NJNG’s utility firm gross margin, earnings and cash flows. Furthermore, while our estimates regarding customer growth are based in part upon information from third parties, the estimates have not been verified by an independent source and are subject to the aforementioned risks and uncertainties, which could cause actual results to materially deviate from the estimates.

We may be adversely impacted by natural disasters, pandemic illness, terrorist activities and other extreme events to which we may be unable to promptly respond.

Local or national natural disasters, pandemic illness, terrorist activities, catastrophic failure of the interstate pipeline system and other extreme events are a threat to our assets and operations. Companies in our industry that are located in our service territory may face a heightened risk due to exposure to acts of terrorism that could target or impact our natural gas distribution, transmission and storage facilities and disrupt our operations and ability to meet customer requirements. In addition, the threat of terrorist activities could lead to increased economic instability and volatility in the price of natural gas that could affect our operations. Natural disasters or actual or threatened terrorist activities may also disrupt capital markets and our ability to raise capital, or may impact our suppliers or our customers directly. A local disaster or pandemic illness could result in part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. In addition, these risks could result in loss of human life, significant damage to property, environmental damage, impairment of our operations and substantial loss to the Company. Our regulators may not allow us to recover from our customers part or all of the increased cost related to the foregoing events, which could negatively affect our financial condition, results of operations and cash flows.

A slow or inadequate response to events that could cause business interruption may have an adverse impact on operations and earnings. We may be unable to obtain sufficient insurance to cover all risks associated with local and national disasters, pandemic illness, terrorist activities, catastrophic failure of the interstate pipeline system and other events, which could increase the risk that an event adversely affects our financial condition, results of operations and cash flows.

Our costs of compliance with present and future environmental laws are significant and could adversely affect our cash flows and profitability.

Our operations are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources and site remediation. Compliance with these laws and regulations

Page 21

New Jersey Resources Corporation
Part I
 
ITEM 1A. RISK FACTORS (Continued)                                                                                                                                        

may require us to expend significant financial resources to, among other things, conduct site remediation and perform environmental monitoring. If we fail to comply with applicable environmental laws and regulations, even if we are unable to do so due to factors beyond our control, we may be subject to civil liabilities or criminal penalties and may be required to incur significant expenditures to come into compliance. Additionally, any alleged violations of environmental laws and regulations may require us to expend significant resources in our defense against alleged violations.

Furthermore, the U.S. Congress has for some time been considering various forms of climate change legislation. There is a possibility that, when and if enacted, the final form of such legislation could impact our costs and put upward pressure on natural gas prices. Higher cost levels could impact the competitive position of natural gas and negatively affect our growth opportunities, cash flows and earnings.

Failure to attract and retain an appropriately qualified employee workforce could adversely affect operations.

Our ability to implement our business strategy and serve our customers is dependent upon our continuing ability to attract and retain talented professionals and a technically skilled workforce, and being able to transfer the knowledge and expertise of our workforce to new employees as our aging employees retire. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the new employees, or the future availability and cost of contract labor could adversely affect the ability to manage and operate our business. Furthermore, NJNG and NJRHS have collective bargaining agreements with the Union that expire in December 2018 and April 2019, respectively. Union negotiations for represented NJNG employees commenced in October 2018 and are expected to commence in February 2019 for represented NJRHS employees. Disputes with the Union over terms and conditions of the agreement could result in instability in our labor relationship and work stoppages that could impact the timely delivery of gas and other services from our utility, which could strain relationships with customers and state regulators and cause a loss of revenues that could adversely affect our results of operations. Our collective bargaining agreement may also increase the cost of employing our natural gas distribution segment workforce, affect our ability to continue offering market-based salaries and employee benefits, limit our flexibility in dealing with our workforce and limit our ability to change work rules and practices and implement other efficiency-related improvements to successfully compete in today’s challenging marketplace.

Investing through partnerships, joint ventures or in an MLP decreases our ability to manage risk.

We have utilized joint ventures through partnerships for certain midstream investments, including Steckman Ridge and PennEast, and we own a minority interest in DM, an MLP, through our investment in DM Common Units. Although we currently have no specific plans to do so, we may acquire interests in other joint ventures or partnerships in the future. In these joint ventures or partnerships, we may not have the right or power to direct the management and policies of the joint ventures or partnerships, and other participants or investors may take action contrary to our instructions or requests and against our policies and objectives. In addition, the other participants may become bankrupt or have economic or other business interests or goals that are inconsistent with those of NJR and our subsidiaries. Our financial condition, results of operations or cash flows could be harmed if a joint venture participant acts contrary to our interests.

Additionally, our investment in DM has risks that are unique to investments in MLPs. Holders of MLP common units have limited control and voting rights on matters affecting the MLP, and investments in MLPs may have limited liquidity. Additionally, if DM is treated as a corporation for federal income tax purposes as a result of a change in current law or a change in DM’s business, such treatment would result in a reduction in the after-tax return to us and may cause a reduction in the value of our investment in DM Common Units.

Our certificate of incorporation and bylaws may delay or prevent a transaction that stockholders would view as favorable.

Our certificate of incorporation and bylaws, as well as New Jersey law, contain provisions that could delay, defer or prevent an unsolicited change in control of NJR, which may negatively affect the market price of our common stock or the ability of stockholders to participate in a transaction in which they might otherwise receive a premium for their shares over the then-current market price. These provisions may also prevent changes in management. In addition, our Board of Directors is authorized to issue preferred stock without stockholder approval on such terms as our Board of Directors may determine. Our common stockholders will be subject to, and may be negatively affected by, the rights of any preferred stock that may be issued in the future. In addition, we are subject to the New Jersey Shareholders’ Protection Act, which could delay or prevent a change of control of NJR.

Page 22

New Jersey Resources Corporation
Part I

ITEM 1B. UNRESOLVED STAFF COMMENTS                                                                                                                        

None

ITEM 2. PROPERTIES                                                                                                                                                                   

Natural Gas Distribution Segment

NJNG owns approximately 7,252 miles of distribution main, 7,525 miles of service main, 227 miles of transmission main and 557,000 meters. Mains are primarily located under public roads. Where mains are located under private property, NJNG has obtained easements from the owners of record.

Additionally, NJNG owns and operates two LNG storage plants in Stafford Township, Ocean County; and Howell Township, Monmouth County. The two LNG plants have an aggregate estimated maximum capacity of approximately 170,000 Dths per day and 1 Bcf of total capacity. These facilities are used for peaking natural gas supply and for emergencies. NJNG’s Liquefaction facility is also located on the Howell Township property and allows NJNG to convert natural gas into LNG to fill NJNG’s existing LNG storage tanks.

NJNG owns four service centers located in Rockaway Township, Morris County; Atlantic Highlands and Wall Township, Monmouth County; and Lakewood, Ocean County. These service centers house storerooms, garages, gas distribution and administrative offices. NJNG leases its headquarters and customer service facilities in Wall Township, Monmouth County; a customer service office in Asbury Park, Monmouth County; and a service center in Manahawkin, Ocean County. These customer service offices support customer contact, marketing, economic development and other functions.

Substantially all of NJNG’s properties, not expressly excepted or duly released, are subject to the lien of the Mortgage Indenture as security for NJNG’s mortgage bonds, which totaled $672 million as of September 30, 2018. In addition, under the terms of the Mortgage Indenture, NJNG could have issued up to $1 billion of additional first mortgage bonds as of September 30, 2018.

Clean Energy Ventures Segment

Clean Energy Ventures has various solar contracts, including lease agreements and easements, allowing the installation, operation and maintenance of solar equipment and access to the various properties, including commercial and residential rooftops. In addition to the lease agreements and easements, Clean Energy Ventures owns solar panels with a total of 231.3 MW of capacity throughout New Jersey and owns 79.5 acres of land in Vineland, New Jersey.

Clean Energy Ventures is also party to various land lease agreements and easements, which allow for the installation, operation and maintenance of wind turbines, associated electric collection facilities, substations, operation and maintenance buildings and access to the various properties. Clean Energy Ventures has a total of 116.9 MW of wind capacity and owns wind projects in Carroll County, Iowa, Rush County, Kansas, Carbon County, Wyoming and Somerset County, Pennsylvania. In addition to the lease agreements and easements, Clean Energy Ventures owns 1.8 acres and 7.1 acres of land for its Carroll County and Rush County wind projects, respectively. Clean Energy Ventures also owns a building on .16 acres in Rush County, Kansas that is used for operation and maintenance purposes.

Clean Energy Ventures leases office space in Wall Township, New Jersey.

Energy Services Segment

As of September 30, 2018, Energy Services leases office space in Wall Township, New Jersey, Houston, Texas, Charlotte, North Carolina and Allentown, Pennsylvania.

Midstream Segment

As of September 30, 2018, Steckman Ridge owned and/or leased storage rights on approximately 6,300 acres of land in Bedford County, Pennsylvania, with a FERC-regulated natural gas storage facility with up to 12 Bcf of working gas capacity. Equipment on the property includes a compressor station, gathering pipelines and pipeline interconnections. As of September 30, 2018, PennEast owned 74 acres of land in Carbon County, Pennsylvania and 58.7 acres of land in Mercer County, New Jersey.


Page 23

New Jersey Resources Corporation
Part I

ITEM 2. PROPERTIES (Continued)                                                                                                                                            

All Other Business Operations

As of September 30, 2018, CR&R’s real estate portfolio consisted of 35 acres of undeveloped land in Atlantic County, New Jersey with a net book value of $1.4 million.

NJRHS leases service centers in Dover, New Jersey and Wall Township, New Jersey.

Capital Expenditure Program

See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations for a discussion of anticipated fiscal 2019 and 2020 capital expenditures, as applicable to our reporting segments and business operations.

ITEM 3. LEGAL PROCEEDINGS                                                                                                                                                

Manufactured Gas Plant Remediation

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

NJNG may recover its remediation expenditures, including carrying costs, over rolling seven-year periods pursuant to a RAC approved by the BPU. NJNG recovered approximately $9.4 million annually through its SBC RAC. On July 25, 2018, the BPU approved NJNG’s annual SBC application requesting a reduction in the RAC, which decreased the annual recovery to $7 million, effective September 1, 2018. On September 21, 2018, NJNG filed its annual SBC application requesting to recover remediation expenses incurred through June 30, 2018, and an increase in the RAC, which will result in an annual increase of approximately $1.4 million, effective April 1, 2019. As of September 30, 2018, $33 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in regulatory assets on the Consolidated Balance Sheets.

NJNG periodically, and at least annually, performs an environmental review of MGP sites located in Atlantic Highlands, Berkeley, Long Branch, Manchester and Toms River, including a review of potential liability for investigation and remedial action. NJNG estimated at the time of the most recent review that total future expenditures to remediate and monitor the MGP sites for which it is responsible, including potential liabilities for natural resource damages that might be brought by the NJDEP for alleged injury to groundwater or other natural resources concerning these sites, will range from approximately $117.7 million to $204.1 million. NJNG’s estimate of these liabilities is based upon known facts, existing technology and enacted laws and regulations in place when the review was completed. Where it is probable that costs will be incurred, and the information is sufficient to establish a range of possible liability, NJNG accrues the most likely amount in the range. If no point within the range is more likely than the other, it is NJNG’s policy to accrue the lower end of the range. Accordingly, as of September 30, 2018, NJNG recorded an MGP remediation liability and a corresponding regulatory asset of $130.8 million on the Consolidated Balance Sheets, based on the most likely amount. This was reduced from $149 million in fiscal 2017, due to the completion of remediation work at certain sites and a reduction to the remediation scope at another site. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and insurance recoveries, if any.

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

General

We are involved, and from time to time in the future may be involved, in a number of pending and threatened judicial, regulatory and arbitration proceedings relating to matters that arise in connection with the conduct of business, certain of which litigation matters are described in Note 13. Commitments and Contingent Liabilities in the accompanying Consolidated Financial Statements. In view of the inherent difficulty of predicting the outcome of litigation matters, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, we cannot state with confidence what the eventual outcome of the pending litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter will be, if any.

Page 24

New Jersey Resources Corporation
Part I

ITEM 3. LEGAL PROCEEDINGS (Continued)                                                                                                                          

In accordance with applicable accounting guidance, we establish reserves for litigation for those matters that present loss contingencies as to which it is both probable that a loss will be incurred and the amount of such loss can be reasonably estimated. Based upon currently available information, we believe that the results of litigation that is currently pending, taken together, will not have a materially adverse effect on our financial condition, results of operations or cash flows. The actual results of resolving the pending litigation matters may be substantially higher than the amounts reserved.

ITEM 4. MINE SAFETY DISCLOSURES                                                                                                                                    

Not applicable

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY                                                                                                        

The Company’s Executive Officers and their age, position and business experience during the past five years are set forth below.
Name
Age
Officer
since
Office held during last five years
Laurence M. Downes
61
1986
Chairman of the Board (September 1996 - present)
Chief Executive Officer (July 1995 - present)
President (July 1995 - September 2018)
Patrick J. Migliaccio
44
2013
Senior Vice President and Chief Financial Officer (January 2016 - present)
Vice President, Finance and Accounting (November 2014 - December 2015)
Treasurer (August 2013 - May 2015)
Stephen D. Westhoven
50
2004
President and Chief Operating Officer (October 2018 - present)
Executive Vice President and Chief Operating Officer (November 2017 - September 2018)
Senior Vice President and Chief Operating Officer, NJRES and NJRCEV (October 2016 -
October 2017)
Senior Vice President, NJRES (May 2010 - September 2016)
Glenn C. Lockwood
57
1990
Executive Vice President (January 2011 - present)
Chief Financial Officer (September 1995 - December 2015)
Amanda E. Mullan
52
2015
Senior Vice President and Chief Human Resources Officer (January 2017 - present)
Vice President and Chief Human Resources Officer (April 2015 - December 2016)
Senior Vice President of HR, N. America, Willis Group Holdings, a risk management and
insurance intermediary (April 2012 - April 2015)
Jacqueline K. Shea
54
2016
Vice President and Chief Information Officer (June 2016 - present)
Chief Information Officer, Godiva Chocolatier, a manufacturer of premium fine chocolates and
related products (March 2011 - May 2016)
Nancy A. Washington
54
2017
Senior Vice President and General Counsel (March 2017 - present)
Senior Vice President and Chief Litigation Counsel, CIT Group Inc., a Livingston, NJ-based
financial services firm (September 2010 - March 2017)


Page 25

New Jersey Resources Corporation
Part II


ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES                                                                                                                    

NJR’s Common Stock is traded on the New York Stock Exchange under the ticker symbol NJR. As of September 30, 2018, NJR had 52,673 holders of record of its common stock.

In 1996, the Board of Directors authorized the Company to implement a share repurchase program, which has been expanded seven times since the inception of the program. The share repurchase plan allows us to purchase our outstanding shares on the open market or in negotiated transactions, based on market and other conditions. We are not required to purchase any specific number of shares and may discontinue or suspend the program at any time. The share repurchase plan will expire when we have repurchased all shares authorized for repurchase thereunder, unless it is earlier terminated by action of our Board of Directors or additional shares are authorized for repurchase.

The following table sets forth NJR’s repurchase activity for the quarter ended September 30, 2018:
Period
Total Number of Shares
(or Units) Purchased
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
7/01/18 - 7/31/18
$


 
2,431,053
8/01/18 - 8/31/18
$


 
2,431,053
9/01/18 - 9/30/18
$


 
2,431,053
Total
$


 
2,431,053


Page 26

New Jersey Resources Corporation
Part II

ITEM 6. SELECTED FINANCIAL DATA                                                                                                                                   

CONSOLIDATED FINANCIAL STATISTICS
(Thousands, except per share data)
 
 
 
 
 
Fiscal Years Ended September 30,
2018
2017
2016
2015
2014
SELECTED FINANCIAL DATA
 
 
 
 
 
Operating revenues
$
2,915,109

$
2,268,617

$
1,880,905

$
2,733,987

$
3,738,145

Gas purchases
$
2,275,342

$
1,703,767

$
1,352,686

$
2,085,645

$
3,139,525

Net income
$
233,436

$
132,065

$
131,672

$
180,960

$
141,970

Total assets
$
4,143,664

$
3,928,507

$
3,718,570

$
3,284,357

$
3,125,388

Common stock equity
$
1,418,978

$
1,236,643

$
1,166,591

$
1,106,956

$
966,166

Long-term debt (1) (2)
$
1,180,619

$
997,080

$
1,055,038

$
843,595

$
598,209

 
 
 
 
 
 
COMMON STOCK DATA
 
 
 
 
 
Earnings per share-basic
$2.66
$1.53
$1.53
$2.12
$1.69
Earnings per share-diluted
$2.64
$1.52
$1.52
$2.10
$1.67
Dividends declared per share
$1.11
$1.038
$0.975
$0.915
$0.855
 
 
 
 
 
 
NON-GAAP RECONCILIATION
 
 
 
 
 
Net income
$
233,436

$
132,065

$
131,672

$
180,960

$
141,970

Add:
 
 
 
 
 
Unrealized loss (gain) on derivative instruments and related transactions
26,770

(11,241
)
46,883

(38,681
)
28,534

Tax effect
(4,512
)
4,062

(17,018
)
14,391

(10,492
)
Effects of economic hedging related to natural gas inventory
(22,570
)
38,470

(36,816
)
(8,225
)
26,639

Tax effect
7,362

(13,964
)
13,364

3,058

(9,794
)
Net financial earnings (3)
$
240,486

$
149,392

$
138,085

$
151,503

$
176,857

 
 
 
 
 
 
Basic earnings per share
$2.66
$1.53
$1.53
$2.12
$1.69
Add:
 
 
 
 
 
Unrealized loss (gain) on derivative instruments and related transactions
0.31

(0.13
)
0.55

(0.45
)
0.34

Tax effect
(0.05
)
0.05

(0.20
)
0.17

(0.13
)
Effects of economic hedging related to natural gas inventory
(0.26
)
0.45

(0.43
)
(0.10
)
0.32

Tax effect
0.08

(0.17
)
0.16

0.04

(0.12
)
Net financial earnings per share-basic (3)
$2.74
$1.73
$1.61
$1.78
$2.10
 
 
 
 
 
 
Diluted earnings per share
$2.64
$1.52
$1.52
$2.10
$1.67
Add:
 
 
 
 
 
Unrealized loss (gain) on derivative instruments and related transactions
0.30

(0.13
)
0.54

(0.45
)
0.34

Tax effect
(0.05
)
0.05

(0.20
)
0.17

(0.12
)
Effects of economic hedging related to natural gas inventory
(0.25
)
0.44

(0.42
)
(0.10
)
0.31

Tax effect
0.08

(0.17
)
0.15

0.04

(0.12
)
Net financial earnings per share-diluted (3)
$2.72
$1.71
$1.59
$1.76
$2.08
(1)
Includes long-term capital leases of $26.4 million, $28.9 million, $30.7 million, $35.7 million and $40.4 million, respectively.
(2)
Includes long-term solar asset financing obligation of $89.8 million and $28.2 million in fiscal 2018 and 2017, respectively.
(3)
NFE is a non-GAAP financial measure that eliminates the timing differences surrounding the recognition of certain derivative gains or losses, to effectively match the earnings effects of economic hedges associated with the physical sale or purchase of gas and, therefore, eliminate the impact of volatility to GAAP earnings associated with the related derivative instruments. For further discussion of this financial measure, see the Energy Services segment in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

Page 27

New Jersey Resources Corporation
Part II

ITEM 6. SELECTED FINANCIAL DATA (Continued)                                                                                                              

NJNG OPERATING STATISTICS
Fiscal Years Ended September 30,
2018
2017
2016
2015
2014
Operating revenues ($ in thousands)
 
 
 
 
 
Residential
$
441,486

$
395,315

$
345,597

$
466,464

$
469,831

Commercial, industrial and other
95,351

98,777

80,994

106,505

110,740

Firm transportation
65,256

73,206

69,696

77,974

86,131

Total residential and commercial
602,093

567,298

496,287

650,943

666,702

Interruptible
7,522

7,970

8,867

10,049

9,384

Total system
609,615

575,268

505,154

660,992

676,086

BGSS incentive programs
122,250

120,369

89,192

120,978

143,329

Total operating revenues
$
731,865

$
695,637

$
594,346

$
781,970

$
819,415

Throughput (Bcf)
 
 
 
 
 
Residential
45.5

40.7

36.9

45.9

43.1

Commercial, industrial and other
8.9

8.7

7.3

9.6

8.2

Firm transportation
15.5

14.4

14.1

16.0

17.7

Total residential and commercial
69.9

63.8

58.3

71.5

69.0

Interruptible
46.2

55

61.5

47.1

10.5

Total system
116.1

118.8

119.8

118.6

79.5

BGSS incentive programs
150.2

178.4

216.7

222.4

180.8

Total throughput
266.3

297.2

336.5

341.0

260.3

Customers at year-end
 
 
 
 
 
Residential
474,495

460,013

448,273

437,979

422,742

Commercial, industrial and other
28,037

26,947

26,218

25,541

24,684

Firm transportation
36,126

42,790

46,608

48,673

56,777

Total residential and commercial
538,658

529,750

521,099

512,193

504,203

Interruptible
31

33

34

35

37

BGSS incentive programs
28

27

30

24

34

Total customers at year-end
538,717

529,810

521,163

512,252

504,274

Interest coverage ratio (1)
6.35

7.96

8.97

9.57

10.24

Average therm use per customer
 
 
 
 
 
Residential
959

885

824

1,049

1,020

Commercial, industrial and other
10,992

11,183

11,378

9,799

4,466

Degree days
4,537

4,129

3,867

5,015

5,080

Weather as a percent of normal (2)
99.5
%
90.0
%
82.5
%
108.3
%
109.6
%
Number of employees
686

680

670

649

626

(1)
NJNGs income from operations divided by interest expense.
(2)
Normal heating degree days are based on a 20-year average, calculated based upon three reference areas representative of NJNGs service territory.



Page 28

New Jersey Resources Corporation
Part II

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                                                                                                                                                                                   

Critical Accounting Policies

We prepare our financial statements in accordance with GAAP. Application of these accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies during the reporting period. We regularly evaluate our estimates, including those related to the calculation of the fair value of derivative instruments, regulatory assets, income taxes, pension and postemployment benefits other than pensions and contingencies related to environmental matters and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In the normal course of business, estimated amounts are subsequently adjusted to actual results that may differ from estimates.

Regulatory Accounting

NJNG maintains its accounts in accordance with the FERC Uniform System of Accounts as prescribed by the BPU and recognizes the impact of regulatory decisions on its financial statements. As a result of the ratemaking process, NJNG is required to apply the accounting principles in ASC 980, Regulated Operations, which differ in certain respects from those applied by unregulated businesses. Specifically, NJNG records regulatory assets when it is probable that certain operating costs will be recoverable from customers in future periods and records regulatory liabilities associated with probable future obligations to customers.

NJNG’s BGSS requires it to project its annual natural gas costs and provides the ability, subject to BPU approval, to recover or refund the difference, if any, of such actual costs compared with the projected costs included in prices through a BGSS charge to customers. Any underrecovery or overrecovery is recorded as a regulatory asset or liability on the Consolidated Balance Sheets and reflected in the BGSS charge to customers in subsequent years.

As recovery of regulatory assets is subject to BPU approval, if there are any changes in future regulatory positions, which indicate that recovery of all or a portion of a regulatory asset is not probable, the related cost would be charged to income in the period of such determination.

Impairment of Long-lived assets

Property, plant and equipment and intangible assets are reviewed periodically when changes in facts and circumstances indicate that the carrying amount of an asset may not be fully recoverable in accordance with the appropriate accounting guidance. When an impairment indicator is present, the Company determines if the carrying value of the asset is recoverable by comparing it to the expected undiscounted future cash flows. If carrying value of the asset is greater than the expected undiscounted future cash flows an impairment charge is recorded in an amount equal to the excess of the carrying value of the asset over its fair value.

Equity method investments are reviewed periodically when changes in facts and circumstances indicate that the current fair value may be less than the asset’s carrying amount and record an impairment charge in an amount equal to the excess of the carrying value of the asset over its fair value if the decline is other than temporary.
 
Derivative Instruments

We record our derivative instruments held as assets and liabilities at fair value on the Consolidated Balance Sheets. In addition, since we choose not to designate any of our physical and financial natural gas commodity derivatives as accounting hedges, changes in the fair value of Energy Services’ commodity derivatives are recognized in earnings, as they occur, as a component of operating revenues or gas purchases on the Consolidated Statements of Operations. Changes in the fair value of foreign exchange contracts are recognized in gas purchases on the Consolidated Statements of Operations.

The fair value of derivative instruments is determined by reference to quoted market prices of listed exchange-traded contracts, published price quotations, pipeline tariff information and/or a combination of those items. Energy Services’ portfolio is valued using the most current and reasonable market information. If the price underlying a physical commodity transaction does not represent a visible and liquid market, Energy Services may utilize additional published pipeline tariff information and/or other services to determine an equivalent market price. As of September 30, 2018, fair value of its derivative assets and liabilities reported on the Consolidated Balance Sheets that is based on such pricing is considered immaterial.


Page 29

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


Should there be a significant change in the underlying market prices or pricing assumptions, Energy Services may experience a significant impact on its financial position, results of operations and cash flows. Refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risks for a sensitivity analysis related to the impact to derivative fair values resulting from changes in commodity prices. The valuation methods we use to determine fair values remained consistent for fiscal 2018, 2017 and 2016. We apply a discount to our derivative assets to factor in an adjustment associated with the credit risk of its physical natural gas counterparties and to our derivative liabilities to factor in an adjustment associated with its own credit risk. We determine this amount by using historical default probabilities corresponding to the appropriate S&P issuer ratings. Since the majority of our counterparties are rated investment grade, this results in an immaterial credit risk adjustment.

Gains and losses associated with derivatives utilized by NJNG to manage the price risk inherent in its natural gas purchasing activities are recoverable through its BGSS, subject to BPU approval. Accordingly, the offset to the change in fair value of these derivatives is recorded as either a regulatory asset or liability on the Consolidated Balance Sheets.

Clean Energy Ventures hedges certain of its expected production of SRECs through forward and futures contracts. Clean Energy Ventures intends to physically deliver all SRECs it sells and recognizes SREC revenue as operating revenue on the Consolidated Statements of Operations upon delivery of the underlying SREC.

We have not designated any derivatives as fair value or cash flow hedges as of September 30, 2018 and 2017.

Income Taxes and Credits

The determination of our provision for income taxes requires the use of estimates and the interpretation and application of tax laws. Judgment is required in assessing the deductibility and recoverability of certain taxable items. We use the asset and liability method to determine and record deferred tax assets, representing future tax benefits, and deferred tax liabilities, representing future taxes payable, resulting from the differences between the financial reporting amount and the corresponding tax basis of the assets and liabilities using the enacted rates expected to be in effect at the time the differences are settled. An offsetting valuation allowance is recorded when it is more likely than not that some or all of the deferred income tax assets won’t be realized. Any significant changes to the estimates and judgments with respect to the interpretations, timing or deductibility could result in a material change to earnings and cash flows. For a more detailed description of Income Taxes see Note 12. Income Taxes in the accompanying Consolidated Financial Statements.

For state income tax and other taxes, estimates and judgments are required with respect to the apportionment among the various jurisdictions. In addition, we operate within multiple tax jurisdictions and are subject to audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We maintain a liability for the estimate of potential income tax exposure and, in our opinion, adequate provisions for income taxes have been made for all years reported. Any significant changes to the estimates and judgments with respect to the apportionment factor could result in a material change to earnings and cash flows.

Occasionally, the federal and state taxing authorities determine that it is necessary to make certain changes to the income tax laws. These changes may include but are not limited to changes in the tax rates and/or the treatment of certain items of income or expense. Accounting guidance requires that the Company reflect the effect of tax laws or tax rates at the date of enactment. Additionally, the Company is required to re-measure its deferred tax assets and liabilities as of the date of enactment. For non-regulated entities, the effect of changes in tax rates and/or tax laws are required to be included in income from continuing operations for the period that includes the enactment date. For regulated entities, if as the result of an action by a regulator it is probable that the future increase or decrease in taxes payable for items such as changes in tax law or rates will be recovered from or returned to customers through future rates, an asset or liability shall be recognized for that probable increase or decrease in future revenue. Additionally, accounting guidance also requires that regulatory liabilities/assets be considered a temporary difference for which a deferred tax asset/liability shall be recognized. As a result, NJNG grossed up its regulatory liability to reflect the required accounting for the tax effects of the revaluation.

Concurrent with the enactment of the current tax reform legislation, the SEC issued Staff Accounting Bulletin No. 118, which lays out an approach that a registrant may follow to comply with the enactment period accounting requirements. Accordingly, registrants can have up to 12 months from the enactment date to complete the accounting for some or all of the income tax effects triggered by the enactment of the new law. Registrants need to determine and use “reasonable estimates” for some or all of the expected effects beginning with the one-year measurement period. The accounting must be finalized no later than 12 months from the enactment date. If reasonable estimates cannot be determined, the accounting should continue to be based on the old law until reasonable estimates can be determined in a subsequent period. As of September 30, 2018, our accounting for the income tax effects of the Tax Act is considered complete.

Page 30

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


Accounting guidance requires that we establish reserves for uncertain tax positions when it is more likely than not that the positions will not be sustained when challenged by taxing authorities. We have no reason to believe that we have any future obligations associated with unrecognized tax benefits; therefore, as of September 30, 2018 and 2017, we have not recorded any liabilities related to uncertain tax positions. Any significant changes to the estimates and judgments with respect to the interpretations, timing or deductibility could result in a material change to earnings and cash flows.

To the extent that NJNG invests in property that qualifies for ITCs, the ITC is deferred and amortized to income over the life of the equipment in accordance with regulatory treatment. For our unregulated subsidiaries, we recognize ITCs as a reduction to income tax expense when the property is placed in service.

Changes to the federal statutes related to ITCs, which have the effect of reducing or eliminating the credits, could have a negative impact on earnings and cash flows.

Environmental Costs

At the end of each fiscal year, NJNG, with the assistance of an independent consulting firm, updates the environmental review of its MGP sites, including its potential liability for investigation and remedial action. From this review, NJNG estimates expenditures necessary to remediate and monitor these MGP sites. NJNG’s estimate of these liabilities is developed from then-currently available facts, existing technology and current laws and regulations.

In accordance with accounting standards for contingencies, NJNG’s policy is to record a liability when it is probable that the cost will be incurred and can be reasonably estimated. NJNG will determine a range of liabilities and will record the most likely amount. If no point within the range is more likely than any other, NJNG will accrue the lower end of the range. Since we believe that recovery of these expenditures, as well as related litigation costs, is possible through the regulatory process, we have recorded a regulatory asset corresponding to the related accrued liability. Accordingly, NJNG recorded an MGP remediation liability and a corresponding regulatory asset on the Consolidated Balance Sheets, which is based on the most likely amount.

The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations and the ultimate ability of other responsible parties to pay, as well as the potential impact of any litigation and any insurance recoveries. Previously incurred remediation costs, net of recoveries from customers and insurance proceeds received are included in regulatory assets on the Consolidated Balance Sheets.

If there are changes in the regulatory position surrounding these costs, or should actual expenditures vary significantly from estimates in that these costs are disallowed for recovery by the BPU, such costs would be charged to income in the period of such determination. See the Legal Proceedings section in Note 13. Commitments and Contingent Liabilities for more details.

Postemployment Employee Benefits

Our costs of providing postemployment employee benefits are dependent upon numerous factors, including actual plan experience and assumptions of future experience. Postemployment employee benefit costs are impacted by actual employee demographics including age, compensation levels and employment periods, the level of contributions made to the plans, changes in long-term interest rates and the return on plan assets. Changes made to the provisions of the plans or healthcare legislation may also impact current and future postemployment employee benefit costs. Postemployment employee benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets, changes in mortality tables, health care cost trends and discount rates used in determining the PBO. In determining the PBO and cost amounts, assumptions can change from period to period and could result in material changes to net postemployment employee benefit periodic costs and the related liability recognized by us.

Our postemployment employee benefit plan assets consist primarily of U.S. equity securities, international equity securities and fixed-income investments, with a targeted allocation of 34 percent, 17 percent and 41 percent, respectively. Fluctuations in actual market returns, as well as changes in interest rates, may result in increased or decreased postemployment employee benefit costs in future periods. Postemployment employee benefit expenses are included in O&M expense on the Consolidated Statements of Operations.

Page 31

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


The following is a summary of a sensitivity analysis for each actuarial assumption:
Pension Plans
 
 
 
 
 
 
 
 
Actuarial Assumptions
Increase/
(Decrease)
Estimated
Increase/(Decrease) on PBO
(Thousands)
Estimated
Increase/(Decrease) to Expense
(Thousands)
Discount rate
1.00

%
 
$
(37,153
)
 
 
$
(4,095
)
 
Discount rate
(1.00
)
%
 
$
46,432

 
 
$
4,756

 
Rate of return on plan assets
1.00

%
 
n/a
 
 
$
(2,619
)
 
Rate of return on plan assets
(1.00
)
%
 
n/a
 
 
$
2,619

 

Other Postemployment Benefits
 
 
 
 
 
 
 
 
Actuarial Assumptions
Increase/
(Decrease)
Estimated
Increase/(Decrease) on PBO
(Thousands)
Estimated
Increase/(Decrease) to Expense
(Thousands)
Discount rate
1.00

%
 
$
(28,595
)
 
 
$
(2,728
)
 
Discount rate
(1.00
)
%
 
$
36,736

 
 
$
3,406

 
Rate of return on plan assets
1.00

%
 
n/a
 
 
$
(713
)
 
Rate of return on plan assets
(1.00
)
%
 
n/a
 
 
$
714

 
 
 
 
 
 
 
 
 
 
Actuarial Assumptions
Increase/
(Decrease)
Estimated
Increase/(Decrease) on PBO
(Thousands)
Estimated
Increase/(Decrease) to Expense
(Thousands)
Health care cost trend rate
1.00

%
 
$
36,260

 
 
$
3,838

 
Health care cost trend rate
(1.00
)
%
 
$
(28,743
)
 
 
$
(2,991
)
 

On October 1, 2016, we changed our approach used to measure the service and interest cost components of our net periodic benefit costs. Previously, we estimated service cost and interest cost based on a single weighted-average discount rate from the yield curve used to measure our projected benefit obligation. We determine our service and interest cost based upon duration-specific spot rates that are aligned to each year’s future benefit payments. Under the new approach, net periodic benefit costs will be lower during periods of low interest rates and upward-sloping yield curves. Conversely, in a downward-sloping yield curve environment, costs could increase. Refer to Note 10. Employee Benefit Plans in the accompanying Consolidated Financial Statements for further discussion of our change in method.

Recently Issued Accounting Standards

Refer to Note 2. Summary of Significant Accounting Policies in the accompanying Consolidated Financial Statements for discussion of recently issued accounting standards.

Managements Overview

Consolidated

NJR is an energy services holding company providing retail natural gas service in New Jersey and wholesale natural gas and related energy services to customers in the United States and Canada. In addition, we invest in clean energy projects and midstream assets and provide various repair, sales and installations services. A more detailed description of our organizational structure can be found in Item 1. Business.


Page 32

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


Reporting Segments

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

segmentorgcharta19.jpg

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

The Tax Act

On December 22, 2017, the Tax Act was signed into law, which resulted in a reduction in the federal corporate tax rate. Since our fiscal year end is September 30, it is required by the Internal Revenue Code to calculate a statutory rate based upon the federal tax rates in effect before and after the effective date of the change in the taxable year that includes the effective date. Accordingly, we applied a federal statutory tax rate of 24.5 percent during fiscal 2018 and the enacted rate of 21 percent beginning in fiscal 2019.

As a result of the Tax Act, we revalued our deferred tax assets and liabilities at the enactment date to reflect the rates expected to be in effect when the deferred tax assets and liabilities are realized or settled. As of September 30, 2018, NJNG had a regulatory liability that included excess deferred income taxes of $205.4 million, which requires amortization over the remaining life of the utility plant consistent with IRS normalization principles. During fiscal 2018, we recognized an income tax benefit of approximately $17 million for NJNG and approximately $59.6 million for the remaining entities on the Consolidated Statements of Operations. See Note 12. Income Taxes for a more detailed discussion on the Tax Act.


Page 33

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


A summary of our consolidated results in net income and assets by reporting segment and operations for the fiscal years ended September 30, is as follows:
(Thousands)
2018
2017
2016
 
Net Income
Assets
Net Income
Assets
Net Income
Assets
Natural Gas Distribution
$
84,048

$
2,663,054

$
86,930

$
2,519,578

$
76,104

$
2,517,401

Clean Energy Ventures
75,849

865,018

24,873

771,340

28,393

665,696

Energy Services
53,139

396,852

476

398,277

14,265

327,626

Midstream
24,367

242,069

12,857

232,806

9,406

186,259

Home Services and Other
(3,555
)
114,732

6,811

114,801

2,882

109,487

Intercompany (1)
(412
)
(138,061
)
118

(108,295
)
622

(87,899
)
Total
$
233,436

$
4,143,664

$
132,065

$
3,928,507

$
131,672

$
3,718,570

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

Net Income

The primary drivers of the changes noted above, which are described in more detail in the individual segment discussions, are discussed below.

The increase in net income of $101.4 million during fiscal 2018, compared with fiscal 2017, was primarily driven by increased operating income at Energy Services related to colder weather, resulting in increased storage withdrawals due to higher demand coupled with higher volatility resulting in an increase in natural gas price spreads. Net income also increased due to impacts from the Tax Act, including a net income tax benefit of $59.6 million and a decrease in tax expense due to the lower tax rate, which was partially offset by increased O&M expense.

The increase in net income of $393,000 during fiscal 2017, compared with fiscal 2016, was primarily driven by increased margin at our Natural Gas Distribution segment due primarily to increased base rates which were effective October 1, 2016, increased other income at Home Services and Other due to the sale of available for sale securities, increased equity in earnings of affiliates at Midstream and increased revenues and PTCs at Clean Energy Ventures. These increases were partially offset by decreased operating income at Energy Services due primarily to a decrease of $16.4 million related to changes in the value of financial hedges and a decrease at Clean Energy Ventures due primarily to increased depreciation, operating and interest expenses.

Assets

The increase in assets during fiscal 2018, compared with fiscal 2017, was due primarily to additional utility plant at our Natural Gas Distribution segment and an advance payment of $10 million for the IEC acquisition, partially offset by a decrease in regulatory assets at our Natural Gas Distribution segment, as well as a decrease in the market value of the DM Common Units at Midstream.

The increase in assets during fiscal 2017, compared with fiscal 2016, was due primarily to additional solar expenditures at Clean Energy Ventures, the acquisition of Talen's wholesale and retail energy contract assets at Energy Services, increased PennEast capital contributions and an increase in the market value of our DM Common Units at Midstream, along with additional utility plant expenditures at our Natural Gas Distribution segment.

Non-GAAP Financial Measures

Our management uses NFE, a non-GAAP financial measure, when evaluating our operating results. Energy Services economically hedges its natural gas inventory with financial derivative instruments and calculates the related tax effect based on the statutory rate. NFE is a measure of the earnings based on eliminating timing differences surrounding the recognition of certain gains or losses, to effectively match the earnings effects of the economic hedges with the physical sale of gas and, therefore, eliminates the impact of volatility to GAAP earnings associated with the derivative instruments. To the extent we utilize forwards or futures to hedge forecasted SREC production, unrealized gains and losses are also eliminated for NFE purposes.


Page 34

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for or a replacement of, the comparable GAAP measure and should be read in conjunction with those GAAP results. The following is a reconciliation of consolidated net income, the most directly comparable GAAP measure, to NFE for the fiscal years ended September 30:
(Thousands, except per share data)
2018
2017
2016
Net income
$
233,436

$
132,065

$
131,672

Add:
 
 
 
Unrealized loss (gain) on derivative instruments and related transactions
26,770

(11,241
)
46,883

Tax effect
(4,512
)
4,062

(17,018
)
Effects of economic hedging related to natural gas inventory (1)
(22,570
)
38,470

(36,816
)
Tax effect
7,362

(13,964
)
13,364

Net financial earnings
$
240,486

$
149,392

$
138,085

 
 
 
 
Basic earnings per share
$
2.66

$
1.53

$
1.53

Add:
 
 
 
Unrealized loss (gain) on derivative instruments and related transactions
0.31

(0.13
)
0.55

Tax effect
(0.05
)
0.05

(0.20
)
Effects of economic hedging related to natural gas inventory (1)
(0.26
)
0.45

(0.43
)
Tax effect
0.08

(0.17
)
0.16

Basic net financial earnings per share
$
2.74

$
1.73

$
1.61

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

NFE by reporting segment and other operations for the fiscal years ended September 30, discussed in more detail within the operating results sections of each segment, is summarized as follows:
(Thousands)
2018
 
2017
 
2016
Natural Gas Distribution
$
84,048

35
 %
 
$
86,930

58
%
 
$
76,104

55
%
Clean Energy Ventures
75,849

32

 
24,873

17

 
28,393

20

Energy Services
60,378

25

 
18,554

12

 
21,934

16

Midstream
24,367

10

 
12,857

9

 
9,406

7

Home Services and Other
(3,829
)
(2
)
 
6,811

4

 
2,882

2

Eliminations (1)
(327
)

 
(633
)

 
(634
)

Total
$
240,486

100
 %
 
$
149,392

100
%
 
$
138,085

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

The increase in NFE during fiscal 2018, compared with fiscal 2017, was driven primarily by higher financial margin generated at Energy Services due primarily to colder weather, resulting in increased storage withdrawals due to higher demand coupled with higher volatility, allowing Energy Services to capture additional margin from natural gas price spreads. The increase in NFE also included a net income tax benefit of $59.6 million associated with the Tax Act, as previously discussed.

The increase in NFE during fiscal 2017, compared with fiscal 2016, was driven primarily by increases at our Natural Gas Distribution segment, Midstream and Home Services and Other, as previously discussed, partially offset by lower financial margin at Energy Services due primarily to lower sales volumes and fewer market opportunities and the decrease at Clean Energy Ventures, as previously discussed.

Page 35

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


Natural Gas Distribution Segment

Overview

Our Natural Gas Distribution segment is comprised of NJNG, a natural gas utility that provides regulated retail natural gas service in central and northern New Jersey to approximately 538,700 residential and commercial customers in its service territory and also participates in the off-system sales and capacity release markets. The business is subject to various risks, which can negatively impact customer growth, operating and financing costs, fluctuations in commodity prices and customer conservation efforts. These risks include, but are not limited to, adverse economic conditions, customer usage, certain regulatory actions, environmental remediation and severe weather conditions. It is often difficult to predict the impact of events or trends associated with these risks.

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

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

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

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

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

managing its customer growth rate, which NJNG expects will be approximately 1.8 percent annually through fiscal 2021;

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

-    planning and authorization of infrastructure investments;

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

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

-    administering and promoting NJNGs BPU-approved SAVEGREEN Project;

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

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

Base Rate Case

In September 2016, the BPU approved NJNG's base rate case, effective October 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 rate mechanism and five-year extension of SAFE II, rate recovery of NJ RISE capital investment costs through June 30, 2016, recovery of NJNG’s SAFE I, Natural Gas Vehicle Refueling Stations and LNG capital investments and recovery of other costs previously deferred in regulatory assets.


Page 36

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


Infrastructure projects

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

Below is a summary of NJNG’s capital expenditures, including accruals and estimates for expected investments over the next two fiscal years:
njr10k2017_chart-33547a04.jpg
Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory oversight, environmental regulations, unforeseen events and the ability to access capital.

SAFE and NJ RISE

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

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

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

In July 2017, the BPU approved NJNG’s annual petition requesting a $4.1 million increase in recoveries of NJ RISE and SAFE II capital investment costs, with a weighted cost of capital of 6.9 percent including a return on equity of 9.75 percent, related to the period ending June 30, 2017, effective October 2017.


Page 37

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


On September 17, 2018, the BPU approved NJNG’s annual petition requesting a base rate increase of $6.8 million for the recovery of SAFE II and NJ RISE capital investment costs, with a weighted cost of capital of 6.9 percent including a return on equity of 9.75 percent, related to the 12-months ended June 30, 2018, effective October 1, 2018.

Natural Gas Vehicle Refueling Stations

NJNG has three natural gas vehicle refueling stations open to the public. Costs for these stations were approximately $10 million and are being recovered through NJNG’s base rates, effective October 2016.

Liquefaction/LNG

NJNG’s Liquefaction facility allows NJNG to convert natural gas into LNG to fill its existing LNG storage tanks. Costs for this facility along with other plant upgrades were approximately $36.5 million and are being recovered through NJNG’s base rates effective October 2016.

Southern Reliability Link

The SRL is an approximately 30-mile, 30-inch transmission main designed to support improved system reliability and integrity in the southern portion of NJNG’s service territory, estimated to cost between $180 million and $215 million. In January 2016, the BPU issued an order approving NJNG’s modified, proposed SRL pipeline installation, operation and route selection. In March 2016, the BPU issued an order designating the SRL route and exempting the SRL from municipal land use ordinances, regulations, permits and license requirements. In February 2017, the New Jersey Department of Environmental Protection issued a permit authorizing construction of the SRL within the jurisdiction of the Coastal Area Facility Review Act, as well as a Freshwater Wetlands permit. In September 2017, the NJ Pinelands Commission approved construction of the SRL as being compliant with the Commission’s Comprehensive Management Plan. All approvals issued by state agencies are under appeal and certain road-opening permits and easements are in the process of being secured. Construction is expected to begin in fiscal 2019, with an estimated in-service date in 2019.

Customer growth

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

NJNG’s total customers as of September 30, include the following:
 
2018
2017
2016
Firm customers
 
 
 
Residential
474,495

460,013

448,273

Commercial, industrial & other
28,037

26,947

26,218

Residential transport
26,490

32,653

36,292

Commercial transport
9,636

10,137

10,316

Total firm customers
538,658

529,750

521,099

Other
59

60

64

Total customers
538,717

529,810

521,163


During fiscal 2018, NJNG added 9,596 new customers, which represents a new customer growth rate of approximately 1.8 percent. During that same time period, NJNG converted 613 existing customers to natural gas heat and other services. This customer growth, as well as commercial customers who switched from interruptible to firm natural gas service, will contribute approximately $5.5 million, on an annualized basis, to utility gross margin. NJNG also added 9,126 and 8,170 new customers and converted 662 and 644 existing customers to natural gas heat and other services during the fiscal years ended September 30, 2017 and 2016, respectively.


Page 38

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


In addition, NJNG currently expects to add approximately 28,000 to 30,000 new customers during the three-year period of fiscal 2019 to 2021. NJNG’s estimates are based on information from municipalities and developers, as well as external industry analysts and management’s experience. NJNG estimates that approximately 68 percent of the growth will come from new construction markets and 32 percent from customer conversions to natural gas from other fuel sources. This new customer and conversion growth would increase utility gross margin under NJNG’s base rates by approximately $5.5 million annually, as calculated under NJNG’s CIP tariff. See the Natural Gas Distribution Segment Operating Results section that follows for a definition and further discussion of utility gross margin.

Energy Efficiency Programs

SAVEGREEN conducts home energy audits and provides various grants, incentives and financing alternatives, which are designed to encourage the installation of high-efficiency heating and cooling equipment and other energy efficiency upgrades. Depending on the specific incentive or approval, NJNG recovers costs associated with the programs over a two- to 10-year period through a tariff rider mechanism. In June 2016, the BPU approved NJNG’s extension of SAVEGREEN through December 31, 2018. On September 17, 2018, the BPU approved the continuation of existing SAVEGREEN programs and the addition of new programs with investments of $135 million through December 2021.

On October 20, 2017, the BPU approved NJNG’s filing to decrease its EE recovery rate, which resulted in an annual decrease of $3.9 million, effective November 1, 2017. On May 25, 2018, NJNG filed a petition with the BPU to decrease its EE recovery rate. On October 16, 2018, NJNG updated this information through September 30, 2018, which will result in an annual decrease of $8.8 million, anticipated to be effective January 1, 2019.

Since inception, $162 million in grants, rebates and loans have been provided to customers, with a total annual recovery of approximately $16.1 million. The recovery includes a weighted average cost of capital that ranges from 6.69 percent to 7.76 percent, with a return on equity of 9.75 percent to 10.3 percent.

Conservation Incentive Program

The CIP facilitates normalizing NJNG’s utility gross margin for variances not only due to weather but also for other factors affecting customer usage, such as conservation and energy efficiency. Recovery of utility gross margin for the non-weather variance through the CIP is limited to the amount of certain gas supply cost savings achieved and is subject to a variable margin review test. Additionally, recovery of the CIP utility gross margin is subject to an annual earnings test. An annual review of the CIP must be filed by June 1, coincident with NJNG’s annual BGSS filing, during which NJNG can request rate changes to the CIP. In May 2014, the BPU approved the continuation of the CIP program with no expiration date. Refer to Note 3. Regulation - BGSS and CIP in the accompanying Consolidated Financial Statements, for a discussion of CIP rate actions.

NJNG’s total utility firm gross margin includes the following adjustments related to the CIP mechanism:
(Thousands)
2018
2017
2016
Weather (1)
$
205

$
19,261

$
27,547

Usage
(1,629
)
(2,309
)
10,420

Total
$
(1,424
)
$
16,952

$
37,967

(1)
Compared with the CIP 20-year average, weather was 0.5 percent, 10 percent and 17.5 percent warmer-than-normal during fiscal 2018, 2017 and 2016, respectively.

Commodity prices

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


Page 39

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


Natural gas commodity prices may experience high volatility as shown in the graph below, which illustrates the daily natural gas prices(1) in the Northeast market region, also known as Tetco M-3.
njr10k2017_chart-38298a04.jpg
(1) Midpoint daily gas price sourced from Platts, a division of McGraw Hill Financial.

The maximum price per MMBtu was $94.93, $8.71 and $4.74 and the minimum price was $0.53, $0.36 and $0.67 for the fiscal years ended September 30, 2018, 2017 and 2016, respectively. A more detailed discussion of the impacts of the price of natural gas on operating revenues, gas purchases and cash flows can be found in the Results of Operations and Cash Flow sections of Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

BGSS

Recovery of natural gas costs

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

On March 26, 2018, the BPU approved maintaining NJNG's BGSS rate for residential and small commercial customers and an increase to its balancing charge rate, which resulted in a $3.7 million increase to the annual revenues credited to BGSS, effective October 2017. The balancing charge rate includes the cost of balancing natural gas deliveries with customer usage for sales and transportation customers and balancing charge revenues are credited to BGSS. During fiscal 2017, NJNG issued bill credits of $42 million as a result of a decline in the wholesale price of natural gas. There were no bill credits issued during fiscal 2018, related to BGSS prices.

Page 40

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


On September 17, 2018, the BPU provisionally approved NJNG’s annual petition to maintain its BGSS rate for residential and small commercial customers and increase its balancing charge rate, resulting in a $10.3 million increase to the annual revenues credited to BGSS, as well changes to the CIP rates, which will result in a $30.9 million annual recovery decrease, effective October 1, 2018. Refer to Note 3. Regulation - BGSS and CIP in the accompanying Consolidated Financial Statements for a further discussion of NJNG’s periodic BGSS rate adjustments and bill credits.

BGSS Incentive Programs

NJNG is eligible to receive financial incentives for reducing BGSS costs through a series of utility gross margin-sharing programs that include off-system sales, capacity release and storage incentive programs. These programs are designed to encourage better utilization and hedging of NJNG’s natural gas supply, transportation and storage assets. Depending on the program, NJNG shares 80 or 85 percent of utility gross margin generated by these programs with firm customers. Should performance of the existing incentives or market conditions warrant, NJNG is permitted to propose a process to re-evaluate and discuss alternative incentive programs annually. Utility gross margin from incentive programs was $12.5 million, $13.7 million and $15 million during the fiscal years ended September 30, 2018, 2017 and 2016, respectively. A more detailed discussion of the impacts to utility gross margin can be found in the Natural Gas Distribution Segment Operating Results section that follows.

Hedging

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

Due to the capital-intensive nature of NJNG’s operations and the seasonal nature of its working capital requirements, significant changes in interest rates can impact NJNG’s results. In June 2015, NJNG entered into a transaction to fix a benchmark treasury rate of 3.26 percent associated with a $125 million debt issuance that was finalized in May 2018. The debt issuance coincided with the maturity of NJNG's $125 million, 5.6 percent notes that came due on May 15, 2018. This treasury lock was settled on March 13, 2018, which coincided with the pricing of the new debt being issued. Settlement of the interest rate contract resulted in a $2.6 million loss, which is recorded as a component of regulatory assets on the Consolidated Balance Sheets and will be amortized to earnings over the 30-year term of the $125 million note issued on May 11, 2018.

A more detailed discussion of NJNG’s debt can be found in the Liquidity and Capital Resources and Cash Flow sections of Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

Societal Benefits Charge

USF

NJNG’s qualifying customers are eligible for the USF program, which is administered by the New Jersey Department of Community Affairs, to help make energy bills more affordable. On September 17, 2018, the BPU approved NJNG’s annual USF compliance filing to increase the statewide USF rate, which will result in a $1 million annual increase, effective October 1, 2018. Refer to Note 3. Regulation - Societal Benefits Clause in the accompanying Consolidated Financial Statements for a further discussion of NJNG’s USF rates.

Environmental Remediation

NJNG is responsible for the environmental remediation of five MGP sites, which contain contaminated residues from former gas manufacturing operations that ceased operating at these sites by the mid-1950s and, in some cases, had been discontinued many years earlier. Actual MGP remediation costs may vary from management’s estimates due to the developing nature of remediation requirements, regulatory decisions by the NJDEP and related litigation. NJNG reviews these costs at the end of each fiscal year and adjusts its liability and corresponding regulatory asset as necessary to reflect its expected future remediation obligation. Accordingly, NJNG recognized a regulatory asset and an obligation of $130.8 million as of September 30, 2018, a decrease of $18.2 million, compared with the prior fiscal period.


Page 41

New Jersey Resources Corporation
Part II
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)                                                                                                                                                             


Other

In May 2016, NJNG included a proposal in its base rate case to recover certain capital costs and incremental operation and maintenance costs related to a March 2016 BPU Order regarding new cybersecurity requirements. This proposal was updated in July 2016, and the associated costs were approved for recovery through NJNG’s new base rates, effective October 2016.

Interest Rate Risk

Due to the capital-intensive nature of NJNG’s operations and the seasonal nature of its working capital requirements, significant changes in interest rates can impact NJNG’s results. A more detailed discussion can be found in the Liquidity and Capital Resources and Cash Flow sections of Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

Other regulatory filings and a more detailed discussion of the filings in this section can be found in Note 3. Regulation in the accompanying Consolidated Financial Statements.

Commodity Service to Customers

The EDECA, which was enacted in 1999, provides the framework for New Jersey’s retail energy markets, which are open to competition from other electric and natural gas suppliers. NJNG’s residential and commercial markets are currently open to competition, and its rates are segregated between BGSS (i.e., natural gas commodity) and delivery (i.e., transportation) components. NJNG does not earn utility gross margin on the commodity portion of its natural gas sales. NJNG earns utility gross margin through the delivery of natural gas to its customers and, therefore, is not negatively affected by customers who use its transportation service and purchase natural gas from another supplier. Under an existing order from the BPU, BGSS can be provided by suppliers other than the state’s natural gas utilities; however, customers who purchase natural gas from another supplier continue to use NJNG for transportation service.

Operating Results

NJNG’s operating results for the fiscal years ended September 30, are as follows:
(Thousands)
2018
2017
2016
Operating revenues
$
731,865

$
695,637

$
594,346

Operating expenses