NJR 10Q Dec2014


 

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

FORM 10‑Q

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2014
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 February 2, 2015 was 42,709,741.

 


New Jersey Resources Corporation

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




GLOSSARY OF KEY TERMS                                                                                                                                                        
AFUDC
Allowance for Funds Used During Construction
AIP
Accelerated Infrastructure Program
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bcf
Billion Cubic Feet
BGSS
Basic Gas Supply Service
BPU
New Jersey Board of Public Utilities
CIP
Conservation Incentive Program
CME
Chicago Mercantile Exchange
CR&R
Commercial Realty & Resources Corp.
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
DRP
NJR Direct Stock Purchase and Dividend Reinvestment Plan
FASB
Financial Accounting Standards Board
FCM
Futures Commission Merchant
FERC
Federal Energy Regulatory Commission
Financial Margin
A non-GAAP financial measure, which represents revenues earned from the sale of natural gas less costs of natural gas sold including any transportation and storage costs, and excludes any accounting impact from the change in the fair value of certain derivative instruments
FMB
First Mortgage Bonds
FRM
Financial Risk Management
GAAP
Generally Accepted Accounting Principles of the United States
Home Services and Other
Home Services and Other Operations (formerly Retail and Other Operations)
ICE
Intercontinental Exchange
Iroquois
Iroquois Gas Transmission L.P.
ISDA
The International Swaps and Derivatives Association
ITC
Investment Tax Credit
LNG
Liquefied Natural Gas
MetLife
Metropolitan Life Insurance Company
MetLife Facility
NJR's unsecured, uncommitted $100 million private placement shelf note agreement with MetLife, Inc. expiring in September 2016
MGP
Manufactured Gas Plant
Moody's
Moody's Investors Service, Inc.
MW
Megawatts
MWh
Megawatt Hour
NAESB
The North American Energy Standards Board
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
NFE
Net Financial Earnings
NGV
Natural Gas Vehicles
NJ RISE
New Jersey Reinvestment in System Enhancement
NJCEP
New Jersey's Clean Energy Program
NJDEP
New Jersey Department of Environmental Protection
NJNG
New Jersey Natural Gas Company
NJNG Credit Facility
NJNG's $250 million unsecured committed credit facility expiring in May 2019
NJR Credit Facility
NJR's $425 million unsecured committed credit facility expiring in August 2017
NJR Energy
NJR Energy Corporation

1


GLOSSARY OF KEY TERMS (cont.)                                                                                                                                           
NJR or The Company
New Jersey Resources Corporation
NJRCEV
NJR Clean Energy Ventures Corporation
NJRES
NJR Energy Services Company
NJRHS
NJR Home Services Company
Non-GAAP
Not in accordance with Generally Accepted Accounting Principles of the United States
NPNS
Normal Purchase/Normal Sale
NYMEX
New York Mercantile Exchange
O&M
Operation and Maintenance
OCI
Other Comprehensive Income
OPEB
Other Postemployment Benefit Plans
PennEast
PennEast Pipeline Company, LLC
PIM
Pipeline Integrity Management
PPA
Power Purchase Agreement
Prudential
Prudential Investment Management, Inc.
Prudential Facility
NJR's unsecured, uncommitted private placement shelf note agreement with Prudential
PTC
Production Tax Credit
RA
Remediation Adjustment
Retail Holdings
NJR Retail Holdings Corporation
S&P
Standard & Poor's Financial Services, LLC
SAFE
Safety Acceleration and Facility Enhancement
Sarbanes-Oxley
Sarbanes-Oxley Act of 2002
SAVEGREEN
The SAVEGREEN Project®
SBC
Societal Benefits Charge
SREC
Solar Renewable Energy Certificate
Steckman Ridge
Collectively, Steckman Ridge GP, LLC and Steckman Ridge, LP
Superstorm Sandy
Post-Tropical Cyclone Sandy
Tetco
Texas Eastern Transmission
The Exchange Act
The Securities Exchange Act of 1934, as amended
U.S.
The United States of America
USF
Universal Service Fund


2

New Jersey Resources Corporation

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS                                                                           

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

The Company cautions readers that the assumptions that form the basis for forward-looking statements regarding customer growth, customer usage, qualifications for ITCs, PTCs and SRECs, financial condition, results of operations, cash flows, capital requirements, future capital expenditures, market risk, effective tax rate and other matters for fiscal 2015 and thereafter include many factors that are beyond the Company's ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes in the debt and equity capital markets. The factors that could cause actual results to differ materially from NJR's expectations include, but are not limited to, those discussed in Item 1A. Risk Factors of NJR's Annual Report on Form 10-K for the year ended September 30, 2014, as well as the following:

weather and economic conditions;
demographic changes in the NJNG service territory and their effect on NJNG's customer growth;
volatility of natural gas and other commodity prices and their impact on NJNG customer usage, NJNG's BGSS incentive programs, NJRES operations and on the Company's risk management efforts;
changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to the Company;
the impact of volatility in the credit markets on our access to capital;
the ability to comply with debt covenants;
the impact to the asset values and resulting higher costs and funding obligations of NJR's pension and postemployment benefit plans as a result of potential downturns in the financial markets, lower discount rates or impacts associated with the Patient Protection and Affordable Care Act;
risks associated with hedging activities and use of derivatives contracts;
commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties, and liquidity in the wholesale energy trading market;
regulatory approval of NJNG's planned infrastructure programs;
the ability to obtain governmental and regulatory approvals, land-use rights, electric grid connection (in the case of distributed power projects) and/or financing for the construction, development and operation of NJR's unregulated energy investments and NJNG's infrastructure projects in a timely manner;
risks associated with the management of the Company's joint ventures and partnerships;
risks associated with NJR's investments in distributed power projects, including the availability of regulatory and tax incentives, the availability of viable projects, NJR's eligibility for ITCs and PTCs, the future market for SRECs and operational risks related to projects in service;
timing of qualifying for ITCs and PTCs due to delays or failures to complete planned solar energy projects and the resulting effect on our effective tax rate and earnings;
the level and rate at which NJNG's costs are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process;
the possible expiration of NJNG's BGSS incentive programs;
access to adequate supplies of natural gas and dependence on third-party storage and transportation facilities for natural gas supply;
operating risks incidental to handling, storing, transporting and providing customers with natural gas;
risks related to our employee workforce;
the regulatory and pricing policies of federal and state regulatory agencies;
the costs of compliance with present and future environmental laws, including potential climate change-related legislation;
risks related to changes in accounting standards;
the impact of a disallowance of recovery of environmental-related expenditures and other regulatory changes;
environmental-related and other litigation and other uncertainties;
risks related to cyber-attack or failure of information technology systems; and
the impact of natural disasters, terrorist activities, and other extreme events could adversely affect our operations, financial conditions and results of operations.

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

3

New Jersey Resources Corporation
Part I


ITEM 1. FINANCIAL STATEMENTS                                                                                                                                          

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three Months Ended
 
December 31,
(Thousands, except per share data)
2014

2013
OPERATING REVENUES
 
 
 
Utility
$
208,727

 
$
233,469

Nonutility
615,397

 
644,936

Total operating revenues
824,124

 
878,405

OPERATING EXPENSES
 
 
 
Gas purchases:
 
 
 
Utility
84,263

 
109,488

Nonutility
472,971

 
661,944

Related parties
3,264

 
3,300

Operation and maintenance
44,759

 
42,023

Regulatory rider expenses
21,463

 
19,832

Depreciation and amortization
14,386

 
12,566

Energy and other taxes
14,321

 
17,028

Total operating expenses
655,427

 
866,181

OPERATING INCOME
168,697

 
12,224

Other (expense) income, net
(110
)
 
1,127

Interest expense, net of capitalized interest
7,195

 
6,295

INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
161,392

 
7,056

Income tax provision
40,867

 
1,505

Equity in earnings of affiliates
2,795

 
2,142

NET INCOME
$
123,320

 
$
7,693

 
 
 
 
EARNINGS PER COMMON SHARE
 
 
 
Basic
$2.92
 
$0.18
Diluted
$2.88
 
$0.18
DIVIDENDS DECLARED PER COMMON SHARE
$0.45
 
$0.42
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
Basic
42,276

 
42,021

Diluted
42,787

 
42,239


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended
 
December 31,
(Thousands)
2014
 
2013
Net income
$
123,320

 
$
7,693

Other comprehensive income, net of tax
 
 
 
Unrealized gain (loss) on available for sale securities, net of tax of $(455), and $214, respectively
659

 
(310
)
Net unrealized (loss) on derivatives, net of tax of $18, and $20, respectively
(31
)
 
(34
)
Adjustment to postemployment benefit obligation, net of tax of $(169) and $(111), respectively
247

 
161

Other comprehensive income (loss)
875

 
(183
)
Comprehensive income
$
124,195

 
$
7,510


See Notes to Unaudited Condensed Consolidated Financial Statements


4

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
 
December 31,
(Thousands)
2014
 
2013
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
 
 
 
Net income
$
123,320

 
$
7,693

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
Unrealized (gain) loss on derivative instruments
(88,673
)
 
65,654

Depreciation and amortization
14,386

 
12,566

Allowance for equity used during construction
(1,253
)
 
(213
)
Allowance for bad debt expense
964

 
414

Deferred income taxes
35,897

 
(16,506
)
Manufactured gas plant remediation costs
(1,008
)
 
(1,132
)
Equity in earnings of equity investees, net of distributions received
2,146

 
1,521

Cost of removal - asset retirement obligations
(105
)
 
(47
)
Contributions to postemployment benefit plans
(69
)
 
(1,559
)
Changes in:
 
 
 
Components of working capital
(75,089
)
 
(145,315
)
Other noncurrent assets
13,489

 
(1,427
)
Other noncurrent liabilities
16,844

 
9,534

Cash flows from (used in) operating activities
40,849

 
(68,817
)
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
 
 
 
Expenditures for:
 
 
 
Utility plant
(34,114
)
 
(30,277
)
Solar and wind equipment
(55,345
)
 
(24,917
)
Real estate properties and other
(11
)
 
(205
)
Cost of removal
(2,634
)
 
(5,124
)
Investments in equity investees
(547
)
 

Distribution from equity investees in excess of equity in earnings
470

 
395

Proceeds from sale of asset

 
6,000

Withdrawal from restricted cash construction fund
(25
)
 
85

Cash flows (used in) investing activities
(92,206
)
 
(54,043
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of common stock
24,373

 
3,557

Tax benefit from stock options exercised
816

 

Proceeds from sale-leaseback transaction
7,216

 
7,576

Proceeds from long-term debt
100,000

 

Payments of long-term debt
(1,723
)
 
(1,576
)
Purchases of treasury stock
(3,945
)
 

Payments of common stock dividends
(18,993
)
 
(17,617
)
Net (payments) proceeds from short-term debt
(46,804
)
 
138,000

Cash flows from financing activities
60,940

 
129,940

Change in cash and cash equivalents
9,583

 
7,080

Cash and cash equivalents at beginning of period
2,151

 
2,969

Cash and cash equivalents at end of period
$
11,734

 
$
10,049

CHANGES IN COMPONENTS OF WORKING CAPITAL
 
 
 
Receivables
$
(166,229
)
 
$
(180,484
)
Inventories
8,385

 
32,278

Recovery of gas costs
2,015

 
5,513

Gas purchases payable
65,563

 
13,673

Gas purchases payable - related parties
184

 
130

Prepaid and accrued taxes
14,108

 
32,449

Accounts payable and other
(53,852
)
 
(10,052
)
Restricted broker margin accounts
46,550

 
(46,745
)
Customers' credit balances and deposits
14,345

 
3,988

Other current assets
(6,158
)
 
3,935

Total
$
(75,089
)
 
$
(145,315
)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
 
 
 
Cash paid for:
 
 
 
Interest (net of amounts capitalized)
$
1,376

 
$
1,704

Income taxes
$
2,228

 
$
137

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
 
 
 
Accrued capital expenditures
$
12,107

 
$
1,421


See Notes to Unaudited Condensed Consolidated Financial Statements

5

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

 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

ASSETS
(Thousands)
December 31,
2014
September 30,
2014
PROPERTY, PLANT AND EQUIPMENT
 
 
Utility plant, at cost
$
1,808,829

$
1,791,009

Construction work in progress
152,985

139,624

Solar and wind equipment, real estate properties and other, at cost
376,893

347,285

Construction work in progress
78,293

55,625

Total property, plant and equipment
2,417,000

2,333,543

Accumulated depreciation and amortization, utility plant
(415,661
)
(409,135
)
Accumulated depreciation and amortization, solar and wind equipment, real estate properties and other
(44,136
)
(40,298
)
Property, plant and equipment, net
1,957,203

1,884,110

CURRENT ASSETS
 
 
Cash and cash equivalents
11,734

2,151

Customer accounts receivable
 
 
Billed
314,139

189,970

Unbilled revenues
48,172

7,231

Allowance for doubtful accounts
(5,202
)
(5,357
)
Regulatory assets
36,842

26,862

Gas in storage, at average cost
269,420

277,516

Materials and supplies, at average cost
7,876

8,165

Prepaid and accrued taxes
7,425

22,269

Derivatives, at fair value
142,338

64,223

Restricted broker margin accounts
19,761

27,339

Deferred taxes
14,767

36,451

Other
32,790

25,911

Total current assets
900,062

682,731

NONCURRENT ASSETS
 
 
Investments in equity investees
151,886

153,010

Regulatory assets
369,176

377,575

Derivatives, at fair value
6,807

5,654

Other
59,158

55,724

Total noncurrent assets
587,027

591,963

Total assets
$
3,444,292

$
3,158,804


See Notes to Unaudited Condensed Consolidated Financial Statements


6

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

CAPITALIZATION AND LIABILITIES
(Thousands)
December 31,
2014
September 30,
2014
CAPITALIZATION
 
 
Common stock, $2.50 par value; authorized 75,000,000 shares;
outstanding December 31, 2014-42,651,486; September 30, 2014-42,178,156
$
114,035

$
112,777

Premium on common stock
328,875

305,185

Accumulated other comprehensive (loss), net of tax
(4,719
)
(5,594
)
Treasury stock at cost and other;
shares December 31, 2014-2,950,569; September 30, 2014-2,932,775
(113,671
)
(121,031
)
Retained earnings
779,126

674,829

Common stock equity
1,103,646

966,166

Long-term debt
702,884

598,209

Total capitalization
1,806,530

1,564,375

CURRENT LIABILITIES
 
 
Current maturities of long-term debt
35,381

34,505

Short-term debt
254,196

301,000

Gas purchases payable
271,490

205,901

Gas purchases payable to related parties
1,556

1,398

Accounts payable and other
48,162

104,005

Dividends payable
19,023

19,001

Deferred and accrued taxes
5,882

2,721

Regulatory liabilities

6,072

New Jersey clean energy program
13,166

14,285

Derivatives, at fair value
91,425

79,863

Broker margin accounts
38,972


Customers' credit balances and deposits
36,680

22,335

Total current liabilities
815,933

791,086

NONCURRENT LIABILITIES
 
 
Deferred income taxes
436,162

423,213

Deferred investment tax credits
5,181

5,262

Deferred revenue
5,438

4,042

Derivatives, at fair value
5,523

6,690

Manufactured gas plant remediation
177,000

177,000

Postemployment employee benefit liability
88,103

86,674

Regulatory liabilities
65,328

61,326

Asset retirement obligation
30,908

30,495

Other
8,186

8,641

Total noncurrent liabilities
821,829

803,343

Commitments and contingent liabilities (Note 12)



Total capitalization and liabilities
$
3,444,292

$
3,158,804


See Notes to Unaudited Condensed Consolidated Financial Statements


7

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                              

1.
NATURE OF THE BUSINESS

New Jersey Resources Corporation provides regulated gas distribution services and operates certain unregulated businesses primarily through the following subsidiaries:

New Jersey Natural Gas Company provides natural gas utility service to approximately 509,600 retail customers in central and northern New Jersey and is subject to rate regulation by the BPU. NJNG comprises the Natural Gas Distribution segment;

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

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

NJR Midstream Holdings Corporation invests in energy-related ventures through its subsidiaries, NJR Steckman Ridge Storage Company, which holds the Company's 50 percent combined interest in Steckman Ridge, NJNR Pipeline Company, which holds the Company's 5.53 percent ownership interest in Iroquois Gas Transmission L.P and NJR Pipeline Company, which holds the Company's 20 percent ownership interest in PennEast. Steckman Ridge, Iroquois and PennEast comprise the Midstream segment; and

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

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by NJR in accordance with the rules and regulations of the Securities and Exchange Commission and ASC 270. The September 30, 2014, Balance Sheet data is derived from the audited financial statements of the Company. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the notes thereto included in NJR's 2014 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, 2015.

Intercompany transactions and accounts have been eliminated.

Gas in Storage

The following table summarizes gas in storage, at average cost by company as of:
 
December 31,
2014
September 30,
2014
($ in thousands)
Gas in Storage
 
Bcf
Gas in Storage
 
Bcf
NJRES
 
$
201,722

57.8

 
$
191,250

56.5

NJNG
 
67,698

17.1

 
86,266

21.3

Total
 
$
269,420

74.9

 
$
277,516

77.8


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 $11.8 million and $10.7 million as of December 31, 2014 and September 30, 2014, 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 $9.2 million, $5.4 million, after tax and $8.1 million, $4.8 million, after tax as of December 31, 2014 and September 30, 2014, respectively. Reclassifications of realized gains out of other comprehensive income into income are determined based on average cost.

8

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Sale of Asset

On October 22, 2013, CR&R sold approximately 25.4 acres of undeveloped land located in Monmouth County for $6 million, generating a pre-tax gain after closing costs of $313,000, which was recognized in other income on the Unaudited Condensed Consolidated Statements of Operations.

Customer Accounts Receivable

Customer accounts receivable include outstanding billings from the following subsidiaries as of:
(Thousands)
December 31,
2014
 
September 30,
2014
NJRES
$
236,564

75
%
 
$
142,566

75
%
NJNG (1)
74,198

24

 
41,281

22

NJRCEV
725


 
594


NJRHS and other
2,652

1

 
5,529

3

Total
$
314,139

100
%
 
$
189,970

100
%
(1)
Does not include unbilled revenues of $48.2 million and $7.2 million as of December 31, 2014 and September 30, 2014, respectively.

Loan Receivable

NJNG provides interest-free loans, with terms ranging from two to 10 years, to customers that elect to purchase and install certain energy efficient equipment in accordance with its BPU-approved SAVEGREEN program. The loans are recognized at net present value on the Unaudited Condensed Consolidated Balance Sheets. The Company has recorded $4.5 million and $3.9 million in other current assets and $29.8 million and $27.3 million in other noncurrent assets as of December 31, 2014 and September 30, 2014, respectively, on the Unaudited Condensed Consolidated Balance Sheets, related to the loans.

NJR's policy is to establish an allowance for doubtful accounts when loan balances are outstanding for more than 60 days. As of December 31, 2014 and September 30, 2014, there was no allowance for doubtful accounts established.

Recent Updates to the Accounting Standards Codification

Income Taxes

In July 2013, the FASB issued ASU No. 2013-11, an amendment to ASC 740, Income Taxes, which clarifies financial statement presentation for unrecognized tax benefits. The ASU requires that an unrecognized tax benefit, or portion thereof, shall be presented in the balance sheet as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss or a tax credit carryforward. To the extent such a deferred tax asset is not available or the company does not intend to use it to settle any additional taxes that would result from the disallowance of a tax position, the related unrecognized tax benefit will be presented as a liability in the financial statements. The amended guidance became effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company currently does not have unrecognized tax benefits recorded on its balance sheet and there was no impact to its financial position upon adoption during its first quarter of fiscal 2015.

Discontinued Operations

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The new guidance changes the definition and reporting of discontinued operations to include only those disposals that represent a strategic shift and that have a major effect on an entity's operations and financial results. The new guidance, which also requires additional disclosures, becomes effective for annual periods beginning on or after December 15, 2014 and interim periods within those years. The company does not expect this standard to have any impact to its financial position, results of operations and cash flows upon adoption.

Revenue

In May 2014, the FASB issued ASU No. 2014-09, and added Topic 606, Revenue from Contracts with Customers, to the ASC. ASC 606 supersedes ASC 605, Revenue Recognition, as well as most industry-specific guidance, and prescribes a single, comprehensive revenue recognition model designed to improve financial reporting comparability across entities, industries, jurisdictions and capital markets. The new guidance will become effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Upon adoption, the guidance will be applied on a full or modified retrospective basis. The

9

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Company is currently evaluating the provisions of ASC 606 to understand the impact, if any, to its financial position, results of operations and cash flows upon adoption.

Stock Compensation

In June 2014, the FASB issued ASU No. 2014-12, an amendment to ASC 718, Compensation - Stock Compensation, which clarifies the accounting for performance awards when the terms of the award provide that a performance target could be achieved after the requisite service period. The new guidance will become effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The company does not expect this standard to have any impact to its financial position, results of operations and cash flows upon adoption.

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. The impact of the ratemaking process and decisions authorized by the BPU allows NJNG to capitalize or defer certain costs that are expected to be recovered from its customers as regulatory assets and to recognize certain obligations representing amounts that are probable future expenditures as regulatory liabilities.

Regulatory assets and liabilities included on the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:
(Thousands)
December 31,
2014
September 30,
2014
Regulatory assets-current
 
 
New Jersey Clean Energy Program
$
13,166

$
14,285

Derivatives at fair value, net
18,866


Conservation Incentive Program
1,556


Underrecovered gas costs
3,254

12,577

Total current regulatory assets
$
36,842

$
26,862

Regulatory assets-noncurrent
 
 
Environmental remediation costs
 
 
Expended, net of recoveries
$
26,226

$
30,916

Liability for future expenditures
177,000

177,000

Deferred income taxes
9,968

9,968

SAVEGREEN
28,411

29,180

Postemployment and other benefit costs
106,503

108,507

Deferred Superstorm Sandy costs
15,207

15,207

Other noncurrent regulatory assets
5,861

6,797

Total noncurrent regulatory assets
$
369,176

$
377,575

Regulatory liability-current
 
 
Conservation Incentive Program
$

$
5,752

Derivatives at fair value, net

320

Total current regulatory liabilities
$

$
6,072

Regulatory liabilities-noncurrent
 
 
Cost of removal obligation
$
58,723

$
61,163

Derivatives at fair value, net

57

Other noncurrent regulatory liabilities
6,605

106

Total noncurrent regulatory liabilities
$
65,328

$
61,326



10

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


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

Recent regulatory filings and/or actions include the following:

On October 1, 2014, NJNG implemented a decrease to its BGSS price for residential sales and general service small sales customers resulting in a 5 percent decrease to the average residential heat customer's bill.

On October 22, 2014, the BPU approved, as prudent and reasonable, the deferred O&M storm costs associated with Superstorm Sandy to be recovered in NJNG's next base rate case to be filed no later than November 15, 2015.

On December 16, 2014, NJNG filed a petition with the BPU to extend SAVEGREEN through June 30, 2018, with minor modifications.

4.
DERIVATIVE INSTRUMENTS

The Company is subject to commodity price risk due to fluctuations in the market price of natural gas, SRECs and electricity. To manage this risk, the Company enters into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial options and swaps to economically hedge the commodity price risk associated with its existing and anticipated commitments to purchase and sell natural gas, SRECs and electricity. In addition, the Company may utilize foreign currency derivatives as cash flow hedges of Canadian dollar denominated gas purchases. These contracts, with a few exceptions as described below, are accounted for as derivatives. Accordingly, all of the financial and certain of the Company's physical derivative instruments are recorded at fair value on the Unaudited Condensed Consolidated Balance Sheets. For a more detailed discussion of the Company's fair value measurement policies and level disclosures associated with 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 or to elect NPNS as appropriate, changes in the fair value of these derivative instruments are recorded as a component of gas purchases or operating revenues, as appropriate for NJRES, on the Unaudited Condensed Consolidated Statements of Operations as unrealized gains or (losses). For NJRES at settlement, realized gains and (losses) on all financial derivative instruments are recognized as a component of gas purchases and realized gains and (losses) on all physical derivatives follow the presentation of the related unrealized gains and (losses) as a component of either gas purchases or operating revenues.

NJRES also enters into natural gas transactions in Canada and, consequently, is exposed to fluctuations in the value of Canadian currency relative to the 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 along with purchases of natural gas. 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 OCI. When the foreign exchange contracts are settled and the related purchases are recognized in income, realized gains and (losses) are recognized in gas purchases on the Unaudited Condensed Consolidated Statements of Operations.

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

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


11

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


The Company elects NPNS accounting treatment on all physical commodity contracts at NJNG. These contracts are accounted for on an accrual basis. Accordingly, physical purchases are recognized in regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets when the contract settles and the natural gas is delivered and amortized in current period earnings based on the current BPU BGSS factor.

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

Fair Value of Derivatives

The following table reflects the fair value of NJR's derivative assets and liabilities recognized on the Unaudited Condensed Consolidated Balance Sheets as of:
 
 
 
Fair Value
 
 
 
December 31, 2014
 
September 30, 2014
(Thousands)
Balance Sheet Location
Asset
Derivatives
Liability
Derivatives
Asset
Derivatives
Liability
Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
NJRES:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
Derivatives - current
 
$

 
$
204

 
$

 
$
155

Fair value of derivatives designated as hedging instruments
 
$

 
$
204

 
$

 
$
155

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
NJNG:
 
 
 
 
 
 
 
 
 
Financial commodity contracts
Derivatives - current
 
$
62

 
$
18,914

 
$
2,525

 
$
2,205

 
Derivatives - noncurrent
 

 

 
82

 
25

NJRES:
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
Derivatives - current
 
14,769

 
24,993

 
15,391

 
30,778

 
Derivatives - noncurrent
 
544

 
1,034

 
35

 
132

Financial commodity contracts
Derivatives - current
 
127,507

 
47,314

 
46,307

 
46,725

 
Derivatives - noncurrent
 
6,263

 
4,489

 
5,537

 
6,533

Fair value of derivatives not designated as hedging instruments
 
$
149,145

 
$
96,744

 
$
69,877

 
$
86,398

Total fair value of derivatives
 
 
$
149,145

 
$
96,948

 
$
69,877

 
$
86,553


At December 31, 2014, the gross notional amount of the foreign currency transactions was approximately $6.2 million, and ineffectiveness in the hedge relationship is immaterial to the financial results of NJR.

Offsetting of Derivatives

NJR transacts under master netting arrangements or equivalent agreements that allow it to offset derivative assets and liabilities with the same counterparty, however NJR's policy is to present its derivative assets and liabilities on a gross basis in the Unaudited Condensed Consolidated Balance Sheets.


12

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


The following table summarizes the reported gross amounts, the amounts that NJR has the right to offset but elects not to, financial collateral, as well as the net amounts NJR could present in the Unaudited Condensed Consolidated Balance Sheets but elects not to.
(Thousands)
Amounts Presented in Balance Sheets (1)
Offsetting Derivative Instruments (2)
Financial Collateral Received/Pledged (3)
Net Amounts (4)
As of December 31, 2014:
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
NJRES
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$
15,313

 
$
(6,054
)
 
$

 
$
9,259

Financial commodity contracts
 
133,770

 
(51,803
)
 
(53,821
)
 
28,146

Total NJRES
 
$
149,083

 
$
(57,857
)
 
$
(53,821
)
 
$
37,405

NJNG
 
 
 
 
 
 
 
 
Financial commodity contracts
 
$
62

 
$
(62
)
 
$

 
$

Derivative liabilities:
 
 
 
 
 
 
 
 
NJRES
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$
26,027

 
$
(6,054
)
 
$
(1,200
)
 
$
18,773

Financial commodity contracts
 
51,803

 
(51,803
)
 

 

Foreign currency contracts
 
204

 

 

 
204

Total NJRES
 
$
78,034

 
$
(57,857
)
 
$
(1,200
)
 
$
18,977

NJNG
 
 
 
 
 
 
 
 
Financial commodity contracts
 
$
18,914

 
$
(62
)
 
$
(18,852
)
 
$

 
 
 
 
 
 
 
 
 
As of September 30, 2014:
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
NJRES
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$
15,426

 
$
(11,531
)
 
$

 
$
3,895

Financial commodity contracts
 
51,844

 
(51,844
)
 

 

Total NJRES
 
$
67,270

 
$
(63,375
)
 
$

 
$
3,895

NJNG
 
 
 
 
 
 
 
 
Financial commodity contracts
 
$
2,607

 
$
(2,230
)
 
$
(377
)
 
$

Derivative liabilities:
 
 
 
 
 
 
 
 
NJRES
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$
30,910

 
$
(12,058
)
 
$
(1,200
)
 
$
17,652

Financial commodity contracts
 
53,258

 
(51,844
)
 
(1,414
)
 

Foreign currency contracts
 
155

 

 

 
155

Total NJRES
 
$
84,323

 
$
(63,902
)
 
$
(2,614
)
 
$
17,807

NJNG
 
 
 
 
 
 
 
 
Financial commodity contracts
 
$
2,230

 
$
(2,230
)
 
$

 
$

(1)
Derivative assets and liabilities are presented on a gross basis in the balance sheet as the Company does not elect balance sheet offsetting under ASC 210-20.
(2)
Offsetting derivative instruments include: transactions with NAESB netting election, transactions held by FCM's with net margining and transactions with ISDA netting.
(3)
Financial collateral includes cash balances at FCMs as well as cash received from or pledged to other counterparties.
(4)
Net amounts represent presentation of derivative assets and liabilities if the Company were to elect balance sheet offsetting under ASC 210-20.

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

13

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
 
 
December 31,
Derivatives not designated as hedging instruments:
2014
 
2013
NJRES:
 
 
 
 
Physical commodity contracts
Operating revenues
$
16,091

 
$
(82
)
Physical commodity contracts
Gas purchases
(19,856
)
 
(24,993
)
Financial commodity contracts
Gas purchases
117,721

 
(40,070
)
Total unrealized and realized gains (losses)
$
113,956

 
$
(65,145
)

The table above does not include (losses) gains associated with NJNG's financial derivatives that totaled $(19) million and $6.6 million for the three months ended December 31, 2014 and 2013, respectively. These derivatives are part of NJNG's risk management activities that relate to its natural gas purchases 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 resulting in 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 on the Unaudited Condensed Consolidated Statements of Operations. The following table reflects the effect of derivative instruments designated as cash flow hedges on OCI as of December 31:
(Thousands)
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) (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)
 
Three Months Ended
Three Months Ended
Three Months Ended
 
December 31,
December 31,
December 31,
Derivatives in cash flow hedging relationships:
2014
2013
2014
2013
2014
2013
Foreign currency contracts
$
(24
)
$
(151
)
$
(25
)
$
97

$

$

(1)
The settlement of foreign currency transactions over the next 12 months is expected to result in the reclassification of $(204,000) from OCI into earnings. The maximum tenor is April 2015.

NJNG and NJRES had the following outstanding long (short) derivatives as of:
 
 
 
Volume (Bcf)
 
 
 
December 31,
2014
September 30,
2014
NJNG
Futures
 
21.5

17.3

 
Options
 
0.5


NJRES
Futures
 
(83.2
)
(62.1
)
 
Options
 
1.2

1.2

 
Physical
 
67.6

28.6



14

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Broker Margin

Generally, exchange-traded futures contracts require posted collateral, referred to as margin, usually in the form of cash. The amount of margin required is comprised of a fixed initial amount based on exchange requirements and a variable amount based on a daily mark-to-market. The Company maintains separate broker margin accounts for NJNG and NJRES. The balances by company, are as follows:
(Thousands)
Balance Sheet Location
December 31,
2014
September 30,
2014
NJNG
NJNG Broker margin - Current assets
$
19,761

$
1,057

NJRES
NJRES Broker margin - Current (liabilities) assets
$
(38,972
)
$
26,282


Wholesale Credit Risk

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

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

The following is a summary of gross credit exposures grouped by investment and noninvestment grade counterparties, as of December 31, 2014. Internally-rated exposure applies to counterparties that are not rated by S&P or Moody's. In these cases, the Company's or guarantor's financial statements are reviewed, and similar methodologies and ratios used by S&P and/or Moody's are applied to arrive at a substitute rating. Gross credit exposure is defined as the unrealized fair value of physical and financial derivative commodity contracts, plus any outstanding wholesale receivable for the value of natural gas delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received. The amounts presented below have not been reduced by any collateral received or netting and exclude accounts receivable for NJNG retail natural gas sales and services.
(Thousands)
Gross Credit Exposure
Investment grade
 
$
213,274

 
Noninvestment grade
 
27,262

 
Internally rated investment grade
 
36,961

 
Internally rated noninvestment grade
 
14,233

 
Total
 
$
291,730

 

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.

15

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Collateral amounts associated with any of these conditions are determined based on a sliding scale and are contingent upon the degree to which the Company's credit rating and/or financial metrics deteriorate, and the extent to which liability amounts exceed applicable threshold limits. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on December 31, 2014 and September 30, 2014, was $223,000 and $39,000, respectively, for which the Company had not posted collateral. If all thresholds related to the credit-risk-related contingent features underlying these agreements had been invoked on December 31, 2014 and September 30, 2014, the Company would have been required to post an additional $178,000 and $7,000, respectively, to its counterparties. These amounts differ from the respective net derivative liabilities reflected on the Unaudited Condensed Consolidated Balance Sheets because the agreements also include clauses, commonly known as “Rights of Offset,” that would permit the Company to offset its derivative assets against its derivative liabilities for determining additional collateral to be posted, as previously discussed.

5.
FAIR VALUE

Fair Value of Assets and Liabilities

The fair value of cash and temporary investments, accounts receivable, current loan receivables, accounts payable, commercial paper and borrowings under revolving credit facilities are estimated to equal their carrying amounts due to the short maturity of those instruments. Non-current loan receivables are recorded based on what the company expects to receive, which approximates fair value. The Company regularly evaluates the credit quality and collection profile of its customers to approximate fair value.

The estimated fair value of long-term debt, including current maturities and excluding capital leases is as follows:
(Thousands)
December 31,
2014
September 30,
2014
Carrying value (1)
$
682,845

$
557,845

Fair market value
$
720,903

$
586,909

(1)
Excludes capital leases of $55.4 million and $57.7 million as of December 31, 2014 and September 30, 2014, respectively.

NJR utilizes a discounted cash flow method to determine the fair value of its debt. Inputs include observable municipal and corporate yields, as appropriate for the maturity of the specific issue and the Company's credit rating. As of December 31, 2014, NJR discloses its debt within Level 2 of the fair value hierarchy.

Fair Value Hierarchy

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

Level 1
Unadjusted quoted prices for identical assets or liabilities in active markets. NJR's Level 1 assets and liabilities include exchange traded futures and options contracts, listed equities, and money market funds. Exchange traded futures and options contracts include all energy contracts traded on the NYMEX/CME and ICE that NJR refers internally to as basis swaps, fixed swaps, futures and financial options that are cleared through a FCM.

Level 2
Other significant observable inputs such as interest rates or price data, including both commodity and basis pricing that is observed either directly or indirectly from publications or pricing services. NJR's Level 2 assets and liabilities include over-the-counter physical forward commodity contracts and swap contracts or derivatives that are initially valued using observable quotes and are subsequently adjusted to include time value, credit risk or estimated transport pricing components for which no basis price is available. Level 2 financial derivatives consist of transactions with non-FCM counterparties (basis swaps, fixed swaps and/or options). For some physical commodity contracts the Company utilizes transportation tariff rates that are publicly available and that it considers to be observable inputs that are equivalent to market data received from an independent source. There are no significant judgments or adjustments applied to the transportation tariff inputs and no market perspective is required. Even if the transportation tariff input was considered to be a “model”, it would still be considered to be a Level 2 input as:

1)     The data is widely accepted and public
2)    The data is non-proprietary and sourced from an independent third party
3)    The data is observable and published

16

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


These additional adjustments are generally not considered to be significant to the ultimate recognized values.

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

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
 
(Thousands)
(Level 1)
(Level 2)
(Level 3)
Total
As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$

 
 
$
15,313

 
 
$

 
$
15,313

Financial derivative contracts - natural gas
 
133,832

 
 

 
 

 
133,832

Available for sale equity securities - energy industry (1)
 
11,786

 
 

 
 

 
11,786

Other (2)
 
1,514

 
 

 
 

 
1,514

Total assets at fair value
 
$
147,132

 
 
$
15,313

 
 
$

 
$
162,445

Liabilities:
 
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$

 
 
$
26,027

 
 
$

 
$
26,027

Financial commodity contracts - natural gas
 
70,717

 
 

 
 

 
70,717

Financial commodity contracts - foreign exchange
 

 
 
204

 
 

 
204

Total liabilities at fair value
 
$
70,717

 
 
$
26,231

 
 
$

 
$
96,948

As of September 30, 2014:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$

 
 
$
15,426

 
 
$

 
$
15,426

Financial derivative contracts - natural gas
 
54,451

 
 

 
 

 
54,451

Available for sale equity securities - energy industry (1)
 
10,672

 
 

 
 

 
10,672

Other (2)
 
1,299

 
 

 
 

 
1,299

Total assets at fair value
 
$
66,422

 
 
$
15,426

 
 
$

 
$
81,848

Liabilities:
 
 
 
 
 
 
 
 
 
 
Physical forward commodity contracts
 
$

 
 
$
30,910

 
 
$

 
$
30,910

Financial commodity contracts - natural gas
 
55,488

 
 

 
 

 
55,488

Financial commodity contracts - foreign exchange
 

 
 
155

 
 

 
155

Total liabilities at fair value
 
$
55,488

 
 
$
31,065

 
 
$

 
$
86,553

(1)
Included in other noncurrent assets on the Unaudited Condensed Consolidated Balance Sheets.
(2)
Includes various money market funds in Level 1.

6.
INVESTMENTS IN EQUITY INVESTEES

NJR's investments in equity investees includes the following investments as of:
(Thousands)
December 31,
2014
September 30,
2014
Steckman Ridge (1)
$
127,907

$
128,413

Iroquois
22,876

24,042

PennEast
1,103

555

Total
$
151,886

$
153,010

(1)
Includes loans with a total outstanding principal balance of $70.4 million for both December 31, 2014 and September 30, 2014. The loans accrue interest at a variable rate that resets quarterly and are due October 1, 2023.

NJR, through a subsidiary, NJR Pipeline Company, formed PennEast with five other investors, plans to construct and operate a 108-mile pipeline that will extend from northeast Pennsylvania to western New Jersey.

NJRES and NJNG have entered into transportation, storage and park and loan agreements with Steckman Ridge and Iroquois. In addition, NJNG has entered into a precedent capacity agreement with PennEast with an estimated service date of November 1, 2017. See Note 14. Related Party Transactions for more information on these intercompany transactions.

17

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


7.
EARNINGS PER SHARE

The following table presents the calculation of the Company's basic and diluted earnings per share for:
 
Three Months Ended
 
December 31,
(Thousands, except per share amounts)
2014
2013
Net income, as reported
$
123,320

$
7,693

Basic earnings per share


Weighted average shares of common stock outstanding-basic
42,276

42,021

Basic earnings per common share
$2.92
$0.18
Diluted earnings per share


Weighted average shares of common stock outstanding-basic
42,276

42,021

Incremental shares (1)
511

218

Weighted average shares of common stock outstanding-diluted
42,787

42,239

Diluted earnings per common share (2)
$2.88
$0.18
(1)
Incremental shares consist primarily of stock awards and performance shares.
(2)
There were no anti-dilutive shares excluded from the calculation of diluted earnings per share for the three months ended December 31, 2014, and 2013.

8.
COMMON STOCK EQUITY

Changes in common stock equity during the three months ended December 31, 2014, are as follows:
(Thousands)
Number of Shares
Common Stock
Premium on Common Stock
Accumulated Other Comprehensive (Loss) Income
Treasury Stock And Other
Retained Earnings
Total
Balance as of September 30, 2014
42,178

$
112,777

$
305,185

 
$
(5,594
)
 
$
(121,031
)
$
674,829

$
966,166

Net income
 
 
 
 
 
 
 
123,320

123,320

Other comprehensive income
 
 
 
 
875

 
 
 
875

Common stock issued under stock plans
564

1,258

25,099

 
 
 
3,046

 
29,403

Tax benefits from stock plans
 
 
(1,409
)
 
 
 
 
 
(1,409
)
Cash dividend declared ($.45 per share)
 
 
 
 
 
 
 
(19,023
)
(19,023
)
Treasury stock and other
(91
)
 
 
 
 
 
4,314

 
4,314

Balance as of December 31, 2014
42,651

$
114,035

$
328,875

 
$
(4,719
)
 
$
(113,671
)
$
779,126

$
1,103,646



18

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Accumulated Other Comprehensive Income

The following table presents the changes in the components of accumulated other comprehensive income, net of related tax effects:
(Thousands)
Available for Sale Securities
Cash Flow Hedges
Postemployment Benefit Obligation
Total
Balance as of September 30, 2014
$
4,782

 
$
(93
)
 
$
(10,283
)
 
$
(5,594
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
Other comprehensive income (loss), before reclassifications, net of tax of $(455), $9, $0, $(446)
659

 
(15
)
 

 
644

Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $9, $(169), $(160)

 
(16
)
(1) 
247

(2) 
231

Net current-period other comprehensive income (loss), net of tax of $(455), $18, $(169), $(606)
659

 
(31
)
 
247

 
875

Balance as of December 31, 2014
$
5,441

 
$
(124
)
 
$
(10,036
)
 
$
(4,719
)
 
 
 
 
 
 
 
 
Balance as of September 30, 2013
$
5,400

 
$
12

 
$
(7,033
)
 
$
(1,621
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
Other comprehensive (loss), before reclassifications, net of tax of $214, $56, $0, $270
(310
)
 
(96
)
 

 
(406
)
Losses reclassified from accumulated other comprehensive income, net of tax of $0, $(36) $(111), $(147)

 
62

(1) 
161

(2) 
223

Net current-period other comprehensive (loss) income, net of tax of $214, $20, $(111), $123
(310
)
 
(34
)
 
161

 
(183
)
Balance as of December 31, 2013
$
5,090

 
$
(22
)
 
$
(6,872
)
 
$
(1,804
)
(1)
Consists of realized losses related to foreign currency derivatives, which are reclassified to gas purchases in the Unaudited Condensed Consolidated Statements of Operations.
(2)
Included in the computation of net periodic pension cost, a component of operations and maintenance expense in the Unaudited Condensed Consolidated Statements of Operations.

9.
DEBT

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

Credit Facilities

A summary of NJR's credit facility and NJNG's commercial paper program and credit facility are as follows:
(Thousands)
December 31,
2014
 
September 30,
2014
 
Expiration Dates
NJR
 
 
 
 
 
Bank revolving credit facilities (1)
$
425,000

 
$
425,000

 
August 2017
Notes outstanding at end of period
$
80,000

 
$
148,000

 
 
Weighted average interest rate at end of period
1.06
%
 
1.08
%
 
 
Amount available at end of period (2)
$
327,345

 
$
256,484

 
 
Bank revolving credit facilities (3)
$
100,000

 
$

 
October 2015
Amount available at end of period
$
100,000

 
$

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

 
$
250,000

 
May 2019
Commercial paper outstanding at end of period
$
174,196

 
$
153,000

 
 
Weighted average interest rate at end of period
0.15
%
 
0.12
%
 
 
Amount available at end of period (4)
$
75,073

 
$
96,269

 
 
(1)
Committed credit facilities, which require commitment fees on the unused amounts.
(2)
Letters of credit outstanding total $17.7 million and $20.5 million as of December 31, 2014 and September 30, 2014, respectively, which reduces amount available by the same amount.
(3)
Uncommitted credit facilities, which require no commitment fees.
(4)
Letters of credit outstanding total $731,000 as of December 31, 2014 and September 30, 2014, which reduces the amount available by the same amount.

19

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


On October 24, 2014, NJR entered into a $100 million uncommitted line of credit agreement, with Santander Bank, N.A., expiring on October 24, 2015.

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.

NJR Long-term Debt

Under the Prudential Facility, as of December 31, 2014, NJR had $50 million in notes at 3.25 percent due on September 17, 2022. On November 7, 2014, an additional $100 million in notes at 3.48 percent was issued and is due on November 7, 2024.

On September 26, 2013, NJR entered into an unsecured, uncommitted $100 million private placement shelf note agreement allowing NJR to issue senior notes during a three-year issuance period ending September 26, 2016. As of December 31, 2014, $100 million remains available for borrowing under this facility.

As of December 31, 2014, NJR had two series of notes outstanding in the amounts of $25 million at 1.94 percent, which will mature on September 15, 2015 and $25 million at 2.51 percent, which will mature on September 15, 2018, under an unsecured, uncommitted private placement shelf note agreement, which expired in May 2013.

NJNG Long-term Debt

On March 13, 2014, NJNG issued $70 million of 3.58 percent senior notes due March 13, 2024, and $55 million of 4.61 percent senior notes due March 13, 2044, secured by FMB in the private placement market pursuant to a note purchase agreement entered into on February 7, 2014.

NJNG received $7.2 million and $7.6 million in December 2014 and 2013, respectively, in connection with the sale-leaseback of its natural gas meters. NJNG records a capital lease obligation that is paid over the term of the lease and has the option to purchase the meters back at fair value upon expiration of the lease.

10.
EMPLOYEE BENEFIT PLANS

Pension and Other Postemployment Benefit Plans

The components of the net periodic cost for pension benefits, including the Company's Pension Equalization Plan, and OPEB costs (principally health care and life insurance) for employees and covered dependents were as follows:
 
Pension
OPEB
 
Three Months Ended
Three Months Ended
 
December 31,
December 31,
(Thousands)
2014
2013
2014
2013
Service cost
$
1,871

$
1,536

$
1,063

$
981

Interest cost
2,550

2,516

1,435

1,433

Expected return on plan assets
(4,272
)
(3,869
)
(1,244
)
(1,044
)
Recognized actuarial loss
1,745

1,399

736

625

Prior service cost amortization
28

28

(91
)
(89
)
Recognized net initial obligation



3

Net periodic benefit cost
$
1,922

$
1,610

$
1,899

$
1,909


20

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


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. There were no discretionary contributions made during the three months ended December 31, 2014 and 2013.

11.
INCOME TAXES

NJR evaluates its tax positions to determine the appropriate accounting and recognition of potential future obligations associated with unrecognized tax benefits. During the three months ended December 31, 2014 and 2013, based on its analysis, the Company determined there was no need to recognize any liabilities associated with uncertain tax positions.

The effective tax rates for the three months ended December 31, 2014 and 2013, are 24.9 percent and 16.3 percent, respectively. The increased tax rate is due primarily to an increase in the pre-tax income that was forecasted as of December 31, 2014, compared with December 31, 2013. This increase is partially offset by the impact of higher forecasted ITCs, net of deferred taxes of $25.1 million for the fiscal year ended September 30, 2015, compared with $18.3 million for the fiscal year ended September 30, 2014, as well as increased forecasted PTCs of $2 million for the fiscal year ended September 30, 2015, compared with $187,000 for the fiscal year ended September 30, 2014. The effective tax rate can also be impacted by fluctuations in unrealized derivative gains and losses. During the three months ended December 31, 2014 and 2013, NJR recognized $88.7 million in unrealized gains and $65.7 million in unrealized losses, respectively.

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

As of December 31, 2014, the Company has state income tax net operating losses of approximately $169.7 million, which generally have a life of 20 years. The Company has recorded a deferred state tax asset of approximately $10 million on the Unaudited Condensed Consolidated Balance Sheets, reflecting the tax benefit associated with the loss carryforwards. In addition, as of December 31, 2014, the Company has recorded a valuation allowance of $211,000 because it believes that it is more likely than not that the deferred tax assets related to CR&R and NJR will expire unused. As of September 30, 2014, the Company had state income tax net operating losses of approximately $153.2 million, a deferred state tax asset of approximately $9 million and a valuation allowance of $212,000.

In addition, as of September 30, 2014, the Company had an ITC carryforward of approximately $7.5 million, all of which was generated in fiscal year 2014, and has a life of 20 years. The Company expects to utilize this entire carryforward, which will begin to expire in fiscal 2034.

12.
COMMITMENTS AND CONTINGENT LIABILITIES

Cash Commitments

NJNG has entered into long-term contracts, expiring at various dates through October 2032, for the supply, storage and transportation of natural gas. These contracts include current annual fixed charges of approximately $62.3 million at current contract rates and volumes, which are recoverable through BGSS.

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


21

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Commitments as of December 31, 2014, for natural gas purchases and future demand fees for the next five fiscal year periods are as follows:
(Thousands)
2015
2016
2017
2018
2019
Thereafter
NJRES:
 
 
 
 
 
 
Natural gas purchases
$
272,131

$
106,975

$
5,673

$

$

$

Storage demand fees
21,019

15,503

4,274

2,520

1,782

2,598

Pipeline demand fees
61,654

50,559

23,246

15,079

7,212

7,838

Sub-total NJRES
$
354,804

$
173,037

$
33,193

$
17,599

$
8,994

$
10,436

NJNG:
 
 
 
 
 
 
Natural gas purchases
$
50,539

$
3,923

$
113

$

$

$

Storage demand fees
21,143

24,957

17,910

12,811

9,299

4,649

Pipeline demand fees
41,115

76,563

45,837

86,881

88,155

869,274

Sub-total NJNG
$
112,797

$
105,443

$
63,860

$
99,692

$
97,454

$
873,923

Total (1)
$
467,601

$
278,480

$
97,053

$
117,291

$
106,448

$
884,359

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

Legal Proceedings

Manufactured Gas Plant Remediation

NJNG is responsible for the remedial cleanup of five MGP sites, dating back to gas operations in the late 1800s and early 1900s that contain contaminated residues from former gas manufacturing operations. NJNG is currently involved in administrative proceedings with the 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 recover its remediation expenditures, including carrying costs, over rolling seven-year periods pursuant to a RA approved by the BPU. In July 2013, NJNG requested approval of its MGP expenditures incurred through June 2013, as well as a reduction in the RA factor to $18.7 million annually. The petition was provisionally approved by the BPU on November 22, 2013, with rates effective December 1, 2013, and was approved on a final basis in July 2014. In September 2014, NJNG requested approval of its MGP expenditures incurred through June 2014 to recover $8.5 million annually related to the SBC RA factor. As of December 31, 2014, $26.2 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in regulatory assets on the Unaudited Condensed Consolidated Balance Sheets.

NJNG periodically, and at least annually, performs an environmental review of the MGP sites, including a review of potential liability for investigation and remedial action. NJNG estimated at the time of the most recent review that total future expenditures to remediate and monitor the five MGP sites for which it is responsible, including potential liabilities for Natural Resource Damages that might be brought by the NJDEP for alleged injury to groundwater or other natural resources concerning these sites, will range from approximately $151.3 million to $249.8 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 December 31, 2014, NJNG recorded an MGP remediation liability and a corresponding regulatory asset of $177 million on the Unaudited Condensed Consolidated Balance Sheets, 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, 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. 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. 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.


22

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


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.

13.
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 consists of capital investments in distributed power projects; the Midstream segment consists of NJR's investments in natural gas transportation and storage facilities; the Home Services and Other operations consist of heating, cooling and water appliance sales, installations and services, commercial real estate development, other investments and general corporate activities.

Information related to the Company's various business segments and other operations is detailed below:
 
Three Months Ended
 
December 31,
(Thousands)
2014
2013
Operating revenues
 
 
Natural Gas Distribution
 
 
External customers
$
208,727

$
233,469

Energy Services
 
 
External customers (1)
600,562

633,691

Intercompany
3,126

4,018

Clean Energy Ventures