Document


 

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, 2017
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM             TO             
 
Commission file number 001‑08359
 
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
New Jersey
 
22‑2376465
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1415 Wyckoff Road, Wall, New Jersey 07719
 
732‑938‑1480
(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, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer:  x
 
Accelerated filer:  o
Non-accelerated filer: o
(Do not check if a smaller reporting company)
 
 
Smaller reporting company: o
 
 
Emerging growth company: o

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

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

The number of shares outstanding of $2.50 par value Common Stock as of February 6, 2018 was 87,594,863.

 


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

GLOSSARY OF KEY TERMS                                                                                                                                                        
Adelphia
Adelphia Gateway, LLC
AFUDC
Allowance for Funds Used During Construction
AOCI
Accumulated Other Comprehensive Income
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bcf
Billion Cubic Feet
BGSS
Basic Gas Supply Service
BPU
New Jersey Board of Public Utilities
CIP
Conservation Incentive Program
CME
Chicago Mercantile Exchange
CR&R
Commercial Realty & Resources Corp.
DM
Dominion Midstream Partners, L.P., a master limited partnership
DM Common Units
Common units representing limited partnership interests in DM
DRP
NJR Direct Stock Purchase and Dividend Reinvestment Plan
Dths
Dekatherms
EE
Energy Efficiency
FASB
Financial Accounting Standards Board
FCM
Futures Commission Merchant
FERC
Federal Energy Regulatory Commission
Financial margin
A non-GAAP financial measure, which represents revenues earned from the sale of natural gas less costs of natural gas sold including any transportation and storage costs, and excludes any accounting impact from the change in the fair value of certain derivative instruments
FMB
First Mortgage Bond
GAAP
Generally Accepted Accounting Principles of the United States
Home Services and Other
Home Services and Other Operations
ICE
Intercontinental Exchange
IEC
Interstate Energy Company, LLC
ISDA
The International Swaps and Derivatives Association
ITC
Federal Investment Tax Credit
MGP
Manufactured Gas Plant
Moody's
Moody's Investors Service, Inc.
Mortgage Indenture
The Amended and Restated Indenture of Mortgage, Deed of Trust and Security Agreement between NJNG and U.S. Bank National Association dated as of September 1, 2014
MW
Megawatts
MWh
Megawatt Hour
NAESB
The North American Energy Standards Board
NFE
Net Financial Earnings
NJ RISE
New Jersey Reinvestment in System Enhancement
NJCEP
New Jersey's Clean Energy Program
NJDEP
New Jersey Department of Environmental Protection
NJNG
New Jersey Natural Gas Company
NJNG Credit Facility
NJNG's $250 million unsecured committed credit facility expiring in May 2019
NJR Credit Facility
NJR's $425 million unsecured committed credit facility expiring in September 2020
NJR or The Company
New Jersey Resources Corporation
NJRHS
NJR Home Services Company
Non-GAAP
Not in accordance with Generally Accepted Accounting Principles of the United States

1

New Jersey Resources Corporation

GLOSSARY OF KEY TERMS (cont.)                                                                                                                                           
 
 
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
PPA
Power Purchase Agreement
PTC
Federal Production Tax Credit
RAC
Remediation Adjustment Clause
REC
Renewable Energy Certificate
S&P
Standard & Poor's Financial Services, LLC
SAFE
Safety Acceleration and Facility Enhancement
SAVEGREEN
The SAVEGREEN Project®
SBC
Societal Benefits Charge
SEC
U.S. Securities and Exchange Commission
SREC
Solar Renewable Energy Certificate
SRL
Southern Reliability Link
Steckman Ridge
Collectively, Steckman Ridge GP, LLC and Steckman Ridge, LP
Talen
Talen Energy Marketing, LLC
Tetco
Texas Eastern Transmission
The Exchange Act
The Securities Exchange Act of 1934, as amended
The Tax Act
An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as The Tax Cuts and Jobs Act of 2017
Trustee
U.S. Bank National Association
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, assumptions and beliefs presented in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures About Market Risk,” Part II, Item I. “Legal Proceedings” and in the notes to the financial statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements can also be identified by the use of forward-looking terminology such as “anticipate,” “estimate,” “may,” “could,” “might,” “intend,” “expect,” “believe,” “will” “plan,” or “should,” or comparable terminology and are made based upon management's current expectations, assumptions and beliefs as of this date concerning future developments and their potential effect on us. There can be no assurance that future developments will be in accordance with management's expectations, assumptions or beliefs, or that the effect of future developments on us will be those anticipated by management.

We caution readers that the expectations, assumptions and beliefs that form the basis for forward-looking statements regarding customer growth, customer usage, qualifications for ITCs, PTCs and SRECs, future rate case proceedings, financial condition, results of operations, cash flows, capital requirements, future capital expenditures, market risk, effective tax rate and other matters for fiscal 2018 and thereafter include many factors that are beyond our ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes in the debt and equity capital markets. The factors that could cause actual results to differ materially from our expectations, assumptions and beliefs include, but are not limited to, those discussed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, as well as the following:

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

While we periodically reassess material trends and uncertainties affecting our results of operations and financial condition in connection with the preparation of management's discussion and analysis of results of operations and financial condition contained in our Quarterly and Annual Reports on Form 10-Q and Form 10-K, respectively, we do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.

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)
2017

2016
OPERATING REVENUES
 
 
 
Utility
$
209,787

 
$
185,556

Nonutility
495,518

 
355,472

Total operating revenues
705,305

 
541,028

OPERATING EXPENSES
 
 
 
Gas purchases:
 
 
 
Utility
77,602

 
61,320

Nonutility
445,084

 
337,932

Related parties
2,149

 
2,111

Operation and maintenance
55,111

 
52,228

Regulatory rider expenses
11,769

 
12,601

Depreciation and amortization
21,854

 
19,260

Energy and other taxes
16,491

 
14,101

Total operating expenses
630,060

 
499,553

OPERATING INCOME
75,245

 
41,475

Other income, net
6,927

 
3,776

Interest expense, net of capitalized interest
11,905

 
10,615

INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
70,267

 
34,636

Income tax (benefit) provision
(50,168
)
 
2,018

Equity in earnings of affiliates
3,264

 
2,311

NET INCOME
$
123,699

 
$
34,929

 
 
 
 
EARNINGS PER COMMON SHARE
 
 
 
Basic
$1.42
 
$0.41
Diluted
$1.42
 
$0.40
DIVIDENDS DECLARED PER COMMON SHARE
$0.2725
 
$0.255
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
Basic
86,996

 
86,084

Diluted
87,347

 
86,855


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three Months Ended
 
 
December 31,
(Thousands)
 
2017
2016
Net income
 
$
123,699

$
34,929

Other comprehensive (loss) income, net of tax
 
 
 
Unrealized (loss) gain on available for sale securities, net of tax of $851 and $(3,786), respectively
 
(2,290
)
5,515

Reclassifications of (gains) to net income on available for sale securities, net of tax of $2,178 and $0, respectively
 
(3,154
)

Adjustment to postemployment benefit obligation, net of tax of $(136) and $(217), respectively
 
240

317

Other comprehensive (loss) income
 
(5,204
)
5,832

Comprehensive income
 
$
118,495

$
40,761


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)
2017
 
2016
CASH FLOWS USED IN OPERATING ACTIVITIES
 
 
 
Net income
$
123,699

 
$
34,929

Adjustments to reconcile net income to cash flows from operating activities
 
 
 
Unrealized loss on derivative instruments
34,855

 
28,302

Gain on sale of available for sale securities, net
(5,332
)
 
(2,581
)
Depreciation and amortization
21,854

 
19,260

Amortization of acquired wholesale energy contracts
3,391

 

Allowance for equity used during construction
(852
)
 
(584
)
Allowance for bad debt expense
471

 
230

Deferred income taxes
(44,114
)
 
16,262

Manufactured gas plant remediation costs
(5,147
)
 
(1,619
)
Distributions received from equity investees, net of equity in earnings
(257
)
 
1,101

Cost of removal - asset retirement obligations
(332
)
 
(198
)
Contributions to postemployment benefit plans
(1,467
)
 
(1,712
)
Tax benefit from stock-based compensation
2,831

 
1,188

Changes in:
 
 
 
Components of working capital
(189,528
)
 
(150,480
)
Other noncurrent assets
31,038

 
9,823

Other noncurrent liabilities
5,388

 
15

Cash flows used in operating activities
(23,502
)
 
(46,064
)
CASH FLOWS USED IN INVESTING ACTIVITIES
 
 
 
Expenditures for:
 
 
 
Utility plant
(34,638
)
 
(31,396
)
Solar and wind equipment
(18,387
)
 
(46,785
)
Real estate properties and other
(1,313
)
 
(171
)
Cost of removal
(12,752
)
 
(7,459
)
Investments in equity investees
(7,202
)
 
(4,636
)
Distribution from equity investees in excess of equity in earnings
793

 
688

Cash paid related to acquisition
(10,000
)
 

Withdrawal from restricted cash construction fund
(43
)
 

Proceeds from sale of available for sale securities
6,616

 
3,218

Cash flows used in investing activities
(76,926
)
 
(86,541
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Payments of long-term debt
(1,690
)
 
(2,716
)
Net proceeds from short-term debt
107,200

 
162,900

Proceeds from sale-leaseback transaction
7,820

 
9,587

Payments of common stock dividends
(23,607
)
 
(21,931
)
Proceeds from waiver discount issuance of common stock
22,690

 

Proceeds from issuance of common stock
3,846

 
4,616

Purchases of treasury stock

 
(6,355
)
Tax withholding payments related to net settled stock compensation
(13,319
)
 
(4,167
)
Cash flows from financing activities
102,940

 
141,934

Change in cash and cash equivalents
2,512

 
9,329

Cash and cash equivalents at beginning of period
2,226

 
37,546

Cash and cash equivalents at end of period
$
4,738

 
$
46,875

CHANGES IN COMPONENTS OF WORKING CAPITAL
 
 
 
Receivables
$
(192,253
)
 
$
(152,180
)
Inventories
(2,561
)
 
(13,954
)
Recovery of gas costs
17,102

 
(2,472
)
Gas purchases payable
43,284

 
47,772

Prepaid and accrued taxes
(12,418
)
 
7,954

Accounts payable and other
(25,527
)
 
(12,405
)
Restricted broker margin accounts
(21,694
)
 
(26,173
)
Customers' credit balances and deposits
6,093

 
616

Other current assets
(1,554
)
 
362

Total
$
(189,528
)
 
$
(150,480
)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
 
 
 
Cash paid (received) for:
 
 
 
Interest (net of amounts capitalized)
$
9,758

 
$
8,153

Income taxes
$
(191
)
 
$
(7,020
)
Accrued capital expenditures
$
26,034

 
$
28,442

 
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,
2017
September 30,
2017
PROPERTY, PLANT AND EQUIPMENT
 
 
Utility plant, at cost
$
2,273,071

$
2,241,324

Construction work in progress
121,679

119,318

Solar and wind equipment, real estate properties and other, at cost
848,900

843,142

Construction work in progress
28,566

7,286

Total property, plant and equipment
3,272,216

3,211,070

Accumulated depreciation and amortization, utility plant
(501,663
)
(489,122
)
Accumulated depreciation and amortization, solar and wind equipment, real estate properties and other
(121,260
)
(112,207
)
Property, plant and equipment, net
2,649,293

2,609,741

CURRENT ASSETS
 
 
Cash and cash equivalents
4,738

2,226

Customer accounts receivable
 
 
Billed
325,406

196,467

Unbilled revenues
70,138

7,202

Allowance for doubtful accounts
(5,274
)
(5,181
)
Regulatory assets
41,574

50,791

Gas in storage, at average cost
203,447

202,063

Materials and supplies, at average cost
13,121

11,944

Prepaid and accrued taxes
39,581

24,764

Derivatives, at fair value
46,299

30,081

Restricted broker margin accounts
52,850

25,827

Other
34,199

33,260

Total current assets
826,079

579,444

NONCURRENT ASSETS
 
 
Investments in equity method investees
179,429

172,585

Regulatory assets
362,150

375,919

Derivatives, at fair value
5,537

9,164

Available for sale securities
55,995

65,752

Intangible assets
37,693

41,084

Other noncurrent assets
70,752

74,818

Total noncurrent assets
711,556

739,322

Total assets
$
4,186,928

$
3,928,507


See Notes to Unaudited Condensed Consolidated Financial Statements

6

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

CAPITALIZATION AND LIABILITIES
(Thousands, except share data)
December 31,
2017
September 30,
2017
CAPITALIZATION
 
 
Common stock, $2.50 par value; authorized 150,000,000 shares;
outstanding December 31, 2017 — 87,475,456; September 30, 2017 — 86,555,507
$
225,095

$
222,258

Premium on common stock
255,142

219,696

Accumulated other comprehensive loss, net of tax
(8,460
)
(3,256
)
Treasury stock at cost and other;
shares December 31, 2017
 2,507,313; September 30, 2017  2,347,380
(91,859
)
(70,039
)
Retained earnings
967,852

867,984

Common stock equity
1,347,770

1,236,643

Long-term debt
1,001,183

997,080

Total capitalization
2,348,953

2,233,723

CURRENT LIABILITIES
 
 
Current maturities of long-term debt
166,167

165,375

Short-term debt
373,200

266,000

Gas purchases payable
203,401

160,115

Gas purchases payable to related parties
1,150

1,152

Accounts payable and other
75,924

96,878

Dividends payable
23,831

23,586

Accrued taxes
4,430

2,031

Regulatory liabilities
434

78

New Jersey clean energy program
12,626

14,202

Derivatives, at fair value
96,788

46,544

Customers' credit balances and deposits
33,050

26,957

Total current liabilities
991,001

802,918

NONCURRENT LIABILITIES
 
 
Deferred income taxes
238,367

514,708

Deferred investment tax credits
4,216

4,297

Deferred gain
27,531

27,728

Derivatives, at fair value
25,759

11,330

Manufactured gas plant remediation
144,046

149,000

Postemployment employee benefit liability
128,574

128,888

Regulatory liabilities
237,838

14,507

Asset retirement obligation
31,792

31,420

Other
8,851

9,988

Total noncurrent liabilities
846,974

891,866

Commitments and contingent liabilities (Note 12)



Total capitalization and liabilities
$
4,186,928

$
3,928,507


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 534,400 retail customers in central and northern New Jersey and is subject to rate regulation by the BPU. NJNG comprises the Natural Gas Distribution segment;

NJR Clean Energy Ventures Corporation, the Company's clean energy subsidiary, comprises the Clean Energy Ventures segment and consists of the Company's capital investments in commercial and residential solar projects located throughout New Jersey and onshore wind investments in Montana, Iowa, Kansas, Wyoming and Pennsylvania;

NJR Energy Services Company and NJR Retail Services Company comprise the Energy Services segment. Energy Services maintains and transacts around a portfolio of natural gas storage and transportation capacity contracts and provides physical wholesale energy and energy management services in the U.S. and Canada and provides retail natural gas supply and transportation services to commercial and industrial customers in Delaware, Maryland, Pennsylvania and New Jersey;

NJR Midstream Holdings Corporation, which comprises the Midstream segment, invests in energy-related ventures through its subsidiaries, NJR Steckman Ridge Storage Company, which holds the Company's 50 percent combined ownership interest in Steckman Ridge, located in Pennsylvania, NJR Pipeline Company, which holds the Company's 20 percent ownership interest in PennEast and NJNR Pipeline Company, which holds the Company's 1.84 million Common Units of Dominion Midstream Partners, L.P. See Note 6. Investments in Equity Investees for more information; and

NJR Retail Holdings Corporation has two principal subsidiaries, NJR Home Services Company, which provides heating, central air conditioning, standby generators, solar and other indoor and outdoor comfort products to residential homes throughout New Jersey, and Commercial Realty & Resources Corporation, which owns commercial real estate. NJR Home Services Company and Commercial Realty & Resources 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 SEC and GAAP. The September 30, 2017 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 2017 Annual Report on Form 10-K.

The Unaudited Condensed Consolidated Financial Statements include the accounts of NJR and its subsidiaries. In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments necessary for a fair presentation of the results of the interim periods presented. These adjustments are of a normal and recurring nature. Because of the seasonal nature of NJR's utility and wholesale energy services operations, in addition to other factors, the financial results for the interim periods presented are not indicative of the results that are to be expected for the fiscal year ending September 30, 2018. 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,
2017
September 30,
2017
($ in thousands)
Gas in Storage
 
Bcf
Gas in Storage
 
Bcf
Energy Services
 
$
144,456

51.9

 
$
122,884

53.9

Natural Gas Distribution
 
58,991

16.5

 
79,179

21.8

Total
 
$
203,447

68.4

 
$
202,063

75.7


Sales Tax Accounting

Sales tax that is collected from customers is presented in both operating revenues and operating expenses on the Unaudited Condensed Consolidated Statements of Operations totaled $13.3 million during the three months ended December 31, 2017, and $11.2 million during the three months ended December 31, 2016. Effective January 1, 2017, the New Jersey sales tax rate decreased from 7 percent to 6.875 percent. Effective January 1, 2018, the New Jersey sales tax rate decreased again to 6.625 percent.

8

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Available for Sale Securities

As of December 31, 2017, included in available for sale securities on the Unaudited Condensed Consolidated Balance Sheets is an investment in a publicly traded energy company. The Company's available for sale securities had a fair value of $56 million and $65.8 million as of December 31, 2017 and September 30, 2017, respectively. Total unrealized gains associated with this investment is included as a part of accumulated other comprehensive income, a component of common stock equity and was $9.9 million, $5.6 million after tax, and $12.8 million, $7.7 million after tax, as of December 31, 2017 and September 30, 2017, respectively.

During the three months ended December 31, 2017 and 2016, NJR received proceeds of approximately $6.6 million and $3.2 million, respectively, from the sale of available for sale securities and realized a pre-tax gain of $5.3 million and $2.6 million, respectively, which is included in other income, net on the Unaudited Condensed Consolidated Statements of Operations. Reclassifications of realized gains out of other comprehensive income into income are determined based on average cost.

Customer Accounts Receivable

Customer accounts receivable include outstanding billings from the following subsidiaries as of:
(Thousands)
December 31,
2017
 
September 30,
2017
Energy Services
$
246,203

76
%
 
$
150,322

77
%
Natural Gas Distribution (1)
72,067

22

 
37,432

19

Clean Energy Ventures
3,072

1

 
2,655

1

NJRHS and other
4,064

1

 
6,058

3

Total
$
325,406

100
%
 
$
196,467

100
%
(1)
Does not include unbilled revenues of $70.1 million and $7.2 million as of December 31, 2017 and September 30, 2017, respectively.

Loans Receivable

NJNG currently provides loans, with terms ranging from three 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 recorded $9.4 million and $8.9 million in other current assets and $40.7 million and $40.4 million in other noncurrent assets as of December 31, 2017 and September 30, 2017, respectively, on the Unaudited Condensed Consolidated Balance Sheets, related to the loans.

NJNG's policy is to establish an allowance for doubtful accounts when loan balances are in arrears for more than 60 days. As of December 31, 2017 and September 30, 2017, there was no allowance for doubtful accounts established for the SAVEGREEN loans.

Reclassification

Certain prior period activities for the three months ended December 31, 2016, were reclassified to conform to the current period presentation.

Recently Adopted Updates to the Accounting Standards Codification

Inventory

In July 2015, the FASB issued ASU No. 2015-11, an amendment to ASC 330, Inventory, which requires entities to measure most inventory “at the lower of cost or net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The Company adopted the new guidance in the first quarter of fiscal 2018 and applied the new provisions on a prospective basis, which did not impact its financial position, results of operations or cash flows upon adoption.

Other Recent Updates to the Accounting Standards Codification

Revenue

In May 2014, the FASB issued ASU No. 2014-09, and added Topic 606, Revenue from Contracts with Customers, to the ASC. ASC 606 supersedes ASC 605, Revenue Recognition, as well as most industry-specific guidance, and prescribes a single, comprehensive revenue recognition model designed to improve financial reporting comparability across entities, industries, jurisdictions and capital markets. In August 2015, the FASB issued ASU No. 2015-14, which defers the implementation of the

9

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


new guidance for one year. The new guidance will not be early adopted and will be effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year.

The Company has concluded that its tariff based sales of natural gas will be within the scope of the new guidance. However, it does not anticipate any modification to the pattern of revenue recognition from such sales. The Company has also evaluated its renewable asset PPA arrangements and does not anticipate any modification to the pattern of revenue recognition of the related electricity, capacity and REC sales. Revenues from RECs sold as part of a bundled arrangement will be recognized in the same period as the related generation, consistent with current practice.

Based on the review of customer contracts to date, the Company is not anticipating a material impact to its financial position, results of operations or cash flows upon adoption. The Company anticipates significant new disclosures as a result of the implementation of ASC 606 and currently expects to transition to the new guidance using the modified retrospective approach. The Company is also monitoring industry specific developments that may have an impact.

Financial Instruments

In January 2016, the FASB issued ASU No. 2016-01, an amendment to ASC 825, Financial Instruments, to address certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The standard affects investments in equity securities that do not result in consolidation and are not accounted for under the equity method and the presentation of certain fair value changes for financial liabilities measured at fair value. It also simplifies the impairment assessment of equity investments without a readily determinable fair value by requiring a qualitative assessment. The guidance is effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year. Upon adoption, the amendment will be applied on a modified retrospective basis. The Company evaluated the amendment and noted that, upon adoption, subsequent changes to the fair value of the Company’s available for sale securities will be recorded in the Consolidated Statement of Operations as opposed to other comprehensive income. The Company does not expect any other material impacts to its financial position, results of operations or cash flows upon adoption.

In June 2016, the FASB issued ASU No. 2016-13, an amendment to ASC 326, Financial Instruments - Credit Losses, which changes the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model requires recognition based upon an estimation of expected credit losses rather than recognition of losses when it is probable that they have been incurred. An entity will apply the amendment through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance is effective for the Company’s fiscal year ending September 30, 2021, and interim periods within that year, with early adoption permitted. The Company is currently evaluating the amendment to understand the impact on its financial position, results of operations and cash flows upon adoption and will apply the new guidance to its trade and loan receivables on a modified retrospective basis.

Leases

In February 2016, the FASB issued ASU No. 2016-02, an amendment to ASC 842, Leases, which provides for a comprehensive overhaul of the lease accounting model and changes the definition of a lease within the accounting literature. Under the new standard, all leases with a term greater than one year will be recorded on the balance sheet. Amortization of the related asset will be accounted for using one of two approaches prescribed by the guidance. Additional disclosures will be required to allow the user to assess the amount, timing and uncertainty of cash flows arising from leasing activities. A modified retrospective transition approach is required for leases existing at the time of adoption. The guidance is effective for the Company’s fiscal year ending September 30, 2020, and interim periods within that year, with early adoption permitted. The Company continues to evaluate the provisions of ASC 842 and is actively monitoring industry specific developments including the exposure draft issued by the FASB that would introduce a land easement practical expedient to ASC 842. At this time, the Company does not plan to early adopt the new guidance and expects to elect the practical expedient package in the new guidance during transition.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, an amendment to ASC 230, Statement of Cash Flows, which addresses eight specific cash flow issues for which there has been diversity in practice. The guidance is effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year with early adoption permitted. Upon adoption, the amendment will be applied on a retrospective basis. The Company does not expect any material impacts to its cash flows upon adoption.

In November 2016, the FASB issued ASU No. 2016-18, an amendment to ASC 230, Statement of Cash Flows, which requires that any amounts that are deemed to be restricted cash or restricted cash-equivalents be included in cash and cash-equivalent

10

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


balances on the cash flow statement and, therefore, transfers between cash and restricted cash accounts will no longer be recognized within the statement of cash flows. The guidance is effective for the Company’s fiscal year ending September 30, 2019, with early adoption permitted. Upon adoption, the amendment will be applied on a retrospective basis. Based on the Company's historical restricted cash balances, it does not expect any material impacts to its financial position, results of operations or cash flows upon adoption.

Business Combinations

In January 2017, the FASB issued ASU No. 2017-01, an amendment to ASC 805, Business Combinations, clarifying the definition of a business in the ASC, which is intended to reduce the complexity surrounding the assessment of a transaction as an asset acquisition or business combination. The amendment provides an initial fair value screen to reduce the number of transactions that would fit the definition of a business, and when the screen threshold is not met, provides an updated model that further clarifies the characteristics of a business. The guidance is effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year, with early adoption permitted. Upon adoption, the amendment will be applied on a prospective basis. The amendment could potentially have material impacts on future transactions that the Company may enter into by altering the Company’s conclusion on the accounting applied to acquisitions.

Gains and Losses from the Derecognition of Nonfinancial Assets

In February 2017, the FASB issued ASU No. 2017-05, an amendment to ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, which clarifies the scope and accounting related to the derecognition of nonfinancial assets, including partial sales and contributions of nonfinancial assets to a joint venture or other non-controlled investee. The guidance is effective concurrently with ASC 606, which is effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year with early adoption permitted. ASU No. 2017-05 may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The Company has determined that to the extent a deferred gain exists related to nonfinancial assets on the balance sheet upon adoption, it would be recognized under the new accounting guidance as a cumulative effect adjustment to the opening balance of retained earnings for the first quarter of fiscal 2019.

Compensation - Retirement Benefits

In March 2017, the FASB issued ASU No. 2017-07, an amendment to ASC 715, Compensation - Retirement Benefits, which changes the presentation of net periodic benefit cost on the income statement by requiring companies to present all components of net periodic benefit cost, other than service cost, outside a subtotal of income from operations. The amendment also states that only the service cost component of net periodic benefits costs is eligible for capitalization, when applicable. The guidance is effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year, with early adoption permitted. Upon adoption, the amendment will be applied on a retrospective basis for presentation and changes to capitalization of costs will be applied on a prospective basis. The Company is continuing to evaluate the amendment to fully understand the impact on its financial position, results of operations and cash flows upon adoption. The Company is also monitoring industry specific developments on the new guidance to determine the appropriate treatment of these changes in a rate regulated environment.

Stock Compensation

In May 2017, the FASB issued ASU No. 2017-09, an amendment to ASC 718, Compensation - Stock Compensation, which clarifies the accounting for changes to the terms or conditions of share-based payments. The guidance is effective for the Company’s fiscal year ending September 30, 2019, and interim periods within that year, with early adoption permitted. Upon adoption, the amendments will be applied prospectively to awards modified on or after the adoption date. The Company is currently evaluating the amendments to understand the impact on its financial position, results of operations and cash flows upon adoption.

Derivatives and Hedging

In August 2017, the FASB issued ASU No. 2017-12, an amendment to ASC 815, Derivatives and Hedging, which is intended to make targeted improvements to the accounting for hedging activities by better aligning an entity’s risk management activities and financial reporting for hedging relationships. These amendments modify the accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the amendments are intended to simplify the application of the hedge accounting guidance and provide relief to companies by easing certain hedge documentation requirements. The guidance is effective for the Company’s fiscal year ending September 30, 2020, and interim periods within that year, with early adoption permitted. Upon adoption, the

11

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


transition requirements and elections will be applied to hedging relationships existing on the date of adoption. The Company does not currently apply hedge accounting to any of its risk management activities and thus does not expect the amendments to have any impact on 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 capital investments based on the BPU's approval. The impact of the ratemaking process and decisions authorized by the BPU allows NJNG to capitalize or defer certain costs that are expected to be recovered from its customers as regulatory assets and to recognize certain obligations representing amounts that are probable future expenditures as regulatory liabilities in accordance with accounting guidance applicable to regulated operations.

NJNG's recovery of costs is facilitated through its base rates, BGSS and other regulatory tariff riders. NJNG is required to make annual filings to the BPU for review of its BGSS, CIP and various other programs and related rates. Annual rate changes are typically requested to be effective at the beginning of the following fiscal year. All rate and program changes are subject to proper notification and BPU review and approval. In addition, NJNG is also permitted to implement certain BGSS rate changes on an interim basis with proper notification to the BPU.

Regulatory assets and liabilities included on the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:
(Thousands)
December 31,
2017
September 30,
2017
Regulatory assets-current
 
 
New Jersey Clean Energy Program
$
12,626

$
14,202

Underrecovered gas costs
490

9,910

Derivatives at fair value, net
18,471

9,010

Conservation Incentive Program
9,987

17,669

Total current regulatory assets
$
41,574

$
50,791

Regulatory assets-noncurrent
 
 
Environmental remediation costs
 
 
Expended, net of recoveries
$
31,236

$
28,547

Liability for future expenditures
144,046

149,000

Deferred income taxes
16,356

21,795

SAVEGREEN
13,419

16,302

Postemployment and other benefit costs
138,681

141,433

Deferred Post-Tropical Cyclone Sandy costs
12,487

13,030

Other noncurrent regulatory assets
5,925

5,812

Total noncurrent regulatory assets
$
362,150

$
375,919

Regulatory liability-current
 
 
Derivatives at fair value, net
$
434

$
78

Total current regulatory liabilities
$
434

$
78

Regulatory liabilities-noncurrent
 
 
Deferred income taxes (1)
$
229,315

$

Cost of removal obligation

7,902

Derivatives at fair value, net

146

New Jersey Clean Energy Program
7,527

5,795

Other noncurrent regulatory liabilities
996

664

Total noncurrent regulatory liabilities
$
237,838

$
14,507

(1)
Includes an adjustment related to the re-measurement of NJNG's net deferred tax liabilities to reflect the change in federal tax rates enacted in the Tax Act. For a more detailed discussion of the Tax Act, see Note 11. Income Taxes.


12

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


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

On October 20, 2017, the BPU approved NJNG's filing to decrease its EE recovery rate, which will result in an annual decrease of $3.9 million, effective November 1, 2017.

On November 17, 2017, NJNG filed its annual SBC application requesting to recover remediation expenses incurred through June 30, 2017, a reduction in the RAC, which will result in an annual decrease of $2.4 million and to increase the NJCEP factor, which will result in an annual increase of $1.8 million, effective April 1, 2018.

On December 22, 2017, the Tax Act was signed into law, which resulted in a reduction in the federal corporate tax rate. As a result, NJNG recorded a regulatory liability of $228 million, which includes $164.3 million for the revaluation of its deferred income taxes and $63.7 million for the accounting of the income tax effects on the revaluation. The revaluation is based on certain assumptions and estimations NJNG made with respect to its deferred taxes, as well as the effects from the Tax Act, and as such are subject to change if and when assumptions are updated. See Note 11. Income Taxes for a more detailed discussion on the Tax Act. On January 31, 2018, the BPU issued an Order directing the New Jersey utilities to submit filings by March 2, 2018, proposing the prospective change in rates as a result of the Tax Act to be effective April 1, 2018, the method to return to customers the rate difference from January 1, 2018, through March 31, 2018, and an outline of the method by which the excess deferred taxes would be returned to customers. The excess deferred taxes are primarily related to timing differences associated with utility plant depreciation and are subject to IRS normalization rules, which require amortization over the remaining life of the utility plant. The return to customers of the plant-related excess deferred taxes, as well as any non-plant related excess deferred taxes will be addressed in NJNG’s filing to the BPU.

4. DERIVATIVE INSTRUMENTS

The Company is subject to commodity price risk due to fluctuations in the market price of natural gas, SRECs and electricity. To manage this risk, the Company enters into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial options and swaps to economically hedge the commodity price risk associated with its existing and anticipated commitments to purchase and sell natural gas, SRECs and electricity. In addition, the Company may utilize foreign currency derivatives to hedge Canadian dollar denominated gas purchases and/or sales. Therefore, the Company's primary underlying risks include commodity prices, interest rates and foreign currency. These contracts are accounted for as derivatives. Accordingly, all of the financial and certain of the Company's physical derivative instruments are recorded at fair value on the Unaudited Condensed Consolidated Balance Sheets. For a more detailed discussion of the Company's fair value measurement policies and level disclosures associated with NJR's derivative instruments, see Note 5. Fair Value.

Energy Services

Energy Services chooses not to designate its financial commodity and physical forward commodity derivatives as accounting hedges or to elect NPNS. The changes in the fair value of these derivatives are recorded as a component of gas purchases or operating revenues, as appropriate for Energy Services, on the Unaudited Condensed Consolidated Statements of Operations as unrealized gains or losses. For Energy Services 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.

Energy Services also enters into natural gas transactions in Canada and, consequently, is exposed to fluctuations in the value of Canadian currency relative to the U.S. dollar. Energy Services may utilize foreign currency derivatives to lock in the exchange rate associated with natural gas transactions denominated in Canadian currency. The derivatives may include currency forwards, futures, or swaps and are accounted for as derivatives. These derivatives are typically used to hedge demand fee payments on pipeline capacity, storage and gas purchase agreements.

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


13

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Expected production of SRECs is hedged through the use of forward and futures contracts. All contracts require the Company to physically deliver SRECs through the transfer of certificates as per contractual settlement schedules. The Company applies NPNS accounting to SREC forward and futures contracts entered into on or before December 31, 2015. Effective for contracts executed on or after January 1, 2016, Energy Services no longer elects NPNS accounting treatment on all SREC forward sales contracts and recognizes changes in the fair value of these derivatives as a component of operating revenues. Upon settlement of the contract, the related revenue is recognized when the SREC is transferred to the counterparty.

NPNS is a contract-by-contract election and, where it makes sense to do so, we can and may elect normal accounting for certain contracts.

Natural Gas Distribution

Changes in fair value of NJNG's financial commodity derivatives are recorded as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets. The Company elects NPNS accounting treatment on all physical commodity contracts that NJNG entered into on or before December 31, 2015, and accounts for these contracts on an accrual basis. Accordingly, physical natural gas purchases are recognized in regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets when the contract settles and the natural gas is delivered. The average cost of natural gas is charged to expense in the current period earnings based on the BGSS factor times the therm sales. Effective for contracts executed on or after January 1, 2016, NJNG no longer elects NPNS accounting treatment on all physical forward commodity contracts. However, since NPNS is a contract-by-contract election, where it makes sense to do so, we can and may elect certain contracts to be normal. Because NJNG recovers these amounts through future BGSS rates as increases or decreases to the cost of natural gas in NJNG’s tariff for gas service, the changes in fair value of these contracts are deferred as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets.

In June 2015, NJNG entered into a BPU-approved treasury lock transaction to fix a benchmark treasury rate of 3.26 percent associated with a forecasted $125 million debt issuance expected in May 2018. This forecasted debt issuance coincides with the maturity of NJNG's existing $125 million, 5.6 percent notes due May 15, 2018. The change in fair value of NJNG's treasury lock agreement is recorded as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets since NJNG believes that the market value upon settlement will be recovered in future rates. Upon settlement, any gain or loss will be amortized into earnings over the life of the future underlying debt issuance.

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, 2017
 
September 30, 2017
(Thousands)
Balance Sheet Location
Asset
Derivatives
Liability
Derivatives
Asset
Derivatives
Liability
Derivatives
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Natural Gas Distribution:
 
 
 
 
 
 
 
 
 
Physical commodity contracts
Derivatives - current
 
$
487

 
$
53

 
$
151

 
$
72

Financial commodity contracts
Derivatives - current
 

 
3,478

 

 
1,149

Interest rate contracts
Derivatives - current
 

 
12,534

 

 
8,467

Energy Services:
 
 
 
 
 
 
 
 
 
Physical commodity contracts
Derivatives - current
 
13,247

 
24,531

 
14,588

 
16,589

 
Derivatives - noncurrent
 
2,801

 
14,256

 
7,127

 
8,710

Financial commodity contracts
Derivatives - current
 
32,559

 
56,188

 
15,302

 
20,267

 
Derivatives - noncurrent
 
2,706

 
11,477

 
2,033

 
2,620

Foreign currency contracts
Derivatives - current
 
6

 
4

 
40

 

 
Derivatives - noncurrent
 
30

 
26

 
4

 

Total fair value of derivatives
 
 
$
51,836

 
$
122,547

 
$
39,245

 
$
57,874



14

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Offsetting of Derivatives

The Company transacts under master netting arrangements or equivalent agreements that allow it to offset derivative assets and liabilities with the same counterparty. However, the Company’s policy is to present its derivative assets and liabilities on a gross basis at the contract level unit of account on the Unaudited Condensed Consolidated Balance Sheets.

The following table summarizes the reported gross amounts, the amounts that the Company has the right to offset but elects not to, financial collateral, as well as the net amounts the Company could present on the Unaudited Condensed Consolidated Balance Sheets but elects not to.
(Thousands)
Amounts Presented on Balance Sheets (1)
Offsetting Derivative Instruments (2)
Financial Collateral Received/Pledged (3)
Net Amounts (4)
As of December 31, 2017:
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Energy Services
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
16,048

 
$
(3,137
)
 
$
(200
)
 
$
12,711

Financial commodity contracts
 
35,265

 
(29,434
)
 
(5,327
)
 
504

Foreign currency contracts
 
36

 
(30
)
 

 
6

Total Energy Services
 
$
51,349

 
$
(32,601
)
 
$
(5,527
)
 
$
13,221

Natural Gas Distribution
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
487

 
$
(25
)
 
$

 
$
462

Total Natural Gas Distribution
 
$
487

 
$
(25
)
 
$

 
$
462

Derivative liabilities:
 
 
 
 
 
 
 
 
Energy Services
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
38,787

 
$
(3,137
)
 
$

 
$
35,650

Financial commodity contracts
 
67,665

 
(29,434
)
 
(38,231
)
 

Foreign currency contracts
 
30

 
(30
)
 

 

Total Energy Services
 
$
106,482

 
$
(32,601
)
 
$
(38,231
)
 
$
35,650

Natural Gas Distribution
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
53

 
$
(25
)
 
$

 
$
28

Financial commodity contracts
 
3,478

 

 
(3,478
)
 

Interest rate contracts
 
12,534

 

 

 
12,534

Total Natural Gas Distribution
 
$
16,065

 
$
(25
)
 
$
(3,478
)
 
$
12,562

As of September 30, 2017:
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Energy Services
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
21,715

 
$
(2,173
)
 
$
(200
)
 
$
19,342

Financial commodity contracts
 
17,335

 
(14,121
)
 

 
3,214

Foreign currency contracts
 
44

 

 

 
44

Total Energy Services
 
$
39,094

 
$
(16,294
)
 
$
(200
)
 
$
22,600

Natural Gas Distribution
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
151

 
$
(20
)
 
$

 
$
131

Total Natural Gas Distribution
 
$
151

 
$
(20
)
 
$

 
$
131

Derivative liabilities:
 
 
 
 
 
 
 
 
Energy Services
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
25,299

 
$
(2,173
)
 
$

 
$
23,126

Financial commodity contracts
 
22,887

 
(14,121
)
 
(8,766
)
 

Total Energy Services
 
$
48,186

 
$
(16,294
)
 
$
(8,766
)
 
$
23,126

Natural Gas Distribution
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
72

 
$
(20
)
 
$

 
$
52

Financial commodity contracts
 
1,149

 

 
(1,149
)
 

Interest rate contracts
 
8,467

 

 

 
8,467

Total Natural Gas Distribution
 
$
9,688

 
$
(20
)
 
$
(1,149
)
 
$
8,519

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


15

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


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

The following table reflects the effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations as of:
(Thousands)
Location of gain (loss) recognized in income on derivatives
Amount of gain (loss) recognized
in income on derivatives
 
 
Three Months Ended
 
 
December 31,
Derivatives not designated as hedging instruments:
2017
 
2016
Energy Services:
 
 
 
 
Physical commodity contracts
Operating revenues
$
1,210

 
$
1,743

Physical commodity contracts
Gas purchases
(22,697
)
 
(8,799
)
Financial commodity contracts
Gas purchases
(25,997
)
 
(30,611
)
Foreign currency contracts
Gas purchases
(48
)
 
(86
)
Total unrealized and realized gains (losses)
$
(47,532
)
 
$
(37,753
)

NJNG’s derivative contracts are part of the Company's risk management activities that relate to its natural gas purchases, BGSS incentive programs and debt financing. These transactions are entered into pursuant to regulatory approval. At settlement, the resulting gains and/or losses are payable to or recoverable from utility customers and are deferred in regulatory assets or liabilities resulting in no impact to earnings. The following table reflects the (losses) gains associated with NJNG's derivative instruments as of:
 
Three Months Ended
 
December 31,
(Thousands)
2017
 
2016
Natural Gas Distribution:
 
 
 
Physical commodity contracts
$
(2,976
)
 
$
1,050

Financial commodity contracts
(8,808
)
 
11,178

Interest rate contracts
(4,067
)
 
20,371

Total unrealized and realized (losses) gains
$
(15,851
)
 
$
32,599


NJNG and Energy Services had the following outstanding long (short) derivatives as of:
 
 
 
Volume (Bcf)
 
 
 
December 31,
2017
 
September 30,
2017
Natural Gas Distribution
Futures
 
20.4

 
18.2

 
Physical
 
26.8

 
32.1

Energy Services
Futures
 
(33.4
)
 
(16.4
)
 
Physical
 
(4.6
)
 
(13.1
)

Not included in the previous table are Energy Services' gross notional amount of foreign currency transactions of approximately $9.7 million, NJNG’s treasury lock agreement as previously discussed and 403,000 SRECs at Energy Services that are open as of December 31, 2017.


16

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Broker Margin

Futures exchanges have contract specific margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily marked-to-market relative to maintenance margin requirements. The Company maintains separate broker margin accounts for the Natural Gas Distribution and Energy Services segments. The balances are as follows:
(Thousands)
Balance Sheet Location
December 31,
2017
September 30,
2017
Natural Gas Distribution
Broker margin - Current assets
$
4,632

$
2,661

Energy Services
Broker margin - Current assets
$
48,218

$
23,166


Wholesale Credit Risk

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

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

Internally-rated exposure applies to counterparties that are not rated by S&P or Moody's. In these cases, the counterparty's or guarantor's financial statements are reviewed, and similar methodologies and ratios used by S&P and/or Moody's are applied to arrive at a substitute rating. Gross credit exposure is defined as the unrealized fair value of physical and financial derivative commodity contracts, plus any outstanding wholesale receivable for the value of natural gas delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received.

The following is a summary of gross credit exposures grouped by investment and noninvestment grade counterparties, as of December 31, 2017. The amounts presented below have not been reduced by any collateral received or netting and exclude accounts receivable for NJNG retail natural gas sales and services and Clean Energy Ventures residential solar installations.
(Thousands)
Gross Credit Exposure
Investment grade
 
$
182,514

 
Noninvestment grade
 
25,079

 
Internally rated investment grade
 
25,435

 
Internally rated noninvestment grade
 
61,714

 
Total
 
$
294,742

 

Conversely, certain of NJNG's and Energy Services' 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

17

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


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, 2017 and September 30, 2017, was $14 million and $8.7 million, respectively, for which the Company had not posted collateral. If all thresholds related to the credit-risk-related contingent features underlying these agreements had been invoked on December 31, 2017 and September 30, 2017, the Company would have been required to post an additional $13.1 million and $8.6 million, respectively, to its counterparties. These amounts differ from the respective net derivative liabilities reflected on the Unaudited Condensed Consolidated Balance Sheets because the agreements also include clauses, commonly known as “Rights of Offset,” that would permit the Company to offset its derivative assets against its derivative liabilities for determining additional collateral to be posted, as previously discussed.

5. FAIR VALUE

Fair Value of Assets and Liabilities

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

The estimated fair value of long-term debt at NJNG and NJR, including current maturities, excluding capital leases, debt issuance costs and solar asset financing obligations, is as follows:
(Thousands)
December 31,
2017
September 30,
2017
Carrying value (1) (2) (3)
$
1,097,045

$
1,097,045

Fair market value
$
1,111,265

$
1,107,676

(1)
Excludes capital leases of $45 million and $39.7 million as of December 31, 2017 and September 30, 2017, respectively.
(2)
Excludes NJNG's debt issuance costs of $6.2 million and $6.3 million as of December 31, 2017 and September 30, 2017, respectively.
(3)
Excludes NJR's debt issuance costs of $804,000 and $770,000 as of December 31, 2017 and September 30, 2017, 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, 2017, NJR discloses its debt within Level 2 of the fair value hierarchy.

Fair Value Hierarchy

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

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

Level 2
Other significant observable inputs such as interest rates or price data, including both commodity and basis pricing that is observed either directly or indirectly from publications or pricing services. NJR's Level 2 assets and liabilities include over-the-counter physical forward commodity contracts and swap contracts, SREC forward sales or derivatives that are initially valued using observable quotes and are subsequently adjusted to include time value, credit risk or estimated transport pricing components for which no basis price is available. Level 2 financial derivatives consist of transactions with non-FCM counterparties (basis swaps, fixed swaps and/or options). NJNG's treasury lock is also considered Level 2 as valuation is based on quoted market interest and swap rates as inputs to the valuation model. Inputs are verifiable and do not require significant management judgment. For some physical commodity contracts the Company utilizes transportation tariff rates that are publicly available and that it considers to be observable inputs that are equivalent to market data received from an independent source. There are no significant judgments or adjustments applied to the transportation tariff inputs and no market perspective is required. Even if the transportation tariff input were considered to be a “model,” it would still be considered to be a Level 2 input as the data is:

widely accepted and public;

18

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


non-proprietary and sourced from an independent third party; and

observable and published.

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

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

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, 2017:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$

 
 
$
16,535

 
 
$

 
$
16,535

Financial commodity contracts
 
35,265

 
 

 
 

 
35,265

Financial commodity contracts - foreign exchange
 

 
 
36

 
 

 
36

Available for sale equity securities - energy industry
 
55,995

 
 

 
 

 
55,995

Other (1)
 
1,106

 
 

 
 

 
1,106

Total assets at fair value
 
$
92,366

 
 
$
16,571

 
 
$

 
$
108,937

Liabilities:
 
 
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$

 
 
$
38,840

 
 
$

 
$
38,840

Financial commodity contracts
 
71,143

 
 

 
 

 
71,143

Financial commodity contracts - foreign exchange
 

 
 
30

 
 

 
30

Interest rate contracts
 

 
 
12,534

 
 

 
12,534

Total liabilities at fair value
 
$
71,143

 
 
$
51,404

 
 
$

 
$
122,547

As of September 30, 2017:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$

 
 
$
21,866

 
 
$

 
$
21,866

Financial commodity contracts
 
17,335

 
 

 
 


 
17,335

Financial commodity contracts - foreign exchange
 

 
 
44

 
 

 
44

Available for sale equity securities - energy industry
 
65,752

 
 

 
 

 
65,752

Other (1)
 
1,202

 
 

 
 

 
1,202

Total assets at fair value
 
$
84,289

 
 
$
21,910

 
 
$

 
$
106,199

Liabilities:
 
 
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$

 
 
$
25,371

 
 
$

 
$
25,371

Financial commodity contracts
 
24,036

 
 

 
 

 
24,036

Interest rate contracts
 

 
 
8,467

 
 

 
8,467

Total liabilities at fair value
 
$
24,036

 
 
$
33,838

 
 
$

 
$
57,874

(1)
Includes money market funds of $4,000 and $112,000 as of December 31, 2017 and September 30, 2017, respectively.

6. INVESTMENTS IN EQUITY INVESTEES

NJR's investments in equity method investees include the following as of:
(Thousands)
December 31,
2017
September 30,
2017
Steckman Ridge (1)
$
119,433

$
120,262

PennEast
59,996

52,323

Total
$
179,429

$
172,585

(1)
Includes loans with a total outstanding principal balance of $70.4 million for both December 31, 2017 and September 30, 2017. The loans accrue interest at a variable rate that resets quarterly and are due October 1, 2023.

The Company, through its subsidiary NJR Pipeline Company, is an investor in PennEast, which is expected to construct and operate a 120-mile pipeline that will extend from northeast Pennsylvania to western New Jersey and is estimated to be completed and operational in 2019.

19

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


NJNG and Energy Services have entered into storage and park and loan agreements with Steckman Ridge. In addition, NJNG has entered into a precedent capacity agreement with PennEast. See Note 14. Related Party Transactions for more information on these intercompany transactions.

7. EARNINGS PER SHARE

The following table presents the calculation of the Company's basic and diluted earnings per share for:
 
Three Months Ended
 
December 31,
(Thousands, except per share amounts)
2017
2016
Net income, as reported
$
123,699

$
34,929

Basic earnings per share
 
 
Weighted average shares of common stock outstanding-basic
86,996

86,084

Basic earnings per common share
$1.42
$0.41
Diluted earnings per share
 
 
Weighted average shares of common stock outstanding-basic
86,996

86,084

Incremental shares (1)
351

771

Weighted average shares of common stock outstanding-diluted
87,347

86,855

Diluted earnings per common share (2)
$1.42
$0.40
(1)
Incremental shares consist primarily of unvested stock awards and performance shares.
(2)
There were no anti-dilutive shares excluded from the calculation of diluted earnings per share for the three months ended December 31, 2017 and 2016.

8. COMMON STOCK EQUITY

Changes in common stock equity during the three months ended December 31, 2017, were as follows:
(Thousands)
Number of Shares
Common Stock
Premium on Common Stock
Accumulated Other Comprehensive (Loss) Income
Treasury Stock And Other
Retained Earnings
Total
Balance at September 30, 2017
86,556

$
222,258

$
219,696

 
$
(3,256
)
 
$
(70,039
)
$
867,984

$
1,236,643

Net income



 

 

123,699

123,699

Other comprehensive income



 
(5,204
)
 


(5,204
)
Common stock issued:
 
 
 
 
 
 
 
 
 
Incentive plan
525

1,453

13,951

 

 



15,404

Dividend reinvestment plan (1)
90


245

 

 
3,554


3,799

Waiver discount
554

1,384

21,306

 

 


22,690

Cash dividend declared ($.2725 per share)



 

 

(23,831
)
(23,831
)
Treasury stock and other
(250
)

(56
)
 

 
(25,374
)

(25,430
)
Balance at December 31, 2017
87,475

$
225,095

$
255,142

 
$
(8,460
)
 
$
(91,859
)
$
967,852

$
1,347,770

(1)
Shares sold through the DRP are issued from treasury stock at average cost, which may differ from the actual market price paid.

NJR satisfies its external common equity requirements, if any, through issuances of its common stock, including the proceeds from stock issuances under its DRP. The DRP allows NJR, at its option, to use treasury shares or newly issued shares to raise capital. NJR raised $3.8 million and $4.6 million of equity through the DRP, by issuing approximately 90,000 and 139,000 shares of treasury stock, during the three months ended December 31, 2017 and 2016, respectively. During the three months ended December 31, 2017, NJR raised approximately $22.7 million of equity by issuing approximately 554,000 new shares through the waiver discount feature of the DRP. NJR issued no new shares during the three months ended December 31, 2016.


20

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in the components of accumulated other comprehensive income (loss), net of related tax effects during the three months ended December 31, 2017 and 2016:
(Thousands)
Available for Sale Securities
Postemployment Benefit Obligation
Total
Balance at September 30, 2017
$
11,044

 
$
(14,300
)
 
$
(3,256
)
Other comprehensive (loss) income, net of tax
 
 
 
 
 
Other comprehensive (loss), before reclassifications, net of tax of $851, $0, $851
(2,290
)
 

 
(2,290
)
Amounts reclassified from accumulated other comprehensive (loss) income, net of tax of $2,178, $(136), $2,042
(3,154
)
 
240

(1) 
(2,914
)
Net current-period other comprehensive (loss) income, net of tax of $3,029, $(136), $2,893
(5,444
)
 
240

 
(5,204
)
Balance at December 31, 2017
$
5,600

 
$
(14,060
)
 
$
(8,460
)
 
 
 
 
 
 
Balance as of September 30, 2016
$
4,198

 
$
(19,353
)
 
$
(15,155
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
Other comprehensive income, before reclassifications, net of tax of $(4,840), $0, $(4,840)
7,042

 

 
7,042

Amounts reclassified from accumulated other comprehensive (loss) income, net of tax of $1,054, $(217), $837
(1,527
)
 
317

(1) 
(1,210
)
Net current-period other comprehensive income, net of tax of $(3,786), $(217), $(4,003)
5,515

 
317

 
5,832

Balance as of December 31, 2016
$
9,713

 
$
(19,036
)
 
$
(9,323
)
(1)
Included in the computation of net periodic pension cost, a component of operations and maintenance expense on the Unaudited Condensed Consolidated Statements of Operations.

9. DEBT

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

Credit Facilities

A summary of NJR's credit facility and NJNG's commercial paper program and credit facility are as follows:
(Thousands)
December 31,
2017
 
September 30,
2017
 
Expiration Dates
NJR
 
 
 
 
 
Bank revolving credit facilities (1)
$
425,000

 
$
425,000

 
September 2020
Notes outstanding at end of period
$
327,200

 
$
255,000

 
 
Weighted average interest rate at end of period
2.26
%
 
2.14
%
 
 
Amount available at end of period (2)
$
86,834

 
$
156,601

 
 
Bank revolving credit facilities (1)
$
75,000

 
$

 
April 2018
Amount available at end of period
$
75,000

 
$

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

 
$
250,000

 
May 2019
Commercial paper outstanding at end of period
$
46,000

 
$
11,000

 
 
Weighted average interest rate at end of period
1.33
%
 
1.13
%
 
 
Amount available at end of period (3)
$
203,269

 
$
238,269

 
 
(1)
Committed credit facilities, which require commitment fees on the unused amounts.
(2)
Letters of credit outstanding total $11 million and $13.4 million for December 31, 2017 and September 30, 2017, respectively, which reduces amount available by the same amount.
(3)
Letters of credit outstanding total $731,000 for both December 31, 2017 and September 30, 2017, which reduces the amount available by the same amount.

21

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


On December 14, 2017, NJR entered into a four-month, $75 million revolving line of credit facility, which will expire on April 14, 2018. As of December 31, 2017, there were no borrowings against the facility. On January 19, 2018, NJR amended the agreement to increase the available amount to $100 million.

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.

Long-term Debt

NJNG

NJNG received $7.8 million and $9.6 million in December 2017 and 2016, 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. NJNG exercised early purchase options with respect to meter leases by making final principal payments of $1.1 million and $1 million during the three months ended December 31, 2017 and 2016, respectively.

NJR

On January 26, 2018, NJR entered into a variable-for-fixed interest rate swap on NJR's existing $100 million variable rate term loan due August 16, 2019, which fixed the variable rate at 2.84 percent.

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)
2017
2016
2017
2016
Service cost
$
2,035

$
2,087

$
1,152

$
1,095

Interest cost
2,623

2,443

1,591

1,386

Expected return on plan assets
(4,910
)
(4,828
)
(1,338
)
(1,192
)
Recognized actuarial loss
1,884

2,207

1,165

1,093

Prior service cost amortization
27

27

(91
)
(91
)
Net periodic benefit cost
$
1,659

$
1,936

$
2,479

$
2,291


The Company does not expect to be required to make additional contributions to fund the pension plans during fiscal 2018 or 2019 based on current actuarial assumptions; however, funding requirements are uncertain and can depend significantly on changes in actuarial assumptions, returns on plan assets 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, 2017.
 
11. INCOME TAXES

ASC Topic 740, Income Taxes requires the use of an estimated annual effective tax rate for purposes of determining the income tax provision during interim reporting periods. In calculating its estimated annual effective tax rate, NJR considers forecasted annual pre-tax income and estimated permanent book versus tax differences, as well as tax credits associated with solar and wind projects. For investment tax credits, the estimate is based on solar 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. For production tax credits, the estimate is based on the forecast of electricity produced during the current fiscal year based on the best information available at each reporting period. Adjustments to the effective tax rate and management's estimates will occur as information and assumptions change.

22

New Jersey Resources Corporation
Part I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)                                               


Changes in tax laws or tax rates are recognized in the financial reporting period that includes the enactment date, the date in which the act is signed into law.

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, 2017 and 2016, the Company determined there was no need to recognize any liabilities associated with uncertain tax positions.

The Tax Act

On December 22, 2017, the President signed into law the Tax Act. The law made several changes to the Internal Revenue Code of 1986, as amended, the most impactful to the Company of which was a reduction in the federal corporate income tax rate from 35 percent to 21 percent that became effective January 1, 2018. Since the Company's fiscal year end is September 30, it is required by the Internal Revenue Code to calculate a statutory rate based upon the federal tax rates in effect before and after the effective date of the change in the taxable year that includes the effective date. Accordingly, the Company will use a federal statutory tax rate of 24.5 percent during fiscal 2018 and will use the enacted rate of 21 percent beginning in fiscal 2019.

As a result of the changes associated with the Tax Act, the Company revalued its deferred tax assets and liabilities at the enactment date to reflect the rates that will be in effect when the deferred tax assets and liabilities are expected to be realized or settled. The decrease of the net deferred tax liability at NJNG of $228 million, which includes $164.3 million for the revaluation of its deferred income taxes and $63.7 million for the accounting of the income tax effects on the revaluation, was recorded as a noncurrent regulatory liability on the Unaudited Condensed Consolidated Balance Sheets since it will be refunded to NJNG's ratepayers. The decrease of the net deferred tax liability for the remaining entities resulted in an income tax benefit of $57.6 million that was recognized on the Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2017.

The adjustments to deferred income taxes are based on assumptions the Company made with respect to its book versus tax differences and the timing of when those differences will reverse, including estimations associated with depreciation and the settlement of derivative unrealized amounts, therefore the revaluation of net deferred tax liabilities is subject to change as information and assumptions are updated.

Effective Tax Rate

The forecasted effective tax rates were 13.9 percent and 8.7 percent, for the three months ended December 31, 2017 and 2016, respectively. The increased effective tax rate is due primarily to an increase in forecasted pre-tax income combined with a decrease in forecasted tax credits for the fiscal year ending September 30, 2018, compared with the prior fiscal year, which more than offset the lower statutory rate. Forecasted tax credits, net of deferred income taxes, were $21.9 million and $36.4 million for fiscal 2018 and 2017, respectively.

To the extent there are discrete tax items that are not included in the forecasted effective tax rate, the actual effective tax rate will differ from the estimated annual effective tax rate. The Company recognized $2.8 million and $1.2 million during the three months ended December 31, 2017 and 2016, respectively, in excess tax benefits associated with the vesting of share-based awards, as a component of income tax (benefit) provision in its Unaudited Condensed Consolidated Statements of Operations. In addition, as discussed further above, the Company recognized a tax benefit of $57.6 million during the three months ended December 31, 2017. As a result of these discrete items, NJR’s actual effective tax rate was (68.2) percent and 5.5 percent as of December 31, 2017 and 2016, respectively.