NJR 10Q June2012


 

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

FORM 10‑Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
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 1‑8359
 
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
New Jersey
 
22‑2376465
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1415 Wyckoff Road, Wall, New Jersey 07719
 
732‑938‑1480
(Address of principal
executive offices)
 
(Registrant's telephone number,
including area code)
 
 
 
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock ‑ $2.50 Par Value
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)

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

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

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

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

The number of shares outstanding of $2.50 par value Common Stock as of August 6, 2012 was 41,588,540.

 


New Jersey Resources Corporation

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



New Jersey Resources Corporation

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS                                                                           

Certain statements contained in this report, including, without limitation, statements as to management expectations and beliefs presented in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures about Market Risk,” Part II, Item I. “Legal Proceedings” and in the notes to the financial statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can also be identified by the use of forward-looking terminology such as “may,” “intend,” “expect,” “believe,” "will" or “continue” or comparable terminology and are made based upon management's current expectations and beliefs as of this date concerning future developments and their potential effect upon New Jersey Resources Corporation (NJR or the Company). There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management.

The Company cautions readers that the assumptions that form the basis for forward-looking statements regarding customer growth, customer usage, qualifications for federal investment tax credits (ITCs) and solar renewable energy certificates (SRECs), financial condition, results of operations, cash flows, capital requirements, market risk and other matters for fiscal 2012 and thereafter include many factors that are beyond the Company's ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes in the debt and equity capital markets. The factors that could cause actual results to differ materially from NJR's expectations include, but are not limited to, those discussed in Item 1A. Risk Factors of NJR's 2011 Annual Report on Form 10-K and Part II, Item 1A of this Form 10-Q, as well as the following:

weather and economic conditions;
demographic changes in the New Jersey Natural Gas (NJNG) service territory and their effect on NJNG's customer growth;
volatility of natural gas and other commodity prices and their impact on NJNG customer usage, NJNG's incentive programs, NJR Energy Services' (NJRES) operations and on the Company's risk management efforts;
changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to the Company;
the impact of volatility in the credit markets;
the ability to comply with debt covenants;
the impact to the asset values and resulting higher costs and funding obligations of NJR's pension and postemployment benefit plans as a result of a downturn in the financial markets, a lower discount rate, and impacts associated with the Patient Protection and Affordable Care Act;
accounting effects and other risks associated with hedging activities and use of derivatives contracts;
commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties, liquidity in the wholesale energy trading market and the Company's ability to recover all of NJRES' funds in the MF Global liquidation proceedings;
the ability to obtain governmental approvals and/or financing for the construction, development and operation of certain non-regulated energy investments;
risks associated with the management of the Company's joint ventures and partnerships;
risks associated with our investments in solar energy projects, including the availability of regulatory and tax incentives, logistical risks and potential delays related to construction, permitting, regulatory approvals and electric grid interconnection, the availability of viable projects and NJR's eligibility for ITCs, the future market for SRECs and operational risks related to projects in service;
timing of qualifying for ITCs due to delays or failures to complete planned solar energy projects and the resulting effect on our effective tax rate and earnings;
the level and rate at which NJNG's costs and expenses are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process;
access to adequate supplies of natural gas and dependence on third-party storage and transportation facilities for natural gas supply;
operating risks incidental to handling, storing, transporting and providing customers with natural gas;
risks related to our employee workforce;
the regulatory and pricing policies of federal and state regulatory agencies;
the costs of compliance with the proposed regulatory framework for over-the-counter derivatives;
the costs of compliance with present and future environmental laws, including potential climate change-related legislation;
risks related to changes in accounting standards;
the disallowance of recovery of environmental-related expenditures and other regulatory changes;
environmental-related and other litigation and other uncertainties; and
the impact of natural disasters, terrorist activities, and other extreme events.

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

Page 1

New Jersey Resources Corporation
Part I


ITEM 1. FINANCIAL STATEMENTS                                                                                                                                          

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
(Thousands, except per share data)
2012

2011
2012

2011
OPERATING REVENUES
 
 
 
 
 
 
Utility
$
106,764

 
$
138,149

$
524,161

 
$
862,073

Nonutility
318,357

 
510,020

1,156,292

 
1,476,235

Total operating revenues
425,121

 
648,169

1,680,453

 
2,338,308

OPERATING EXPENSES
 
 
 
 
 
 
Gas purchases:
 
 
 
 
 
 
Utility
45,916

 
74,385

209,847

 
469,835

Nonutility
333,402

 
482,735

1,121,874

 
1,460,600

Operation and maintenance
40,857

 
38,811

118,987

 
114,123

Regulatory rider expenses
5,835

 
6,518

36,821

 
47,520

Depreciation and amortization
10,687

 
8,514

30,726

 
25,445

Energy and other taxes
8,335

 
10,024

39,202

 
60,138

Total operating expenses
445,032

 
620,987

1,557,457

 
2,177,661

OPERATING (LOSS) INCOME
(19,911
)
 
27,182

122,996

 
160,647

Other income
551

 
1,176

1,427

 
2,426

Interest expense, net of capitalized interest
4,834

 
4,744

15,266

 
15,085

(LOSS) INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
(24,194
)
 
23,614

109,157

 
147,988

Income tax (benefit) provision
(11,230
)
 
6,197

15,901

 
48,662

Equity in earnings of affiliates
2,644

 
2,957

8,316

 
9,484

NET (LOSS) INCOME
$
(10,320
)
 
$
20,374

$
101,572

 
$
108,810

 
 
 
 
 
 
 
(LOSS) EARNINGS PER COMMON SHARE
 
 
 
 
 
 
BASIC
$(0.25)
 
$0.49
$2.45
 
$2.63
DILUTED
$(0.25)
 
$0.49
$2.44
 
$2.62
DIVIDENDS PER COMMON SHARE
$0.38
 
$0.36
$1.14
 
$1.08
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
BASIC
41,560

 
41,381

41,501

 
41,338

DILUTED
41,560

 
41,597

41,643

 
41,551


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
(Thousands)
2012
 
2011
2012
 
2011
Net (loss) income
$
(10,320
)
 
$
20,374

$
101,572

 
$
108,810

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
Unrealized gain (loss) on available for sale securities, net of tax of $(79), $141, $(104) and $(411), respectively (1)
$
114

 
$
(205
)
$
150

 
$
595

Net unrealized (loss) gain on derivatives, net of tax of $8, $(1), $49 and $(56), respectively
(14
)
 
2

(84
)
 
97

Adjustment to postemployment benefit obligation, net of tax of $(149), $0, $(448) and $0, respectively
220

 

658

 

Other comprehensive income (loss)
$
320

 
$
(203
)
$
724

 
$
692

Comprehensive (loss) income
$
(10,000
)
 
$
20,171

$
102,296

 
$
109,502

(1)
Available for sale securities are included in other noncurrent assets in the Unaudited Condensed Consolidated Balance Sheets.
 
See Notes to Unaudited Condensed Consolidated Financial Statements


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended
 
June 30,
(Thousands)
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
101,572

 
$
108,810

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
Unrealized loss on derivative instruments
17,596

 
53,503

Depreciation and amortization
30,726

 
25,445

Allowance for equity used during construction
(317
)
 
(1,252
)
Allowance for bad debt expense
1,989

 
3,365

Deferred income taxes
30,588

 
22,110

Manufactured gas plant remediation costs
(6,125
)
 
(10,818
)
Equity in earnings of affiliates, net of distributions received
4,209

 
(470
)
Cost of removal - asset retirement obligations
(912
)
 
(711
)
Contributions to postemployment benefit plans
(24,446
)
 
(9,591
)
Changes in:
 
 
 
Components of working capital
(110,114
)
 
5,311

Other noncurrent assets
8,747

 
11,951

Other noncurrent liabilities
6,404

 
19,568

Cash flows from operating activities
59,917

 
227,221

CASH FLOWS (USED IN) INVESTING ACTIVITIES
 
 
 
Expenditures for
 
 
 
Utility plant
(71,916
)
 
(69,894
)
Solar equipment
(75,243
)
 
(17,529
)
Real estate properties and other
(568
)
 
(2,423
)
Cost of removal
(10,634
)
 
(8,075
)
Withdrawal from restricted cash construction fund
126

 
67

Cash flows (used in) investing activities
(158,235
)
 
(97,854
)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of common stock
10,636

 
10,507

Tax benefit from stock options exercised
222

 
355

Proceeds from sale-leaseback transaction
6,522

 
5,901

Payments of long-term debt
(4,856
)
 
(25,690
)
Purchases of treasury stock
(8,768
)
 
(7,222
)
Payments of common stock dividends
(46,466
)
 
(43,747
)
Net proceeds from short-term debt
140,650

 
(9,600
)
Cash flows from (used in) financing activities
97,940

 
(69,496
)
Change in cash and cash equivalents
(378
)
 
59,871

Cash and cash equivalents at beginning of period
7,440

 
943

Cash and cash equivalents at end of period
$
7,062

 
$
60,814

CHANGES IN COMPONENTS OF WORKING CAPITAL
 
 
 
Receivables
$
36,598

 
$
(97,566
)
Inventories
78,601

 
87,210

Recovery of gas costs
(13,405
)
 
36,329

Gas purchases payable
(99,173
)
 
12,856

Prepaid and accrued taxes
(11,375
)
 
15,654

Accounts payable and other
9,754

 
11,857

Restricted broker margin accounts
(20,320
)
 
(36,544
)
Customers' credit balances and deposits
(75,318
)
 
(16,341
)
Other current assets
(15,476
)
 
(8,144
)
Total
$
(110,114
)
 
$
5,311

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
 
 
 
Cash paid for:
 
 
 
Interest (net of amounts capitalized)
$
8,918

 
$
9,778

Income taxes
$
7,536

 
$
4,138

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
 
 
 
Accrued capital expenditures
$
(108
)
 
$
(4,245
)

See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

ASSETS
(Thousands)
June 30,
2012
 
September 30,
2011
PROPERTY, PLANT AND EQUIPMENT
 
 
 
Utility plant, at cost
$
1,549,194

 
$
1,502,955

Construction work in progress
111,612

 
92,323

Solar equipment, real estate properties and other, at cost
185,466

 
76,431

Construction work in progress
4,428

 
34,455

Total property, plant and equipment
1,850,700

 
1,706,164

Accumulated depreciation and amortization
(418,253
)
 
(410,237
)
Property, plant and equipment, net
1,432,447

 
1,295,927

CURRENT ASSETS
 
 
 
Cash and cash equivalents
7,062

 
7,440

Customer accounts receivable
 
 
 
Billed
171,492

 
209,266

Unbilled revenues
6,695

 
7,333

Allowance for doubtful accounts
(4,787
)
 
(4,612
)
Regulatory assets
52,940

 
17,630

Gas in storage, at average cost
215,159

 
294,475

Materials and supplies, at average cost
8,110

 
7,395

Prepaid and accrued taxes
68,300

 
54,311

Derivatives, at fair value
54,479

 
100,338

Restricted broker margin accounts
42,915

 
22,595

Deferred taxes
6,860

 
1,498

Other
15,580

 
14,698

Total current assets
644,805

 
732,367

NONCURRENT ASSETS
 
 
 
Investments in equity investees
157,671

 
159,063

Regulatory assets
411,528

 
434,185

Derivatives, at fair value
3,093

 
6,515

Other
26,363

 
21,387

Total noncurrent assets
598,655

 
621,150

Total assets
$
2,675,907

 
$
2,649,444


See Notes to Unaudited Condensed Consolidated Financial Statements

CAPITALIZATION AND LIABILITIES
(Thousands)
June 30,
2012
 
September 30,
2011
CAPITALIZATION
 
 
 
Common stock equity
$
836,086

 
$
776,257

Long-term debt
428,064

 
426,797

Total capitalization
1,264,150

 
1,203,054

CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
8,034

 
7,575

Short-term debt
300,000

 
159,350

Gas purchases payable
153,518

 
252,691

Accounts payable and other
71,961

 
65,960

Dividends payable
15,804

 
14,912

Deferred and accrued taxes
3,392

 
778

Regulatory liabilities

 
4,633

New Jersey clean energy program
7,434

 
15,011

Derivatives, at fair value
51,249

 
68,698

Customers' credit balances and deposits
38,458

 
113,776

Total current liabilities
649,850

 
703,384

NONCURRENT LIABILITIES
 
 
 
Deferred income taxes
369,107

 
327,782

Deferred investment tax credits
5,985

 
6,227

Deferred revenue
5,734

 
7,633

Derivatives, at fair value
3,005

 
6,341

Manufactured gas plant remediation
182,900

 
182,900

Postemployment employee benefit liability
95,687

 
114,305

Regulatory liabilities
66,100

 
59,837

New Jersey clean energy program

 
5,133

Asset retirement obligation
27,433

 
27,026

Other
5,956

 
5,822

Total noncurrent liabilities
761,907

 
743,006

Commitments and contingent liabilities (Note 11)

 


Total capitalization and liabilities
$
2,675,907

 
$
2,649,444


See Notes to Unaudited Condensed Consolidated Financial Statements


Page 2

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                              

1.
NATURE OF THE BUSINESS

New Jersey Resources Corporation (NJR or the Company) provides regulated gas distribution services and certain non-regulated businesses primarily through the following subsidiaries:

New Jersey Natural Gas Company (NJNG) provides natural gas utility service to approximately 499,900 retail customers in central and northern New Jersey and is subject to rate regulation by the New Jersey Board of Public Utilities (BPU). NJNG comprises the Natural Gas Distribution segment;

NJR Energy Services Company (NJRES) comprises the Energy Services segment that maintains and transacts around a portfolio of natural gas storage and transportation positions and provides wholesale energy and energy management services;

NJR Clean Energy Ventures (NJRCEV) comprises the Clean Energy Ventures segment and reports the results of operations and assets related to the Company's capital investments in renewable energy projects, including commercial and residential solar projects;

NJR Energy Holdings Corporation (NJREH) primarily invests in energy-related ventures through its subsidiaries, NJNR Pipeline Company (Pipeline), which holds the Company's 5.53 percent ownership interest in Iroquois Gas Transmission L.P. (Iroquois), and NJR Steckman Ridge Storage Company, which holds the Company's 50 percent combined interest in Steckman Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge). Iroquois and Steckman Ridge comprise the Energy Holdings segment (previously Midstream Assets);

NJR Retail Holdings Corporation (Retail Holdings) has two principal subsidiaries, NJR Home Services Company (NJRHS) and Commercial Realty & Resources Corporation (CR&R). Retail Holdings and NJR Energy Corporation (NJR Energy) are included in Retail and Other operations.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by NJR in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The September 30, 2011, Balance Sheet data is derived from the audited financial statements of the Company. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and the notes thereto included in NJR's 2011 Annual Report on Form 10-K.

The Unaudited Condensed Consolidated Financial Statements include the accounts of NJR and its subsidiaries. In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments necessary, for a fair presentation of the results of the interim periods presented. These adjustments are of a normal and recurring nature. Because of the seasonal nature of NJR's utility and wholesale energy services operations, in addition to other factors, the financial results for the interim periods presented are not indicative of the results that are to be expected for the fiscal year ended September 30, 2012.

Intercompany transactions and accounts have been eliminated.

Gas in Storage

The following table summarizes gas in storage, at average cost by company as of:
 
June 30,
2012
September 30,
2011
($ in thousands)
Gas in Storage
 
Bcf
Gas in Storage
 
Bcf
NJNG
 
$
114,927

20.3

 
$
159,328

23.1

NJRES
 
100,232

45.6

 
135,147

36.8

Total
 
$
215,159

65.9

 
$
294,475

59.9


Available for Sale Securities

Included in Other noncurrent assets on the Unaudited Condensed Consolidated Balance Sheets are certain investments in equity securities of a publicly traded energy company that have a fair value of $10.6 million and $10.3 million as of June 30, 2012 and September 30, 2011, respectively. Total unrealized gains associated with these equity securities, which are included as a part of accumulated other comprehensive income, a component of common stock equity, were $7.9 million ($4.7 million, after tax) and $7.7 million ($4.5 million, after tax) as of June 30, 2012 and September 30, 2011, respectively.

Recent Updates to the Accounting Standards Codification (ASC)

Fair Value

In May 2011, the FASB issued an amendment to ASC Topic 820, Fair Value Measurements and Disclosures, clarifying certain guidance to ensure that U.S. generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) have the same fair value meaning, measurements and disclosure requirements. The amended guidance became effective for interim and annual periods beginning after December 15, 2011. There was no impact to the Company's financial position, results of operations or cash flows upon adoption.

Presentation of Comprehensive Income

In June 2011, the FASB issued an update to ASC Topic 220, Comprehensive Income, allowing two alternatives for the presentation of comprehensive income, eliminating the option to present the components of comprehensive income (OCI) as a part of the statement of changes in stockholder's equity and requiring that reclassification adjustments from OCI to income be presented on the face of the financial statements. The amended guidance requires that comprehensive income, including the components of net income and OCI, be presented in either one statement or in two separate but consecutive statements. In December 2011, the FASB issued a subsequent amendment indefinitely deferring the provisions requiring reclassification adjustments out of OCI to be presented on the face of the financial statements. The other portions of the original update remain unchanged and became effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. Effective September 30, 2011, NJR adopted the two-statement approach retrospectively. There was no impact to the Company's financial position, results of operations or cash flows upon adoption.

Balance Sheet Offsetting

In December 2011, the FASB issued an amendment to ASC Topic 210, Balance Sheet, requiring additional disclosures about the nature of an entity's rights of setoff and related master netting arrangements associated with its financial and derivative instruments. The objective of the disclosures is to facilitate comparison between financial statements prepared on the basis of U.S. generally accepted accounting principles (U.S. GAAP) and those prepared on the basis of International Financial Reporting Standards (IFRS). The amended guidance will become effective for interim and annual periods beginning on or after January 1, 2013, and will be applied retrospectively. The Company has determined that the new guidance will not impact its financial position, results of operations or cash flows upon adoption.

3.
REGULATION

NJNG is subject to cost-based regulation, therefore, it is permitted to recover authorized operating expenses and earn a reasonable return on its utility investment based on the BPU's approval, in accordance with accounting guidance applicable to regulated operations. Accordingly, NJNG capitalizes or defers certain costs that are expected to be recovered from its customers as regulatory assets and recognizes certain obligations representing amounts that are probable future expenditures as regulatory liabilities.


Page 3

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Regulatory assets and liabilities included on the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:
(Thousands)
June 30,
2012
September 30,
2011
Regulatory assets-current
 
 
Conservation Incentive Program
$
26,240

$
9,178

Underrecovered gas costs
8,772


Derivatives, net
17,928

8,452

Total current
$
52,940

$
17,630

Regulatory assets-noncurrent
 
 
Environmental remediation costs
 
 
Expended, net of recoveries
$
59,683

$
75,646

Liability for future expenditures
182,900

182,900

Deferred income taxes
11,574

10,879

Energy Efficiency Program
21,944

11,906

New Jersey Clean Energy Program
7,434

20,144

Postemployment and other benefit costs
118,456

123,827

Other
9,537

8,883

Total noncurrent
$
411,528

$
434,185

Regulatory liability-current
 
 
Overrecovered gas costs
$

$
4,633

Total current
$

$
4,633

Regulatory liabilities-noncurrent
 
 
Cost of removal obligation
$
66,007

$
59,752

Other
93

85

Total noncurrent
$
66,100

$
59,837


NJNG's recovery of costs is facilitated through its base tariff rates, Basic Gas Supply Service (BGSS) and other regulatory riders. As recovery of regulatory assets is subject to BPU approval, if there are any changes in regulatory positions that indicate recovery is not probable, the related cost would be charged to income in the period of such determination.

Recent regulatory filings and/or actions include the following:

On November 17, 2011, NJNG notified the BPU that it would provide bill credits to NJNG's residential and small commercial customers during December 2011 and January 2012, as a result of the decline in the wholesale prices of natural gas and a change in the methodology used to develop estimates of unaccounted-for gas. On January 25, 2012 and March 9, 2012, NJNG notified the BPU that it would extend bill credits through February 2012 and March 2012, respectively. In total, customers received approximately $90.7 million in credits based on usage during the four-month period.

On January 18, 2012, the BPU approved an extension of NJNG's Energy Efficiency program (EE) for one year with an additional $10.4 million of investments in customer incentives and rebates, earning a weighted average cost of capital of 7.1 percent, including a cost of equity of 10.3 percent.

On January 18, 2012, the BPU approved NJNG's 2010 Societal Benefits Clause (SBC) filing, in which NJNG requested approval of its manufactured gas plant remediation expenditures incurred through June 30, 2009, which maintained the expected annual recovery at approximately $20 million. In February 2012, NJNG filed its 2011 SBC filing, requesting approval of its MGP expenditures incurred through June 30, 2011, which would continue its existing overall SBC rate and recovery.

On March 9, 2012, NJNG notified the BPU of a decrease to its BGSS rate, effective April 1, 2012, which will have an annual impact of approximately $19 million.


Page 4

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


On March 20, 2012, NJNG filed a petition with the BPU seeking to implement a Safety Acceleration and Facility Enhancement (SAFE) program, whereby NJNG would invest up to $204 million over a five-year period to replace portions of NJNG's gas distribution unprotected steel and cast iron infrastructure. If approved as filed, commencing in 2013, NJNG would file a petition with the BPU annually in June to recover the costs associated with its investment in SAFE over a five-year period, earning an overall weighted average cost of capital of 7.76 percent, including a cost of equity of 10.3 percent.

On June 1, 2012, NJNG submitted its annual BGSS and CIP filings to the Board of Public Utilities. NJNG sought approval to maintain its current BGSS rate, decrease the CIP rate for residential non-heating customers and increase the CIP rates for residential heating and commercial customers, effective October 1, 2012. Pending BPU approval, an average residential heating customer bill would increase by 2.4 percent.

On June 18, 2012, the BPU approved a pilot program for NJNG to invest up to $10 million to build compressed natural gas vehicle refueling stations in Monmouth, Ocean and Morris counties. NJNG intends to begin construction of the stations within one year and submit a cost recovery filing to the BPU in the spring of 2013, requesting a base rate change to be effective in the summer of 2013, earning an overall weighted average cost of capital of 7.1 percent, including a cost of equity of 10.3 percent. A portion of the proceeds from the utilization of the CNG equipment, along with any available federal and state incentives, will be credited back to ratepayers to help offset the cost of this investment.

On July 9, 2012, NJNG filed two petitions with the BPU related to The SAVEGREEN Project® (SAVEGREEN) energy-efficiency programs. The petitions include the 2012 rate filing which represents a reconciliation of BPU approved actual costs for energy-efficiency programs and a petition related to the extension of NJNG's energy-efficiency programs over a four-year program, with modifications to include certain new programs. The Company's petition requests a BPU decision in early 2013. The rate impact will incorporate the existing Savegreen programs and the extension of the new Savegreen programs over four years.

4.
DERIVATIVE INSTRUMENTS

The Company and certain of its subsidiaries are subject to commodity price risk due to fluctuations in the market price of natural gas. To manage this risk, the Company and certain of its subsidiaries enter into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial options and swaps to economically hedge the commodity price risk associated with its existing and anticipated commitments to purchase and sell natural gas. In addition, the Company may utilize foreign currency derivatives as cash flow hedges of Canadian dollar denominated gas purchases. These contracts, with a few exceptions as described below, are accounted for as derivatives. Accordingly, all of the financial and certain of the Company's physical derivative instruments are recorded at fair value in the Unaudited Condensed Consolidated Balance Sheets. For a more detailed discussion of the Company's fair value measurement policies and level disclosures associated with the NJR's derivative instruments. See Note 5. Fair Value.

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

NJRES also enters into natural gas transactions in Canada and, consequently, is exposed to fluctuations in the value of Canadian currency relative to the US dollar. NJRES utilizes foreign currency derivatives to lock in the currency translation rate associated with natural gas transactions denominated in Canadian currency. The derivatives may include currency forwards, futures, or swaps and are accounted for as derivatives. These derivatives are being used to hedge future forecasted cash payments associated with transportation and storage contracts. The Company has designated these foreign currency derivatives as cash flow hedges of that exposure, and expects the hedge relationship to be highly effective throughout the term. Since NJRES designates its foreign exchange contracts as cash flow hedges, changes in fair value of the effective portion of the hedge are recorded in other comprehensive income (OCI). When the foreign exchange contracts are settled, realized gains and (losses) are recognized in gas purchases in the Unaudited Condensed Consolidated Statements of Operations.


Page 5

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


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

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

The Company elects normal purchase/normal sale (normal) accounting treatment on all physical commodity contracts at NJNG. These contracts are accounted for on an accrual basis. Accordingly, gains or (losses) are recognized in earnings when the contract settles and the natural gas is delivered.

During fiscal 2012, NJRCEV began hedging certain of its expected production of solar renewable energy certificates (SRECs) through forward sale contracts. The Company intends to physically deliver the SRECs upon settlement and will recognize related revenue upon transfer of the SRECs.

Fair Value of Derivatives

The following table reflects the fair value of NJR's derivative assets and liabilities recognized in the Unaudited Condensed Consolidated Balance Sheets as of:
 
 
 
Fair Value
 
 
 
June 30, 2012
 
September 30, 2011
(Thousands)
Balance Sheet Location
Asset
Derivatives
Liability
Derivatives
Asset
Derivatives
Liability
Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
NJRES:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
Derivatives - current
 
$
122

 
$
17

 
$
153

 
$
8

 
Derivatives - noncurrent
 
40

 
11

 
127

 
6

Fair value of derivatives designated as hedging instruments
 
$
162

 
$
28

 
$
280

 
$
14

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
NJNG:
 
 
 
 
 
 
 
 
 
Financial commodity contracts
Derivatives - current
 
$
4,416

 
$
23,042

 
$
5,424

 
$
13,258

 
Derivatives - noncurrent
 
698

 

 
2

 
620

NJRES:
 
 

 

 

 

Physical forward commodity contracts
Derivatives - current
 
20,715

 
8,870

 
33,240

 
10,570

 
Derivatives - noncurrent
 
1,481

 
307

 
4,450

 
781

Financial commodity contracts
Derivatives - current
 
29,226

 
19,320

 
61,521

 
44,862

 
Derivatives - noncurrent
 
874

 
2,687

 
1,936

 
4,934

Fair value of derivatives not designated as hedging instruments
 
$
57,410

 
$
54,226

 
$
106,573

 
$
75,025

Total fair value of derivatives
 
 
$
57,572

 
$
54,254

 
$
106,853

 
$
75,039


At June 30, 2012, the gross notional amount of the foreign currency transactions was approximately $10.1 million, and ineffectiveness in the hedge relationship is immaterial to the financial results of NJR.

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

Page 6

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


The following table reflects the effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations as of:
(Thousands)
Location of gain (loss) recognized in income on derivatives
Amount of gain (loss) recognized
in income on derivatives
 
 
Three Months Ended
Nine Months Ended
 
 
June 30,
June 30,
Derivatives not designated as hedging instruments:
2012
 
2011
2012
 
2011
NJRES:
 
 
 
 
 
 
 
Physical commodity contracts
Operating revenues
$
(2,860
)
 
$
5,044

$
(6,023
)
 
$
29,881

Physical commodity contracts
Gas purchases
8,155

 
4,639

12,546

 
(1,467
)
Financial commodity contracts
Gas purchases
(9,717
)
 
8,703

93,248

 
(19,072
)
Total unrealized and realized (losses) gains
$
(4,422
)
 
$
18,386

$
99,771

 
$
9,342


Not included in the previous table, are gains (losses) associated with NJNG's financial derivatives that totaled $3.7 million and $(2.1) million for the three months ended June 30, 2012 and 2011, respectively and $(31.6) million and $(7) million for the nine months ended June 30, 2012 and 2011, respectively. These derivatives are part of its risk management activities that relate to its natural gas purchasing activities and BGSS incentive programs. As these transactions are entered into pursuant to and recoverable through regulatory riders, any changes in the value of NJNG's financial derivatives are deferred in regulatory assets or liabilities and there is no impact to earnings.

As previously noted, NJRES designates its foreign exchange contracts as cash flow hedges, therefore, changes in fair value of the effective portion of the hedges are recorded in OCI and, upon settlement of the contracts, realized gains and losses are reclassified from OCI to gas purchases in the Unaudited Condensed Consolidated Statements of Operations. The following table reflect the effect of derivative instruments designated as cash flow hedges on OCI as of:
(Thousands)
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
Amount of Gain or (Loss) Reclassified from OCI into Income (Effective Portion)
Amount of Gain or (Loss) Recognized on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Three Months Ended
Three Months Ended
Three Months Ended
 
June 30,
June 30,
June 30,
Derivatives in cash flow hedging relationships:
2012
2011
2012
2011
2012
2011
Foreign currency contracts
$
12

$
3

$
(35
)
$
32

$

$


(Thousands)
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) (1)
Amount of Gain or (Loss) Reclassified from OCI into Income (Effective Portion)
Amount of Gain or (Loss) Recognized on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Nine Months Ended
Nine Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
Derivatives in cash flow hedging relationships:
2012
2011
2012
2011
2012
2011
Foreign currency contracts
$
(63
)
$
164

$
(70
)
$
91

$

$

(1)
The settlement of foreign currency transactions over the next twelve months is expected to result in the reclassification of $104,000 from OCI into earnings. The maximum tenor is April 2015.


Page 7

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


NJNG and NJRES had the following outstanding long (short) derivatives as of:
 
 
 
Volume (Bcf)
 
 
 
June 30,
2012
September 30,
2011
NJNG
Futures
 
11.1

23.7

 
Swaps
 
0.1

(1.8
)
 
Options
 
0.1

1.1

NJRES
Futures
 
(28.4
)
(13.8
)
 
Swaps
 
(4.4
)
(41.9
)
 
Options
 


 
Physical
 
0.3

58.3


Broker Margin

Generally, exchange-traded futures contracts require posted collateral, referred to as margin, usually in the form of cash. The amount of margin required is comprised of a fixed initial amount based on the contract and a variable amount based on market price movements from the initial trade price. The Company maintains broker margin accounts for NJNG and NJRES. The balances by company, are as follows:
(Thousands)
Balance Sheet Location
June 30,
2012
September 30,
2011
NJNG
Broker margin - Current assets
$
20,995

$
11,722

NJRES (1)
Broker margin - Current assets
$
21,920

$
10,873

(1)
As of June 30, 2012, NJRES' balance includes $20.2 million related to the remaining exposure at MF Global.

Wholesale Credit Risk

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

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


Page 8

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


The following is a summary of gross credit exposures grouped by investment and noninvestment grade counterparties, as of June 30, 2012. Internally-rated exposure applies to counterparties that are not rated by Standard & Poor's (S&P) or Moody's Investors Service, Inc. (Moody's). In these cases, the company's or guarantor's financial statements are reviewed, and similar methodologies and ratios used by S&P and/or Moody's are applied to arrive at a substitute rating. Gross credit exposure is defined as the unrealized fair value of physical and financial derivative commodity contracts plus any outstanding wholesale receivable for the value of natural gas delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received. The amounts presented below have not been reduced by any collateral received or netting.
(Thousands)
Gross Credit
Exposure
Investment grade
 
$
125,897

 
Noninvestment grade
 
25,088

 
Internally rated investment grade
 
15,916

 
Internally rated noninvestment grade
 
6,035

 
Total
 
$
172,936

 

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

Collateral amounts associated with any of these conditions are determined based on a sliding scale and are contingent upon the degree to which the Company's credit rating and/or financial metrics deteriorate, and the extent to which liability amounts exceed applicable threshold limits. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on June 30, 2012 and September 30, 2011, was $1.8 million and $4.1 million, respectively, for which the Company had not posted any collateral. If all the thresholds related to the credit-risk-related contingent features underlying these agreements had been invoked on June 30, 2012 and September 30, 2011, the Company would have been required to post an additional $1.5 million and $1.7 million, respectively, to its counterparties. These amounts differ from the respective net derivative liabilities reflected in the Unaudited Condensed Consolidated Balance Sheets because the agreements also include clauses, commonly known as “Rights of Offset,” that would permit the Company to offset its derivative assets against its derivative liabilities for determining additional collateral to be posted.

Liquidation of Clearing Broker

MF Global Inc. (MFGI) and MF Global UK Limited (UKMF), which operated as futures commission merchants and broker/dealer entities of MF Global Holdings Ltd. (collectively with its affiliates, MF Global), were NJRES' clearing brokers through which NJRES held positions in energy futures contracts, options on futures contracts, and swaps cleared on exchanges administered by the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). The CME and ICE both require NJRES to maintain adequate margin against NJRES' trading positions, which our former clearing brokers, MFGI and UKMF, were required to hold on our behalf in segregated or secured accounts. MF Global disclosed to the CME that it had a “significant shortfall” in its segregated customer accounts. Shortly thereafter, on October 31, 2011, the Securities Investor Protection Corporation announced that it had initiated the liquidation of MFGI under the Securities Investor Protection Act (SIPA) in the U.S. and the High Court in the U.K. appointed special administrators to conduct the liquidation of UKMF. The SIPA Trustee's latest estimate of the shortfall in commodities customers' segregated account funds is $1.6 billion.

As of the close of business on November 3, 2011, the market value of NJRES' MF Global account was $27.8 million, of which $10.6 million related to CME positions and $17.2 million related to ICE positions. On May 21, 2012, NJRES received notice from the Trustee that its claim filed in the MFGI liquidation proceeding had been allowed in the amount of $27.8 million. As of June 30, 2012, NJRES has received distributions from the SIPA Trustee totaling $7.6 million related to its CME positions. Accordingly, the remaining exposure as of June 30, 2012, is $20.2 million. On July 13, 2012, NJRES received an additional $848,000 related to its CME positions.


Page 9

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


NJRES intends to continue vigorously prosecuting its claim against MFGI to recover all of its funds, but it cannot estimate at this time, either how much of those funds will be recovered or when they will be recovered.

5.
FAIR VALUE

Fair Value of Assets and Liabilities

The fair value of cash and temporary investments, commercial paper and borrowings under revolving credit facilities are estimated to equal their carrying amounts due to the short maturity of those instruments. The estimated fair value of long-term debt, including current maturities is as follows:
(Thousands)
June 30,
2012
September 30,
2011
Carrying value
$
436,098

$
434,372

Fair market value
$
479,239

$
471,022


Effective January 1, 2012, NJR changed its valuation technique from a market approach to an income approach. NJR considers the discounted cash flow method to provide a more consistently reliable fair value. Inputs include U.S. Treasury securities and credit spreads, both of which are observable inputs. Any adjustments to the measurement for duration, as applicable, are not considered to be significant, therefore, NJR classifies its debt within Level 2 of the fair value hierarchy.

Fair Value Hierarchy

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

Level 1
Unadjusted quoted prices for identical assets or liabilities in active markets; NJR's Level 1 assets and liabilities include exchange traded futures contracts, listed equities, and money market funds.

Level 2
Price data, which includes both commodity and basis price data other than Level 1 quotes, that is observed either directly or indirectly from publications or pricing services; NJR's Level 2 assets and liabilities include over-the-counter physical forward commodity contracts and swap contracts or derivatives that are initially valued using observable quotes and are subsequently adjusted to include time value, credit risk or estimated transport pricing components for which no basis price is available. These additional adjustments are not considered significant to the ultimate recognized values.

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

NJNG's and NJRES' financial derivatives portfolios consist mainly of futures, options and swaps. NJR primarily uses the market approach and its policy is to use actively quoted market prices when available. The principal market for its derivative transactions is the natural gas wholesale market, therefore, the primary source for its price inputs is the New York Mercantile (NYMEX) exchange. NJRES also uses Natural Gas Exchange (NGX) for Canadian delivery points and Platts and NYMEX ClearPort for certain over-the-counter physical forward commodity contracts. However, NJRES also engages in transactions that result in transporting natural gas to delivery points for which there is no actively quoted market price. In most instances, the cost to transport to the final delivery location is not significant to the overall valuation. If required, NJRES' policy is to use the best information available to determine fair value based on internal pricing models, which would include estimates extrapolated from broker quotes or pricing services.

NJR also has available for sale securities and other financial assets that include listed equities, mutual funds and money market funds for which there are active exchange quotes available.

Page 10

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


When NJR determines fair values, measurements are adjusted, as needed, for credit risk associated with its counterparties, as well as its own credit risk. NJR determines these adjustments by using historical default probabilities that correspond to the applicable Standard and Poor's issuer ratings, while also taking into consideration collateral and netting arrangements that serve to mitigate risk.

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant
Unobservable
Inputs
 
(Thousands)
(Level 1)
(Level 2)
(Level 3)
Total
As of June 30, 2012:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$

 
 
$
22,196

 
 
$

 
$
22,196

Financial derivative contracts - natural gas
 
13,813

 
 
21,401

 
 

 
35,214

Financial commodity contracts - foreign exchange
 

 
 
162

 
 

 
162

Available for sale equity securities - energy industry (1)
 
10,602

 
 

 
 

 
10,602

Other
 
855

 
 

 
 

 
855

Total assets at fair value
 
$
25,270

 
 
$
43,759

 
 
$

 
$
69,029

Liabilities:
 
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$

 
 
$
9,177

 
 
$

 
$
9,177

Financial commodity contracts - natural gas
 
28,153

 
 
16,896

 
 

 
45,049

Financial commodity contracts - foreign exchange
 

 
 
28

 
 

 
28

Other
 
735

 
 

 
 

 
735

Total liabilities at fair value
 
$
28,888

 
 
$
26,101

 
 
$

 
$
54,989

 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2011:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$

 
 
$
37,690

 
 
$

 
$
37,690

Financial derivative contracts - natural gas
 
25,617

 
 
43,266

 
 

 
68,883

Financial commodity contracts - foreign exchange
 

 
 
280

 
 


 
280

Available for sale equity securities - energy industry (1)
 
10,348

 
 

 
 

 
10,348

Other
 
2,820

 
 

 
 

 
2,820

Total assets at fair value
 
$
38,785

 
 
$
81,236

 
 
$

 
$
120,021

Liabilities:
 
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$

 
 
$
11,351

 
 
$

 
$
11,351

Financial derivative contracts - natural gas
 
23,715

 
 
39,959

 
 

 
63,674

Financial commodity contracts - foreign exchange
 

 
 
14

 
 

 
14

Other
 
616

 
 

 
 

 
616

Total liabilities at fair value
 
$
24,331

 
 
$
51,324

 
 
$

 
$
75,655

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

6.
INVESTMENTS IN EQUITY INVESTEES

NJR uses the equity method of accounting for its investments in Steckman Ridge and Iroquois. Earnings or losses from equity method investments are included in Equity in earnings of affiliates in the Unaudited Condensed Consolidated Statements of Operations.

NJR's investments in equity investees include the following investments as of:
(Thousands)
June 30,
2012
September 30,
2011
Steckman Ridge
$
134,018

$
135,130

Iroquois
23,653

23,933

Total
$
157,671

$
159,063


As of June 30, 2012, the investment in Steckman Ridge includes loans with a total outstanding principal balance of $70.4 million. The loans accrue interest at a variable rate that resets quarterly and are due December 31, 2017.

NJRES and NJNG have entered into transportation, storage and park and loan agreements with Iroquois and Steckman Ridge. See Note 13. Related Party Transactions for more information on these affiliate transactions.

7.
EARNINGS PER SHARE

The following table presents the calculation of the Company's basic and diluted earnings per share for:
 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
(Thousands, except per share amounts)
2012
2011
2012
2011
Net (loss) income, as reported
$
(10,320
)
$
20,374

$
101,572

$
108,810

Basic earnings per share




Weighted average shares of common stock outstanding-basic
41,560

41,381

41,501

41,338

Basic (loss) earnings per common share
$(0.25)
$0.49
$2.45
$2.63
Diluted earnings per share




Weighted average shares of common stock outstanding-basic
41,560

41,381

41,501

41,338

Incremental shares (1)

216

142

213

Weighted average shares of common stock outstanding-diluted
41,560

41,597

41,643

41,551

Diluted (loss) earnings per common share (2)
$(0.25)
$0.49
$2.44
$2.62
(1)
Incremental shares consist of stock options, stock awards and performance units.
(2)
Since there was a net loss for the three months ended June 30, 2012, incremental shares of 140 were not included in the computation of diluted loss per common share, as their effect would have been anti-dilutive. There were no anti-dilutive shares excluded from the calculation of diluted earnings per share for the nine months ended June 30, 2012 and the three and nine months ended June 30, 2011.

8.
DEBT

NJR and NJNG finance working capital requirements and capital expenditures through the issuance of various long-term debt and other financing arrangements, including unsecured credit and private placement debt shelf facilities. Amounts available under credit facilities are reduced by bank or commercial paper borrowings, as applicable, and any outstanding letters of credit. Neither NJNG nor the results of its operations are obligated or pledged to support the NJR credit or debt shelf facilities.

A summary of NJR's and NJNG's debt shelf and credit facilities are as follows:
(Thousands)
June 30, 2012
 
September 30,
2011
 
Maturity Dates
NJR
 
 
 
 
 
Debt shelf facilities (1) (2) (3)
$
175,000

 
$
175,000

 
Various (3)
Bank credit facilities (4)
$
325,000

 
$
325,000

 
December 2012
Notes payable outstanding at end of period
$
218,000

 
$
132,850

 
 
Weighted average interest rate at end of period
0.56
%
 
0.54
%
 
 
Amount available at end of period (5)
$
98,464

 
$
157,853

 
 
NJNG
 
 
 
 
 
Bank credit facility dedicated to EDA Bonds (2) (4)
$
100,000

 
$
100,000

 
August 2015
Bank credit facilities (4)
$
200,000

 
$
200,000

 
August 2014
Commercial paper outstanding at end of period
$
82,000

 
$
26,500

 
 
Weighted average interest rate at end of period
0.19
%
 
0.24
%
 
 
Amount available at end of period
$
118,000

 
$
173,500

 
 
(1)
Uncommitted, long-term debt shelf facilities, which require no commitment fees on the unused amounts.
(2)
There were no borrowings outstanding as of June 30, 2012 and September 30, 2011, respectively.
(3)
$100 million debt shelf expires May 2013 and $75 million debt shelf expires June 2014.
(4)
Committed credit facilities, which require commitment fees on the unused amounts.
(5)
Letters of credit outstanding total $8.5 million and $34.3 million as of June 30, 2012 and September 30, 2011, respectively, which reduces amount available.
 

Page 11

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


NJR

NJR has a $325 million unsecured committed credit facility expiring in December 2012, which it expects to refinance in August 2012.

NJR has a $100 million and a $75 million uncommitted private placement shelf note agreement, expiring in May 2013 and June 2014, respectively, allowing NJR to issue senior notes, the terms and conditions of which, including interest rates and maturity dates, will be agreed upon at the time of each issuance. As of June 30, 2012, NJR had no borrowings outstanding under these agreements. On September 17, 2012, subject to the terms and conditions of the respective shelf note agreements, NJR intends to borrow $25 million at 1.94 percent, which will mature on September 15, 2015, $25 million at 2.51 percent, which will mature on September 15, 2018 and $50 million at 3.25 percent, which will mature on September 17, 2022.

Other

NJNG received $6.5 million and $5.9 million in December 2011 and 2010, respectively, in connection with the sale-leaseback of its natural gas meters. This sale-leaseback program is expected to continue on an annual basis.

On June 1, 2012, NJNG filed a petition with the BPU requesting authorization over a three-year period to issue debt, renew its revolving credit facility expiring August 2014, renew its credit facility supporting NJNG's obligations with respect to bonds issued by the New Jersey Economic Development Authority, enter into interest rate risk management transactions and increase the size of its meter leasing program on a permanent basis.

9.
EMPLOYEE BENEFIT PLANS

Pension and Other Postemployment Benefit Plans (OPEB)

The components of the net periodic cost for pension benefits, including the Company's Pension Equalization Plan, and OPEB costs (principally health care and life insurance) for employees and covered dependents were as follows:
 
Pension
OPEB
 
Three Months Ended
Nine Months Ended
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
June 30,
(Thousands)
2012
2011
2012
2011
2012
2011
2012
2011
Service cost
$
1,344

$
1,194

$
4,032

$
3,582

$
896

$
836

$
2,688

$
2,508

Interest cost
2,206

2,094

6,618

6,283

1,283

1,211

3,849

3,634

Expected return on plan assets
(3,171
)
(2,873
)
(9,513
)
(8,618
)
(687
)
(618
)
(2,059
)
(1,854
)
Recognized actuarial loss
1,254

987

3,762

2,960

724

653

2,172

1,959

Prior service cost amortization
11

12

33

36

6

19

18

57

Recognized net initial obligation




89

89

267

267

Net periodic benefit cost
$
1,644

$
1,414

$
4,932

$
4,243

$
2,311

$
2,190

$
6,935

$
6,571


The Company does not expect to be required to make additional contributions to fund the pension plans over the next three fiscal years based on current actuarial assumptions; however, funding requirements are uncertain and can depend significantly on changes in actuarial assumptions, returns on plan assets, interest rates and changes in the demographics of eligible employees and covered dependents. In addition, as in the past, the Company may elect to make contributions in excess of the minimum required amount to the plans. NJR made a discretionary contribution of $20 million to the pension plans in December 2011.

10.
INCOME TAXES

NJR evaluates its tax positions to determine the appropriate accounting and recognition of potential future obligations associated with unrecognized tax benefits. During the nine months ended June 30, 2012 and 2011, based on its analysis, the Company determined that there was no need to recognize any liabilities associated with uncertain tax positions.

The effective tax rates for the nine months ended June 30, 2012 and 2011, are 13.5 percent and 30.9 percent, respectively. The decrease in the rate is due primarily to the impact of federal investment tax credits (ITC) of $27.2 million and $7.3 million, generated by solar investments placed into service in the nine months ended June 30, 2012 and 2011, respectively, and solar investments forecasted to be completed before the end of the fiscal year.

To calculate the estimated annual effective tax rate, NJR considers projects that are probable of being completed and available for use during the current fiscal year based on the best information available at each reporting period. The estimate includes an assessment of various factors, such as board of director approval, status of contractual agreements, permitting and interconnection. Adjustments to the effective tax rate and management's estimates will occur as information and assumptions change.

11.
COMMITMENTS AND CONTINGENT LIABILITIES

Cash Commitments

NJNG has entered into long-term contracts, expiring at various dates through November 2024, for the supply, storage and delivery of natural gas. These contracts include current annual fixed charges of approximately $101.2 million at current contract rates and volumes, which are recoverable through BGSS.

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

Commitments as of June 30, 2012, for natural gas purchases and future demand fees for the next five fiscal year periods are as follows:
(Thousands)
2012
2013
2014
2015
2016
Thereafter
NJRES:
 
 
 
 
 
 
Natural gas purchases
$
190,416

$
213,773

$
8,735

$

$

$

Storage demand fees
11,503

30,740

18,634

12,016

7,106

12,353

Pipeline demand fees
17,669

41,037

21,587

10,896

9,083

17,432

Sub-total NJRES
$
219,588

$
285,550

$
48,956

$
22,912

$
16,189

$
29,785

NJNG:
 
 
 
 
 
 
Natural gas purchases
$
14,085

$
1,191

$

$

$

$

Storage demand fees
7,783

29,834

25,015

15,888

11,088

33,245

Pipeline demand fees
13,482

76,773

73,147

35,210

31,575

201,815

Sub-total NJNG
$
35,350

$
107,798

$
98,162

$
51,098

$
42,663

$
235,060

Total (1)
$
254,938

$
393,348

$
147,118

$
74,010

$
58,852

$
264,845

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

NJNG's capital expenditures are estimated at $128.4 million and $70 million in fiscal 2012 and 2013, respectively, and consist primarily of its construction program to support customer growth, maintenance of its distribution system and replacement needed under pipeline safety regulations. Approximately $86.1 million has been committed or spent on capital expenditures, including accruals, during the nine months ended June 30, 2012. The expected expenditures in fiscal 2012 include an estimate of $49.9 million related to AIP II. NJNG has committed or spent $29.1 million related to AIP II programs during the nine months ended June 30, 2012.

The Company has entered into various agreements to install solar equipment involving both residential and commercial projects. Total solar-related capital expenditures during the nine months ended June 30, 2012 were $75.2 million. The Company currently estimates solar-related capital expenditures of $92.4 million during fiscal 2012, of which $86.9 million has been committed or spent. Solar-related capital expenditures in fiscal 2013 are estimated to be $90 million. These investments are subject to a variety of factors, such as the identification of appropriate projects, the timing of construction schedules, the permitting and regulatory process and delays related to electric grid interconnection, which may affect our ability to commence operations at these projects on a timely basis or, at all.


Page 12

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Legal Proceedings

Manufactured Gas Plant Remediation

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

NJNG may, subject to BPU approval, recover its remediation expenditures, including carrying costs, over rolling seven-year periods pursuant to a Remediation Adjustment (RA). On January 18, 2012, the BPU approved the recovery of the remediation expenditures incurred through June 30, 2009, which maintained the expected annual recovery at approximately $20 million. In February 2012, NJNG filed its 2011 SBC filing, requesting approval of its MGP expenditures incurred through June 30, 2011, which would continue its existing overall SBC rate and recovery. As of June 30, 2012, $59.7 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in regulatory assets on the Unaudited Condensed Consolidated Balance Sheets.

In September 2011, NJNG updated an environmental review of the MGP sites, including a review of potential liability for investigation and remedial action. NJNG estimated at the time of the review that total future expenditures to remediate and monitor the five MGP sites for which it is responsible, including potential liabilities for Natural Resource Damages that might be brought by the NJDEP for alleged injury to groundwater or other natural resources concerning these sites, will range from approximately $161.5 million to $278.5 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. However, NJNG expects actual costs to differ from these estimates. Where it is probable that costs will be incurred, and the information is sufficient to establish a range of possible liability, NJNG accrues the best estimated amount in the range. If no point within the range is more likely than the other, it is NJNG's policy to accrue the lower end of the range. Accordingly, NJNG has recorded an MGP remediation liability and a corresponding regulatory asset of $182.9 million on the Unaudited Condensed Consolidated Balance Sheets, based on the best estimate. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and any insurance recoveries.

NJNG will continue to seek recovery of MGP-related costs through the RA. If any future regulatory position indicates that the recovery of such costs is not probable, the related non-recoverable costs would be charged to income in the period of such determination. However, because recovery of such costs is subject to BPU approval, there can be no assurance as to the ultimate recovery through the RA or the impact on the Company's results of operations, financial position or cash flows, which could be material.

General

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

12.
BUSINESS SEGMENT AND OTHER OPERATIONS DATA

NJR organizes its businesses based on its products and services as well as regulatory environment. As a result, the Company manages the businesses through the following reportable segments and other operations: the Natural Gas Distribution segment consists of regulated energy and off-system, capacity and storage management operations; the Energy Services segment consists of unregulated wholesale energy operations; the Clean Energy Ventures segment consist of capital investments in renewable energy projects; the Energy Holdings segment (previously Midstream Assets) consists of NJR's investments in natural gas transportation and storage facilities; the Retail and Other operations consist of appliance and installation services, commercial real estate development, renewable energy and other investments and general corporate activities.

Information related to the Company's various business segments and other operations is detailed below:
 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
(Thousands)
2012
2011
2012
2011
Operating revenues
 
 
 
 
Natural Gas Distribution
 
 
 
 
External customers
$
106,764

$
138,149

$
524,161

$
862,073

Intercompany




Energy Services
 
 
 
 
External customers
306,273

498,834

1,126,435

1,449,252

Intercompany
(32
)
1,579

2,816

55,010

Clean Energy Ventures
 
 
 
 
External customers
370

328

1,277

328

Segment subtotal
413,375

638,890

1,654,689

2,366,663

Retail and Other
 
 
 
 
External customers
11,714

10,859

28,580

26,655

Intercompany
278

92

720

248

Eliminations
(246
)
(1,672
)
(3,536
)
(55,258
)
Total
$
425,121

$
648,169

$
1,680,453

$
2,338,308

Depreciation and amortization
 
 


Natural Gas Distribution
$
8,860

$
8,192

$
26,241

$
24,650

Energy Services
16

15

48

46

Clean Energy Ventures
1,632

115

3,953

143

Energy Holdings
1

1

4

4

Segment subtotal
10,509

8,323

30,246

24,843

Retail and Other
178

191

480

602

Eliminations




Total
$
10,687

$
8,514

$
30,726

$
25,445

Interest income (1)
 
 


Natural Gas Distribution
$
223

$
304

$
683

$
844

Energy Services
10

1

36

9

Energy Holdings
267

225

800

677

Segment subtotal
500

530

1,519

1,530

Retail and Other
1

1

2

2

Eliminations
(248
)
(220
)
(751
)
(658
)
Total
$
253

$
311

$
770

$
874

(1)
Included in other income in the Unaudited Condensed Consolidated Statements of Operations.

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
(Thousands)
2012
2011
2012
2011
Interest expense, net of capitalized interest
 
 
 
 
Natural Gas Distribution
$
3,717

$
3,630

$
11,167

$
11,454

Energy Services
214

193

729

792

Clean Energy Ventures
190

14

530

21

Energy Holdings
653

803

2,050

2,428

Segment subtotal
4,774

4,640

14,476

14,695

Retail and Other
60

104

790

390

Total
$
4,834

$
4,744

$
15,266

$
15,085

Income tax provision (benefit)
 
 


Natural Gas Distribution
$
1,114

$
3,283

$
43,726

$
44,162

Energy Services
(11,511
)
1,949

(2,108
)
8,632

Clean Energy Ventures
(3,013
)
(898
)
(30,010
)
(7,608
)
Energy Holdings
1,126

1,281

3,750

3,951

Segment subtotal
(12,284
)
5,615

15,358

49,137

Retail and Other
1,056

605

685

(439
)
Eliminations
(2
)
(23
)
(142
)
(36
)
Total
$
(11,230
)
$
6,197

$
15,901

$
48,662

Equity in earnings of affiliates
 
 


Energy Holdings
$
3,547

$
3,891

$
11,129

$
11,871

Segment subtotal
3,547

3,891

11,129

11,871

Eliminations
(903
)
(934
)
(2,813
)
(2,387
)
Total
$
2,644

$
2,957

$
8,316

$
9,484

Net financial earnings (loss)
 
 


Natural Gas Distribution
$
7,545

$
5,979

$
78,455

$
74,375

Energy Services
(5,425
)
213

18,061

19,381

Clean Energy Ventures
(1,157
)
259

20,802

5,484

Energy Holdings
1,634

1,847

5,438

5,705

Segment subtotal
2,597

8,298

122,756

104,945

Retail and Other
1,549

1,401

860

913

Eliminations
(16
)

(52
)

Total
$
4,130

$
9,699

$
123,564

$
105,858

Capital expenditures
 
 


Natural Gas Distribution
$
33,405

$
30,783

$
82,550

$
77,969

Clean Energy Ventures
13,457

7,040

75,243

16,977

Segment subtotal
46,862

37,823

157,793

94,946

Retail and Other
109

1,012

568

2,975

Total
$
46,971

$
38,835