New Jersey Resources
Annual Report 2014

Plain-text annual report

Always 2014 Annual Report We are committed to enhancing our customers’ quality of life by meeting their expectations for reliability and value in an environmentally responsible way, every day. • Safe, Reliable and Competitively pRiCed SeRviCe • CuStomeR SatiSfaCtion • GRowth • Quality • valuinG employeeS • CoRpoRate CitizenShip • SupeRioR RetuRn trust is the strength of our disciplined growth strategy and our consistent execution that delivers performance year after year. in fiscal 2014, we once again demonstrated why we are a company that our shareowners can trust. Contents Financial Performance Letter from the Chairman Feature Section Directors and Officers Presenting Our 2014 Form 10-K Form 10-K Shareowner Information 2 3 12 28 30 31 ibc Financial Performance dividendS peR ShaRe $2.00 $1.50 $1.44 $1.36 $1.62 $1.71 $1.54 $1.00 $0.50 payout Ratio (On an NFE‡ basis) 55% 56% 57% 59% 41% 60% 40% 20% 0% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 peRfoRmanCe GRaph* value of $10,000 inveSted*** (9/30/09) to ouR ShaReowneRS In fiscal 2014, we once again demonstrated why we are a $16,594 As I began to work on this letter — my 20th since I became chief company our shareowners can trust. Net financial earnings $225 $200 $175 $150 $125 $100 $75 $13,972 $13,974 $12,576 $11,208 $17,500 $15,000 19.73% S&P 500 18.75% nJR $10,000 17.13% S&P Utilities 16.32% Company Peer Group** $5,000 $0 2009 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 * The performance graph shows a comparison of the five-year cumulative return, including reinvestment of dividends, assuming $100 invested on September 30, 2009, in New Jersey Resources (NJR) stock, the Company Peer Group, the Standard & Poor’s (S&P) Utilities Index and the S&P 500 Index. Total return percentages have been annualized. ** The nine companies in the Company Peer Group noted above are as follows: AGL Resources, Inc., Atmos Energy Corporation, The Laclede Group, Inc., Northwest Natural Gas Company, Piedmont Natural Gas Company, Inc., South Jersey Industries, Inc., Southwest Gas Corporation, Vectren Corporation and WGL Holdings, Inc. NJR includes the performance of the Company Peer Group because the Company Peer Group has a higher percentage of natural gas utility and combination natural gas and electric utility companies of comparable size and market capitalization to that of NJR, as compared with the S&P Utilities Index. *** Assumes Dividends Reinvested † According to Cogent Reports, a division of Market Strategies International, 2014 Utility Trusted Brand and Customer Engagement™ study, NJNG scored the highest in the East region, and was the fourth highest of all natural gas utilities and eighth highest of all utilities in the nation. More information can be found at: marketstrategies.com/en/news. ‡ Net financial earnings (NFE) is a financial measure not calculated in accordance with generally accepted accounting principles (GAAP) of the United States as it excludes all unrealized and certain realized gains and losses associated with derivative instruments, net of applicable tax adjustments. For further discussion of this financial measure, please see our Form 10-K. § Utility gross margin is a financial measure not calculated in accordance with GAAP, which is defined as natural gas revenues less natural gas costs, sales and other taxes and regulatory rider expenses, and may not be comparable to the definition of gross margin used by others in the natural gas distribution business and other industries. For further discussion of this financial measure, please see our Form 10-K. Information Regarding Forward-Looking Statements — This letter contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “intends,” “expects,” “believes,” “should” and similar expressions may identify forward-looking information and such forward-looking statements are made based upon management’s current expec- tations and/or beliefs as of this date or a prior date concerning future developments and their potential effect upon NJR. There can be no assurance that future developments will be in accordance with management’s expectations or that the effect of future developments on NJR will be those anticipated by management. NJR cautions persons reading this letter that the assumptions that form the basis for forward-looking statements including, but not limited to, certain statements regarding NJR’s long-term NFE growth rate, NJR’s annual dividend growth rate, forecasted contribution of business segments to fiscal 2015 NFE, long-term benefits of increased NFE in fiscal 2014, future NJNG customer growth, future capital expenditures and infrastructure investments, NJNG utility gross margin growth, and the completion of Carroll Area Wind Farm, Alexander Wind Farm and the PennEast Pipeline projects include many factors that are beyond the Company’s ability to control or estimate precisely, such as estimates of future market conditions and the behavior of other market participants. The factors that could cause actual results to differ materially from NJR’s expectations include, but are not limited to, 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 Basic Gas Supply Service 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 downturns in the financial markets, a lower discount rate, and impacts associated with the Patient Protection and Affordable Care Act; accounting effects and other risks associated with hedging activities and use of derivatives contracts; commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties and liquidity in the wholesale energy trading market; the ability to obtain governmental and regulatory approvals, land- use rights and/or financing for the construction, development and creation of certain of NJR’s energy investments, and NJNG infrastructure projects; risks associated with the management of the Company’s joint ventures and partnerships; risks associated with our investments in distributed power projects, including the availability of regulatory and tax incentives, logistical risks and potential delays related to construction, permitting, regulatory approvals and electric grid interconnection, the availability of viable projects and NJR’s eligibility for federal investment tax credits (ITC), and production tax credits (PTC), the future market for SRECs and operational risks related to projects in service; timing of qualifying for ITCs due to delays or failures to complete planned solar energy projects and the resulting effect on our effective tax rate and earnings; the level and rate at which NJNG’s costs and expenses are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process; access to adequate supplies of natural gas and dependence on third-party storage and transportation facilities for natural gas supply; operating risks incidental to handling, storing, transporting and providing customers with natural gas; risks related to our employee workforce; the regulatory and pricing policies of federal and state regulatory agencies; the costs of compliance with present and future environmental laws, including potential climate change-related legislation; risks related to changes in accounting standards; the disallowance of recovery of environmental-related expenditures and other regulatory changes; environmental-related and other litigation and other uncertainties; risks related to cyber- attack or failure of information technology systems; and the impact of natural disasters, terrorist activities and other extreme events on our operations and customers. The aforementioned factors are detailed in the “Risk Factors” sections of our Annual Report on Form 10-K filed on or about November 25, 2014, as filed with the Securities and Exchange Commission (SEC), which is available on the SEC’s website at sec.gov. Information included in this letter is representative as of the date of the letter only, and while NJR periodically reassesses material trends and uncertainties affecting NJR’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 filed with the SEC, NJR 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. executive officer in 1995 — one word kept resonating with me: (NFE)‡ were $176.9 million, or $4.20 per basic share, compared Trust. During my tenure, I have learned that trust is more than with $113.7 million, or $2.73 per share, last year. And in September, the confidence that is placed in us. It’s our principal obligation our Board of Directors approved a 7.1 percent dividend increase to our stakeholders. It’s our promise to always be there to meet to an annual rate of $1.80 per share, which represented the 21st their needs and expectations. It’s our highest responsibility, increase since 1996. Shareowners were rewarded with a total and it is one that we always strive to meet. So when a national return of 18.8 percent. study† ranked us as one of the most trusted utility brands in the United States, it affirmed that our customers feel the same NJR Energy Services (NJRES), our unregulated wholesale energy way we do. services business, had a record year with NFE of $79.7 million, compared with $19.3 million last year. New Jersey Natural Gas For us, trust is the safety, reliability and resiliency of our system. (NJNG), our principal subsidiary, also delivered solid financial Trust is what keeps our customers’ homes warm and businesses results with earnings of $74.2 million, compared with $73.9 running. Trust is the return we provide our investors on the million last year, even after accounting for higher discretionary resources they provide. Trust is the character of our team of expenses, including the impact of a voluntary early retirement dedicated employees, and what earns us the respect of our program. NJR Clean Energy Ventures (NJRCEV), our distributed communities. Trust is the strength of our disciplined growth power subsidiary, had NFE of $12.7 million, compared with $10.1 strategy and our consistent execution that delivers performance million last year. NJR Midstream, our natural gas storage and year after year. I think you will agree that, once again, we pipeline business, generated earnings of $7.5 million, compared honored that trust with strong performance in fiscal 2014. with $7.2 million, last year. And, NJR Home Services (NJRHS), Throughout our annual report, you will see the many ways our fiscal 2014, compared with $3.1 million last year. All in all, we had our retail and appliance service business, earned $2.5 million in team of more than 960 women and men work together to make an excellent year. us one of the most respected companies and trusted brands in our industry. We are always reliable, resourceful, innovative With the polar vortex causing extreme weather throughout and balanced. We are always disciplined in our strategy and much of the country this past winter, demand for natural gas approach. And, our customers, shareowners and communities increased considerably across the United States. In fact, on can always count on us to deliver. January 7, 2014, NJNG reached a record sendout of 690,415 3 dekatherms, eclipsing the previous record of 636,063 dekatherms we have re-invested approximately $50 million into system Through our Safety Acceleration and Facility Enhancement Beginning in fiscal 2015, we plan to invest a total of $34 million set in 2007, which underscores the reliability and resiliency of growth and renewal projects annually. NJNG’s fiscal 2014 (SAFE) program, we are replacing a total of 276 miles of cast iron to build a new natural gas liquefier. This added capability, NJNG’s infrastructure. capital expenditures totaled more than $156.9 million, including and unprotected steel mains and associated services through along with other improvements, will enable us to better During this time of high demand and resulting volatility, NJRES Superstorm Sandy (Sandy) restoration efforts, $40.3 million for million and replaced 150 miles of cast iron and unprotected well as significantly reduce truck traffic and emissions related effectively utilized its expertise and strategically located portfolio our accelerated system safety enhancement projects, $4.8 million steel main and services. With only about 20 miles remaining to to the transportation of LNG, while also creating savings for $30.1 million for customer growth, $9.8 million for ongoing fiscal 2016. Over the past two years, NJNG has invested $67 utilize our existing Liquefied Natural Gas (LNG) facilities, as of natural gas storage and transportation assets to meet the needs on bringing the first public natural gas vehicle (NGV) refueling be replaced, NJNG has the lowest inventory of cast iron main our customers. of its customers throughout the U.S. and Canada. This led to a stations to our service territory and $10.1 million for our natural among the state’s local distribution companies and expects to more than fourfold increase in NFE at NJRES, compared with last gas liquefaction project. We remain committed to investing the have it all completed by the end of summer 2015. Additionally, we plan to invest in a new 28-mile transmission year. NJRES was the key driver in our overall improved results, necessary capital to support the safety, reliability and resiliency main in Ocean County. This project, referred to as the Southern along with NJNG, which was supported by our infrastructure of our system and grow our business. In July 2014, we received approval from the New Jersey Board Reliability Link (SRL), will enhance both the diversity and investments, solid customer growth in both the new construction of Public Utilities (BPU) for our New Jersey Reinvestment in dependability of our supply portfolio and delivery system, as and conversion markets and regulatory initiatives. Our team also successfully completed the relocation of nearly System Enhancement (NJ RISE) program. Filed in the aftermath well as our ability to provide safe, reliable service. 20 miles of distribution main and over 540 associated services of Sandy that devastated the Jersey Shore — the heart of our Our story begins with our regulated along Route 35 on the Seaside peninsula as a part of the New service territory — NJ RISE is designed to improve the reliability Seeking to expand our midstream footprint, we announced our infrastructure investments Jersey Department of Transportation’s (NJDOT) reconstruction and resiliency of our distribution and transmission systems. participation in the proposed PennEast Pipeline project, a 108- Behind our performance is the story of a disciplined strategy project. This was a major undertaking and, by far, the largest Over the next five years, we will invest over $100 million on a mile natural gas transmission pipeline designed to bring 1 Bcf executed by our team of talented employees that enables us main relocation project in our history. Not only did we complete series of storm-hardening and mitigation projects, including the per day of safe, reliable, low-cost natural gas from Pennsylvania to safely and reliably serve our customers, invest in growing the work on an expedited timeframe to accommodate NJDOT’s installation of new distribution main as secondary feeds; the to New Jersey. our Company and reward our shareowners. For those who work schedule, we did so without any personal injuries or motor relocation and reinforcement of regulator stations; and, the have followed us over the years, you know our approach vehicle accidents. begins with consistent investments in our infrastructure. Our installation of approximately 35,000 excess flow valves in the PennEast successfully completed its open season in September most storm-prone areas of our service territory. These targeted 2014, which resulted in 965,000 dekatherms per day of binding extensive pipeline network of nearly 7,300 miles of distribution This was an exceptional accomplishment by our team, and improvements will enhance the reliability and resiliency of our bids. In October, it was accepted into the Federal Energy and transmission main serves more than 504,000 customers I am proud that our overall focus on safety was recognized by system, and should help mitigate the number and duration Regulatory Commission’s (FERC) pre-filing review process, throughout Monmouth and Ocean counties and parts of Morris, the Northeast Gas Association with its annual Excellence in of future outages and improve our ability to safely respond to which includes a formal structure for stakeholder input and Middlesex, Sussex and Burlington counties. Safety award. This award honors safety programs that positively service disruptions. provides the framework for the environmental analysis required impact the lives of customers, employees and the general public. for the design, location and permitting of the proposed pipeline. Since 2009, we have made infrastructure investments of NJNG was one of only two companies to receive this prestigious We are also pursuing additional infrastructure investments PennEast expects to file a formal application with FERC more than $710 million. On average, over the past six years, recognition this year. to further improve service and reliability to our customers. by mid-2015. 4 5 In fiscal 2014, New Jersey Resources achieved NFE of $176.9 million, or $4.20 per basic share, compared with $113.7 million, or $2.73 per basic share, last year; and shareowners were rewarded with a total return of 18.8 percent. Our existing midstream assets, Steckman Ridge, a 12-Bcf storage needed basis, when they are safely able to accept it. We also $40 million in fiscal 2015 to help customers use energy more Developed in partnership with the BPU and the Division of facility located in southwestern Pennsylvania jointly owned converted more than 625 existing customers to natural gas heat wisely. Through this current program, we expect customers to Rate Counsel (Rate Counsel), our Basic Gas Supply Service with Spectra Energy, and our 5.53 percent stake in Iroquois and other services. Together, we expect these new customers save close to $115 million through lower energy bills. (BGSS) incentive programs saved customers over $77 million Pipeline, continue to contribute steady annual earnings and and conversions to contribute $4.3 million annually in utility and generated almost $16 million in utility gross margin generated $7.5 million of NFE in fiscal 2014. We will continue to gross margin.§ Additionally, the Red Oak generating station in Since its inception in 2009, our SAVEGREEN team has completed in fiscal 2014. These programs complement our natural gas evaluate new midstream opportunities that meet our strategic Sayreville, New Jersey became our largest customer with an over 28,000 energy audits and awarded nearly 30,000 grants for procurement activities, lower costs for our customers and benefit and financial objectives. estimated margin of over $2 million annually. Service is expected high-efficiency equipment upgrades. More than 4,000 customers our shareowners. Since 1992, customers have saved nearly These regulated investments support our long-standing the next two fiscal years, we expect to add about 8,000 new rate on-bill repayment program and embraced a “whole-house” shareowners earned in excess of $2.24 per share, or an average to commence in the first half of fiscal 2015. And in each of have taken advantage of the zero-percent annual percentage $712 million, or an average of almost 7 percent annually, and commitment to safety and reliability and drive our long-term customers annually, with about half coming from conversions. approach to energy efficiency. The number of contractors of $.09 per share annually. earnings growth. participating in the program has grown from 100 to almost 2,100, In May, the BPU approved the continuation of our Conservation and NJNG’s total investment of $91.6 million since 2009 has Working with our regulators is an important part A sound foundation for customer and margin growth Incentive Program (CIP). The CIP enables us to actively encourage resulted in an estimated $248 million in economic activity in our of our strategy The healthy demographics of our service territory and the conservation and energy efficiency, while protecting utility gross service territory. benefits of natural gas provide us with a strong foundation margin. This past year, we helped customers save $33.7 million Critical to our infrastructure investments and our ability to safely and reliably meet customer expectations are our for steady customer growth and higher gross margin. With an on their energy costs by using less natural gas, and maintained By the end of 2014, we expect the first public access constructive regulatory relationships. Working collaboratively abundant, domestic resource base estimated to be sufficient for $6.6 million in gross margin for NJNG. Since its inception in compressed natural gas (CNG) refueling stations in our service with our regulators at both the BPU and Rate Counsel to identify more than 100 years, the demand for clean, efficient, affordable 2006, customers have saved a total of $312 million and reduced territory to be operational. Approved by the BPU in 2012, NJNG areas of common interest is an important part of our strategy. natural gas continues to expand. Customers today are more emissions by more than 3.5 billion pounds of carbon dioxide, will invest almost $10 million and entered into agreements Our investments in projects such as SAFE and NJ RISE reflect informed of their energy choices to heat their homes, run their the equivalent of removing over 336,500 cars from the road. with three host facilities — Waste Management, Inc. of Toms our shared goals to provide customers with affordable service; businesses and fuel their fleets. When it comes to maintaining River, Shore Point Distributing Company of Freehold and the support public policy, including storm resiliency, emissions comfort, managing costs and reducing emissions, we believe Our SAVEGREEN Project® continues to be a great success. Middletown Department of Public Works — to build, own and reductions and job creation; and strengthen our Company natural gas, by any measure, is the smartest choice. Through available rebates and on-bill repayment opportunities, maintain CNG infrastructure at each location. Each facility through our commitment to system safety and reliability. SAVEGREEN makes upgrading to high-efficiency equipment an will be required to use at least 20 percent of the fueling In fiscal 2014, 7,599 new customers in our service territory chose easy and more affordable choice. These programs augment capacity and open the stations to the public. We expect the We look forward to building on these relationships to natural gas, a 2 percent increase over last year. We restored those offered through New Jersey’s Clean Energy ProgramTM, stations to be operational in the first quarter of fiscal 2015 and advance New Jersey’s energy future, prudently investing natural gas service to 8,821 Sandy-affected customers, but and support the state’s Energy Master Plan. This past year, we to help further encourage the market for CNG vehicles, as in our system as we identify opportunities that benefit our recognize there are still many displaced families. As customers invested over $31 million in grants and incentives provided well as accelerate the economic and environmental benefits customers and shareowners, while advancing the state’s return to their homes, we are ready to restore service on an as to SAVEGREEN customers and plan to invest an additional they provide. public policy goals. 6 7 A strong complement of non-regulated investments West Pemberton and Jacobstown, New Jersey. Through fiscal We also reached a milestone with our 10,000th plumbing, NJNG will continue to drive our long-term growth. Our Our energy-related, non-regulated businesses complement our 2014, NJRCEV has installed in excess of 325,000 solar panels electrical and generator service contract in less than two years. focus in 2015 will remain on customer growth, infrastructure portfolio of regulated infrastructure investments and are built with a total of 83 megawatts (MW) of installed capacity, which will Additionally, NJRHS’ marketing efforts are continuing in Sussex, investments, key initiatives, such as SAVEGREEN and our BGSS upon our Company’s core competencies. generate about 100,000 Solar Renewable Energy Certificates Warren and Hudson counties, as we look to expand our footprint incentives, along with NJ RISE and SRL. NJRCEV will build out (SRECs) annually. SRECs are earned by solar equipment beyond Monmouth, Ocean and Morris counties. its inventory of BPU-approved, grid-connected projects, adding On an NFE basis, NJRES has been profitable every year since its owners and sold to electric suppliers to satisfy New Jersey’s to its supply of SRECs, which we expect to increase in value inception in 1995. With its diverse portfolio of supply contracts requirement that a portion of the state’s electric generation As you can see, our energy-related, non-regulated businesses at a reasonable rate of growth from their current levels, and and physical firm storage and transportation assets, NJRES comes from renewable sources. support our overall performance, while providing service to our prudently pursue residential solar projects. NJRES will continue manages and provides physical natural gas service to utilities, customers and value for our shareowners. to provide physical and producer natural gas services to benefit power generators, storage operators, pipelines and industrial Additionally, we successfully completed our first onshore wind from market volatility. PennEast will focus its efforts on the FERC customers across North America. On average, NJRES transports farm in Two Dot, Montana and announced our second project Our long-term growth strategy application process. And, NJRHS will continue to expand its over 1.7 billion cubic feet of natural gas daily and maintains in Carroll County, Iowa. Consisting of six wind turbines with a Our excellent financial performance in fiscal 2014 supports our product and service offerings, while maintaining a focus on transportation capacity on almost every major interstate pipeline total capacity of 9.72 MW, Two Dot is producing enough clean long-term NFE growth prospects through the increased earnings growing its service contract business. in the U.S. Our team continues to meet the growing natural gas energy to power nearly 3,000 homes annually, which is sold retention, resulting from NJRES’ strong performance, which needs of our customers and create value by focusing on physical to NorthWestern Energy through a 25-year power purchase has reduced our need for future equity issuances. By avoiding In fiscal 2016, NJNG expects to file a base rate case and place natural gas services, producer services and asset management agreement. We expect the 20 MW Carroll Area Wind Farm, earnings dilution, we increased the per-share profitability of our liquefaction plant into service. NJRCEV plans to gradually transactions. Through the combination of our strategically located 65 miles northwest of Des Moines, to be operational our new investments, which enabled us to increase our goal of reduce its solar investments, continue to increase its supply of located assets and portfolio of services, and the talent of our by spring 2015. And this past October, we announced our third long-term NFE growth rate to a range of 5 to 9 percent and our SRECs and place the Alexander Wind Farm project into service. team, NJRES remains a national leader in the growing natural and largest wind farm project to date. The Alexander Wind dividend growth goal to 6 to 8 percent annually. Our regulated PennEast is also expected to file its formal application with FERC. gas market. Farm located in Rush County, Kansas, which we expect to be investments are expected to contribute the majority of our NFE. in service by fall 2015, will consist of 21 turbines with a capacity As we saw this year, however, actual results will be determined By fiscal 2017, we will have invested more than $1 billion since NJRCEV continues to grow and diversify its distributed of 48 MW. NJRCEV retains all of the production tax credits by market conditions and execution. the conclusion of our last base rate case in 2008 to maintain and power business and provide customers with clean, affordable generated by the projects, and will continue to evaluate potential strengthen NJNG’s system and support our growing customer electricity. This year we added over 1,000 residential solar lease investment opportunities in other onshore wind projects, as well Our growth strategy is driven by increased regulated infrastructure base. In fiscal 2017, NJNG expects to successfully complete customers and celebrated a new milestone with the addition of as assessing opportunities for Combined Heat and Power (CHP) investments that ensure safe, reliable service and anchor our our base rate case and place SRL into service. We expect that The Sunlight Advantage’s® 3,000th customer. Launched in 2010, projects in the still evolving CHP marketplace. business portfolio; providing customers with cost-efficient NJRCEV will benefit from increased earnings from wind and The Sunlight Advantage provides homeowners with simple, renewable electricity, while reducing our reliance on investment SREC sales that will offset the expected decline of investment solar savings. NJRCEV also invested $43.5 million and installed NJRHS added 7,800 new customers to its premier service plan. tax credits; and providing physical and producer services to a tax credits to 10 percent. We also anticipate FERC approval four commercial projects in Medford, Woolwich Township, We now have over 31,300 customers enrolled in the plan. variety of natural gas market participants. of PennEast. 8 9 Our excellent financial performance in fiscal 2014 enabled us to increase our goal of long-term NFE annual growth to 5 to 9 percent and our dividend growth goal to 6 to 8 percent annually. This approach affords us the opportunity to continue to provide contributed over 5,000 hours of service to help support nonprofit and I am grateful for their willingness to share their expertise to provide value to our shareowners and safe, reliable service to our customers with the highest quality service and meet their organizations in our service territory. Additionally, over the course and insight to benefit our Company. I’d also like to thank our our customers in the years ahead. Our commitment to meeting expectations for safety and reliability, while also creating value of two days this summer, our employees worked alongside one leadership team. All of the accomplishments in this report these expectations will never change. That’s our pledge to you. for our shareowners. of our oldest community partners, the United Way of Monmouth are the result of their dedication, commitment and focus on An unwavering commitment to corporate citizenship for families displaced by Sandy. It has been more than two years January 21, 2015 at Eagle Oaks Golf and Country Club located This fiscal year, we celebrated the 25th anniversary of our Project since Sandy left a trail of devastation up and down the Jersey We are blessed with an exceptional group of employees, in Farmingdale, New Jersey. I hope you will be able to join us. County, to help rebuild homes in Monmouth County’s Bayshore executing our plan. Our Annual Shareowners Meeting will be held at 9:30 a.m. on Venture mentoring program. The original idea was simple — to help Shore. Thanks to our efforts, 10 families are another step closer many of whom are members of the International Brotherhood students embrace learning as a lifelong skill and show them how to getting their lives back to some degree of normalcy. of Electrical Workers, Local 1820. I would like to recognize Your feedback is important to me. Please feel free to write, success in the classroom translates into success in the workplace. Tom Curtis for his leadership as union president over the past call or e-mail me at lmdownes@njresources.com and share Since its inception in 1988, almost 100 employees have mentored In total, we partnered with 1,778 nonprofit and community- nine years, and welcome Jeff Bollermann, who was elected your thoughts on our performance as well as any suggestions nearly 300 students and helped them gain firsthand experience in based organizations to help them fulfill their respective missions. to succeed him. I look forward to working with Jeff and the for improvement. the workplace, as well as a glimpse of the possibilities their future Thanks to the dedication and volunteer efforts of our employees, members of Local 1820 to expand our strong and mutually may hold. In particular, I would like to recognize my colleagues, every day we are making a difference in our communities — and beneficial partnership. I began this letter reflecting on trust. I hope you agree that our fiscal Melody Easy, Rhonda Figueroa, Marianne Harrell, Barbara Tyler, the lives of those who need it most. 2014 performance fulfilled the trust you place in us. On behalf of and Debora West, who have been a part of Project Venture since Our employees are the heart and soul of our Company. They our entire Company, I appreciate the opportunity to serve our the very beginning. These five employees have mentored over 100 Our team is always working for you make all of our achievements possible. It’s people like Bob Lewis, customers, work with our community partners, policymakers students and helped make the program the success it is today. Our consistent performance is the result of our proven and who joined NJNG on April 20, 1964 and has provided more and regulators and reward our shareowners with proven results. Another way we are making a difference in our communities is diversified customer and gross margin growth, constructive for our Company. And Sy Farrow, a first responder in Energy As always, I appreciate the confidence you place in us, and pledge through our Home Ownership Program. Since 1996, we have regulatory relationships and prudent investment in the Delivery, who while responding to a report of a possible natural that we will continue to give our best to deliver performance of worked with Interfaith Neighbors and, more recently, Homes for development of our non-regulated energy portfolio. It’s a gas leak saved an elderly neighbor’s life when he discovered which we can all be proud. sound strategy of reliability-related infrastructure investments, than 50 years of service to our customers, which is a record All, Inc. in Ocean County and Morris Habitat for Humanity, to help reflection of our commitment to corporate citizenship and the her unconscious after mistakenly leaving her car running in a 85 deserving families become first-time homeowners. More than communities we serve. And, it’s a testament to the character of closed garage. Every day, women and men from throughout our Sincerely, just houses, these homes represent the building blocks of our the women and men of NJR. neighborhoods and the promise of a better tomorrow for us all. Company give their best. Their dedication is a source of inspiration and pride, which makes us the Company we are today. I would like to express my personal appreciation to the members Through our Volunteers Inspiring Service In Our Neighborhoods of our Board of Directors for their guidance and support. As you can see, our business is strong, our strategy sound and Laurence M. Downes (VISION) program, our employees, retirees and their families Collectively, our board has more than 100 years of experience our team second to none. We have the fundamentals in place Chairman and CEO 10 11 Always Balanced Achieving and maintaining balance requires constant focus and dedication. At NJR, we must meet the needs of a diverse group of stakeholders, giving equal weight to their expectations —  energy for customers, growth for investors, vibrancy for neighborhoods and sustainability to ensure our future. Our Conservation Incentive Program exemplifies this commitment to balance. This rate mechanism encourages our customers to conserve natural gas through a variety of tools, resources and energy- efficiency incentives and, at the same time, protects utility gross margin that would have been lost from reduced sales. Customers save energy and money. Emissions are reduced and natural resources preserved. Shareholders realize continued growth. Guided by the clear set of core values that comprise NJR’s Commitment to Stakeholders, over 960 dedicated women and men are the balancing force behind our promise to provide reliability and comfort to our customers, value to our investors, opportunity to our suppliers and service to our communities and state  —  in a safe and environmentally responsible way every day. 12 12 13 13 Always Renewable 14 14 15 15 You first knew us as clean, energy-efficient natural gas. Then our solar investment strategy took shape as we built a commercial solar portfolio of more than 55 megawatts and a successful residential program to make solar energy affordable for customers. Now we’ve harnessed the power of the wind. This year, our first onshore wind project, located in Two Dot, Montana, was placed into service, to be followed next year by a second wind farm in Carroll County, Iowa. As our renewable portfolio grows, so does our commitment to advancing the development of clean energy to help preserve our natural resources for generations to come. Always Local NJNG planted its roots in Asbury Park in 1952. Today, we’re the only utility that still maintains an office in this city by the sea. So, when approached by the Asbury Park Chamber of Commerce with an idea to help promote the city, NJNG was there to lend a hand. This summer, the NJNG Boardwalk Studio filled the airways with live radio broadcasts right from the Asbury Park shoreline. Crowds grew as the boardwalk became a gathering place to listen to local and state radio personalities and catch a glimpse of visiting musicians, dignitaries and celebrities. But there was more to this idea. Each Friday, NJNG played on-air host to several nonprofit organizations to showcase their community efforts and raise awareness for their causes. Hundreds of thousands of listeners heard their messages and discovered the excitement of Asbury Park. The end result? According to Tom Gilmour, director of economic development for the city, “visitors were up nearly 30 percent this summer, helping to further revitalize this treasured Jersey Shore town!” 16 16 17 17 Always Reliable 18 18 19 19 We’re all customers. Our employees are too, so they understand. They know each and every customer expects and deserves prompt, consistent and meaningful service. They listen, identify and anticipate individual customer needs. They are our greatest asset. Whether tuning up a furnace before the winter cold hits, responding to a safety call or providing energy assistance information to a family in need, our employees all have one thing in common — reliability. There are some things you can always count on in life. We’d like to think we’re one of them. Always Innovative NJNG was the first utility, and one of the first businesses, to support the state’s goal to reduce greenhouse gas emissions 20 percent by 2020. Building an environmentally sustainable fleet is an important part of our plan. With a firm focus on reducing our carbon footprint, we transitioned more than 245 fleet vehicles to compressed natural gas (CNG), hybrid, electric and bio-fuel, reducing our emissions by 33 percent. We’re also investing $10 million in three CNG fueling stations in our service territory — the first in Monmouth and Ocean counties that will be open to the public. Working collaboratively with municipalities, host businesses and regulators, we’re making sure that New Jersey residents have access to clean, energy-efficient fuel. As a committed environmental steward, our goal is to lead others down the road to sustainability. 20 20 21 21 Always Resourceful Winter 2014 sent an extreme arctic blast throughout the Midwest and Mid-Atlantic, and carried with it temperatures unseen in decades. This sustained, severe weather created a significantly increased demand for energy. Through its strategically located portfolio of storage and transportation assets, NJRES was able to deliver natural gas to energy providers to keep the lights on, homes warm and businesses running in cities and towns across the country  — and create significant value for our shareowners. 22 22 23 23 Always Trusted Trust noun \’tr st\: reliance on the integrity, strength, ability, etc., of a person or thing; confidence. e According to a national study released in July 2014 by Cogent Reports, NJNG is one of the most trusted utility brands in the nation — and the most trusted natural gas utility in the eastern United States. This kind of trust is evident in each of NJR’s subsidiaries  — whether serving homes and businesses along the Jersey Shore or building wind farms in Montana  — all benefiting our customers, communities and investors alike. 2424 25 25 Our Corporate Profile New Jersey resources (NYSE: NJR) is a Fortune 1000 company that provides safe and reliable natural gas and clean energy services, including transportation, distribution and asset management. With annual revenues in excess of $3 billion, NJR is comprised of five primary businesses: New Jersey Natural Gas is NJR’s principal subsidiary that operates and maintains 7,000 miles of natural gas transportation and distribution infrastructure to serve over half a million customers in New Jersey’s Monmouth, Ocean and parts of Morris and Middlesex counties. NJr eNerGy services manages a diversified portfolio of natural gas transportation and storage assets and provides physical natural gas services and customized energy solutions to its customers across North America. NJr cleaN eNerGy veNtures invests in, owns and operates solar and onshore wind projects with a total capacity in excess of 93 megawatts, providing residential and commercial customers with low-carbon solutions. NJr MidstreaM serves customers from local distributors and producers to electric generators and wholesale marketers through its equity ownership in a natural gas storage facility and a transportation pipeline, both of which are Federal Energy Regulatory Commission, or FERC-regulated investments. NJr HoMe services provides heating, central air conditioning, standby generators, solar and other indoor and outdoor comfort products to residential homes and businesses throughout New Jersey and serves approximately 118,000 service contract customers. NJR and its more than 960 employees are committed to helping customers save energy and money by promoting conservation and encouraging efficiency through Conserve to Preserve® and initiatives such as The SAVEGREEN Project® and The Sunlight Advantage®. For more information about NJR, visit njresources.com, follow us on Twitter @NJNaturalGas, “like” us on facebook.com/NewJerseyNaturalGas and download our free NJR investor relations app for iPad and iPhone. 26 26 27 27 Directors and Officers of New Jersey Resources New Jersey resources directors Lawrence R. Codey, 70 (A,B,D) Lead Director, President and Chief Operating Officer (retired) Public Service Electric and Gas (2000) Donald L. Correll, 64 (A,B,C) Chief Executive Officer and Co-Founder KWP Capital LLC (2008) Laurence M. Downes, 57 (B) Chairman of the Board, President and Chief Executive Officer New Jersey Resources (1995) Robert B. Evans, 66 (A,B) President and Chief Executive Officer (retired) Duke Energy Americas (2009) New Jersey resources aNd subsidiaries officers M. William Howard, 68 (B,C) Pastor Bethany Baptist Church (2005) J. Terry Strange, 70 (A,B) Vice Chairman (retired) KPMG (2003) Jane M. Kenny, 63 (B,C,D) Co-owner and Managing Partner The Whitman Strategy Group, LLC (2006) Sharon C. Taylor, 60 (C) Senior Vice President– Human Resouces Prudential (2012) Alfred C. Koeppe, 68 (A,B,C,D) President and Chief Executive Officer (retired) Bell Atlantic-New Jersey; President and Chief Executive Officer (retired) Public Service Electric and Gas; Chief Executive Officer (retired) Newark Alliance David A. Trice, 66 (C,D) President and Chief Executive Officer (retired) Newfield Exploration Company (2004) George R. Zoffinger, 66 (D) President and Chief Executive Officer Constellation Capital Corporation (1996) Date represents year Director joined NJR Board. (A) Member of Audit Committee (B) Member of Executive Committee (C) Member of Leadership Development and Compensation Committee (D) Member of Nominating and Corporate Governance Committee Laurence M. Downes Mariellen Dugan Kathleen F. Kerr Thomas J. Massaro Jr. Mark R. Sperduto Kathleen T. Ellis Rhonda M. Figueroa Stanley M. Kosierowski Patrick Migliaccio Stephen D. Westhoven Glenn C. Lockwood Richard R. Gardner Craig A. Lynch Ginger P. Richman Deborah G. Zilai Linda B. Kellner Joseph J. Marazzo George C. Smith Jr. New Jersey resources officers Laurence M. Downes, 57 President and Chief Executive Officer (1985) Mariellen Dugan, 48 Senior Vice President and General Counsel (2005) Kathleen T. Ellis, 61 Senior Vice President, Corporate Affairs (2004) Rhonda M. Figueroa, 55 Corporate Secretary (1981) Linda B. Kellner, 55 Chief of Staff (1995) Glenn C. Lockwood, 53 Executive Vice President and Chief Financial Officer (1988) Patrick Migliaccio, 40 Vice President-Finance and Accounting and Teasurer (2007) Date represents year of affiliation with an NJR company. directors aNd officers of New Jersey resources subsidiaries New Jersey Natural Gas directors Laurence M. Downes, 57 (1995) Chairman Lawrence R. Codey, 70 (2000) Donald L. Correll, 64 (2008) Robert B. Evans, 66 (2009) Alfred C. Koeppe, 68 (2003) Lead Director Sharon C. Taylor, 60 (2014) Date represents year Director joined NJR Board. officers Laurence M. Downes, 57 President and Chief Executive Officer (1985) Mariellen Dugan, 48 Senior Vice President and General Counsel (2005) Kathleen T. Ellis, 61 Executive Vice President and Chief Operating Officer (2004) Rhonda M. Figueroa, 55 Corporate Secretary (1981) Kathleen F. Kerr, 51 Vice President, Customer Services (2005) Craig A. Lynch, 53 Senior Vice President, Energy Delivery (1984) Thomas J. Massaro Jr., 48 Vice President, Marketing and Business Intelligence (1989) Patrick Migliaccio, 40 Vice President-Finance and Accounting and Teasurer (2007) Mark R. Sperduto, 56 Senior Vice President, Regulatory and External Affairs (2005) Date represents year of affiliation with an NJR company. NJr service officers Laurence M. Downes, 57 President and Chief Executive Officer (1985) Mariellen Dugan, 48 Senior Vice President and General Counsel (2005) Rhonda M. Figueroa, 55 Corporate Secretary (1981) Glenn C. Lockwood, 53 Senior Vice President and Chief Financial Officer (1988) Patrick Migliaccio, 40 Vice President-Finance and Accounting and Teasurer (2009) George C. Smith Jr., 57 Vice President, Internal Audit (1984) Deborah G. Zilai, 61 Vice President, Corporate Services (1996) Date represents year of affiliation with an NJR company. NJr eNerGy services directors Laurence M. Downes, 57 (1995) Chairman Robert B. Evans, 66 (2009) Lead Director M. William Howard, 68 (2005) J. Terry Strange, 70 (2003) David A. Trice, 66 (2004) George R. Zoffinger, 66 (1996) coMMercial realty aNd resources officers Mariellen Dugan, 48 Senior Vice President and General Counsel (2005) Rhonda M. Figueroa, 55 Corporate Secretary (1981) Glenn C. Lockwood, 53 Senior Vice President, Chief Financial Officer and Treasurer (1988) Date represents year Director joined NJR Board. Date represents year of affiliation with an NJR company. officers Laurence M. Downes, 57 President and Chief Executive Officer (1985) Mariellen Dugan, 48 Senior Vice President and General Counsel (2005) Rhonda M. Figueroa, 55 Corporate Secretary (1981) Glenn C. Lockwood, 53 Senior Vice President and Chief Financial Officer (1988) Patrick Migliaccio, 40 Vice President-Finance and Accounting and Teasurer (2009) Ginger P. Richman, 50 Vice President, Energy Services (2003) Stephen D. Westhoven, 46 Senior Vice President (1990) Date represents year of affiliation with an NJR company. NJr HoMe services officers Stanley M. Kosierowski, 62 President (2008) Joseph J. Marazzo, 56 Vice President and Treasurer (2010) Date represents year of affiliation with an NJR company. NJr cleaN eNerGy veNtures directors Laurence M. Downes, 57 (1995) Chairman M. William Howard, 68 (2005) Lead Director Jane M. Kenny, 63 (2006) J. Terry Strange, 70 (2003) David A. Trice, 66 (2004) George R. Zoffinger, 66 (1996) Date represents year Director joined NJR Board. officers Laurence M. Downes, 57 Chief Executive Officer (1985) Mariellen Dugan, 48 Senior Vice President and General Counsel (2005) Rhonda M. Figueroa, 55 Corporate Secretary (1981) Richard R. Gardner, 55 Vice President, Business Development (1983) Stanley M. Kosierowski, 62 President (2008) Glenn C. Lockwood, 53 Senior Vice President, Chief Financial Officer (1988) Patrick Migliaccio, 40 Vice President-Finance and Accounting and Teasurer (2009) Date represents year of affiliation with an NJR company. 28 29 Presenting our 2014 Form 10-K 2014 Form 10-K Our 2014 Form 10-K includes financial statements for NJR. Part i: a descriPtioN of NJr busiNesses iNcludes: It also includes detailed information about each of our • Detailed descriptions of NJR subsidiaries subsidiaries and the competitive environments of our • Regulatory outlook for the utility business businesses, properties we own and other matters. • Risk factors related to our business All publicly held companies in the United States are required to file a Form 10-K report with the Securities and Exchange Commission (SEC) every year. Our Form 10-K is required by the rules and regulations of the SEC to contain information in addition to the financial information included in our • Description of properties owned and operated by NJR • Legal proceedings • Information about our executive officers Part ii: MaNaGeMeNt’s discussioN of results aNd fiNaNcial stateMeNts iteMs 5 aNd 6 iNclude: previous annual reports to shareowners. We are supplying • Quarterly dividend and stock price information our 2014 Form 10-K (without exhibits) consistent with our commitment to provide transparency and full disclosure to • Selected financial data for NJR • Operational statistics for NJNG our shareowners. iteMs 7 aNd 7a iNclude: The 2014 Form 10-K is amended, sup plemented and updated • Management’s Discussion and Analysis of Financial Condition by any amendment that we may file, and by all of the and Results of Operations, which provides a discussion of quarterly reports on Form 10-Q and current reports on Form changes in earnings and cash flows over the past three years 8-K we file with the SEC during the year. We urge you to • Quantitative and qualitative disclosures about market risk read all such reports. Copies may be obtained as described under “Request for Documents” on the inside back cover of iteMs 8 aNd 9 iNclude: this Annual Report. • Management’s reports on internal control over financial reporting and disclosure controls and procedures forM 10-K overview • Reports of independent auditors This Annual Report is not a part of, and should not be • Financial statements and footnotes for NJR considered to be included in, our 2014 Form 10-K. Use the • Supplementary financial information (unaudited) listing below, which includes highlights of the 2014 Form 10-K, to help you find information easily. A comprehensive Table of Contents with the page number for each item can be found on page “i” of the 2014 Form 10-K. Part iii: iNforMatioN about board MeMbers, executive officers aNd auditors iNcludes: • Information about members of the Board of Directors, executive compensation and accounting fees is incorporated by reference to NJR’s proxy statement Part iv: exHibits aNd siGNatures iNclude: • Index of exhibits • Signatures of members of the Board of Directors and certain officers 30 31 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO NEW JERSEY RESOURCES CORPORATION (Exact name of registrant as specified in its charter) New Jersey (State or other jurisdiction of incorporation or organization) 1415 Wyckoff Road, Wall, New Jersey 07719 (Address of principal executive offices) (I.R.S. Employer Identification Number) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: (Title of each class) New York Stock Exchange (Name of each exchange on which registered) Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. No: Yes: Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. No: Yes: 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: No: 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: No: Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 of the Exchange Act. Large accelerated filer: Accelerated filer: Non-accelerated filer: (Do not check if a smaller reporting company) Smaller reporting company: Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). No: Yes: The aggregate market value of the Registrant's Common Stock held by nonaffiliates was $2,064,781,156 based on the closing price of $49.80 per share on March 31, 2014, as reported on the New York Stock Exchange. The number of shares outstanding of $2.50 par value Common Stock as of November 21, 2014 was 42,249,211. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareowners (Proxy Statement) to be held January 21, 2015, to be filed on or about December 11, 2014, are incorporated by reference into Part I and Part III of this report. New Jersey Resources Corporation TABLE OF CONTENTS Glossary of Terms Information Concerning Forward-Looking Statements PART I ITEM 1. Business Organizational Structure Business Segments Natural Gas Distribution Energy Services Clean Energy Ventures Midstream Other Business Operations Home Services and Other Environment Employee Relations Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Securities Selected Financial Data ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 4A. Executive Officers of the Company PART II ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Management's Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to Consolidated Financial Statements Note 1. Nature of the Business Note 2. Summary of Significant Accounting Policies Note 3. Regulation Note 4. Derivative Instruments Note 5. Fair Value Note 6. Investments in Equity Investees Note 7. Earnings Per Share Note 8. Debt Note 9. Stock-Based Compensation Note 10. Employee Benefit Plans Note 11. Asset Retirement Obligations Note 12. Income Taxes Note 13. Commitments and Contingent Liabilities Note 14. Business Segment and Other Operations Data Note 15. Related Party Transactions Note 16. Selected Quarterly Financial Data (Unaudited) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions and Director Independence Principal Accountant Fees and Services PART III* ITEM 9. ITEM 9A. ITEM 9B. ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. PART IV ITEM 15. Exhibits and Financial Statement Schedules Index to Financial Statement Schedules Signatures Exhibit Index * Portions of Item 10 and Items 11-14 are Incorporated by Reference from the Proxy Statement. i Page 1 3 4 4 5 5 9 10 11 12 12 12 12 13 20 20 21 22 22 23 24 26 58 62 62 63 65 70 70 70 78 83 88 90 91 92 96 100 105 106 107 109 112 112 113 113 113 114 114 114 114 114 115 116 118 119 GLOSSARY OF KEY TERMS New Jersey Resources Corporation Allowance for Funds Used During Construction Accelerated Infrastructure Program Asset Retirement Obligations Accounting Standards Codification Accounting Standards Update Billion Cubic Feet Basic Gas Supply Service New Jersey Board of Public Utilities Continuing Covenant Agreement Conservation Incentive Program Chicago Mercantile Exchange Commercial Realty & Resources Corp. Construction Work In Progress Dodd-Frank Act DRP dths EDA FASB FCM FERC EDA Bonds EDECA Financial Margin AFUDC AIP ARO ASC ASU Bcf BGSS BPU CCA CIP CME CR&R CWIP FMB FRM GAAP HCCTR ICE Iroquois ISDA ITC LIBOR LNG MGP Moody's MW MWh NAESB NFE NGV NJ RISE NJCEP NJDEP NJNG Degree Day The measure of the variation in the weather based on the extent to which the average daily temperature falls below 65 degrees Fahrenheit Dodd-Frank Wall Street Reform and Consumer Protection Act NJR Direct Stock Purchase and Dividend Reinvestment Plan Dekatherms New Jersey Economic Development Authority Collectively, Series 2011A, Series 2011B and Series 2011C Bonds issued by the EDA Electric Discount and Energy Competition Act Financial Accounting Standards Board Futures Commission Merchant Federal Energy Regulatory Commission 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 Generally Accepted Accounting Principles of the United States First Mortgage Bonds Financial Risk Management Health Care Cost Trend Rate Intercontinental Exchange Iroquois Gas Transmission L.P. JPMC Facility NJNG's $100 million, four-year credit facility with JPMorgan Chase Bank, N.A. expiring in Loan Agreement MetLife MetLife Facility NJR's unsecured, uncommitted $100 million private placement shelf note agreement with New 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 The International Swaps and Derivatives Association Investment Tax Credit August 2015 and terminated on September 26, 2014 London Inter-Bank Offered Rate Liquefied Natural Gas Loan Agreement between the EDA and the Company Metropolitan Life Insurance Company MetLife, Inc. expiring in September 2016 Manufactured Gas Plant Moody's Investors Service, Inc. Megawatts Megawatt Hour The North American Energy Standards Board Net Financial Earnings Natural Gas Vehicles New Jersey Reinvestment in System Enhancement New Jersey's Clean Energy Program New Jersey Department of Environmental Protection New Jersey Natural Gas Company Page 1 NJNG Credit Facility The $250 million unsecured committed credit facility expiring in May 2019 New Jersey Resources Corporation New Jersey Resources Corporation GLOSSARY OF KEY TERMS (cont.) NJR Credit Facility NJR Energy NJR or The Company NJR Service NJRCEV NJRES NJRHS Non-GAAP NPNS NYMEX O&M OCI Old Mortgage Indenture OPEB PBO PennEast PEP PIM PPA Prudential Prudential Facility PTC RA Home Services and Other Retail Holdings S&P SAFE Sarbanes-Oxley SAVEGREEN Savings Plan SBC SEC SREC Steckman Ridge Superstorm Sandy TEFA Tetco The Exchange Act Trustee U.S. Union USF Wells Fargo NJR's $425 million unsecured committed credit facility expiring in August 2017 NJR Energy Corporation New Jersey Resources Corporation NJR Service Corporation NJR Clean Energy Ventures Corporation NJR Energy Services Company NJR Home Services Company Not in accordance with Generally Accepted Accounting Principles of the United States Normal Purchase/Normal Sale New York Mercantile Exchange Operation and Maintenance Other Comprehensive Income Indenture of Mortgage and Deed of Trust between NJNG and The Bank of New York Mellon Trust Company, N.A., dated April 1, 1952, as amended Other Postemployment Benefit Plans Projected Benefit Obligations PennEast Pipeline Company, LLC Pension Equalization Plan Pipeline Integrity Management Power Purchase Agreement Prudential Investment Management, Inc. NJR's unsecured, uncommitted private placement shelf note agreement with Prudential Production Tax Credit Remediation Adjustment Home Services and Other Operations (formerly Retail and Other Operations) NJR Retail Holdings Corporation Standard & Poor's Financial Services, LLC Safety Acceleration and Facility Enhancement Sarbanes-Oxley Act of 2002 The SAVEGREEN Project® Employees' Retirement Savings Plan Societal Benefits Charge Securities and Exchange Commission Solar Renewable Energy Certificate Collectively, Steckman Ridge GP, LLC and Steckman Ridge, LP Post-Tropical Cyclone Sandy Transitional Energy Facilities Assessment Texas Eastern Transmission The Securities Exchange Act of 1934, as amended U.S. Bank National Association The United States of America International Brotherhood of Electrical Workers Local 1820 Universal Service Fund Wells Fargo Municipal Capital Strategies, LLC INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Certain statements contained in this report, including, without limitation, statements as to management expectations and beliefs presented in Item 1.-Business, under the captions “BUSINESS SEGMENTS -Natural Gas Distribution-General;-Seasonality of Gas Revenues;-Gas Supply;-Regulation and Rates;-Competition;” “-Energy Services;” “-Clean Energy Ventures;” “- Midstream;” “-Home Services and Other;” “ENVIRONMENT,” and Item 3.“-Legal Proceedings,” and in Part II including “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, and “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A 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, 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; accounting effects and other risks associated with hedging activities and use of derivatives contracts; commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties, and liquidity in the wholesale energy trading market; 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 non-regulated 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; effective tax rate and earnings; regulatory process; timing of qualifying for ITCs and PTCs due to delays or failures to complete planned solar energy projects and the resulting effect on our 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 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. Page 2 Page 3 New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1. BUSINESS ORGANIZATIONAL STRUCTURE New Jersey Resources Corporation is a New Jersey corporation formed in 1981 pursuant to a corporate reorganization. The Company is an energy services holding company whose principal business is the distribution of natural gas through a regulated utility, and which provides other retail and wholesale energy services to customers and invests in midstream assets. The Company is an exempt holding company under section 1263 of the Energy Policy Act of 2005. NJR's subsidiaries and businesses include: New Jersey Natural Gas Company, a local natural gas distribution company that provides regulated retail natural gas service to approximately 504,300 residential and commercial customers in central and northern New Jersey and participates in the off-system sales and capacity release markets. NJNG is regulated by the BPU and comprises the Company's Natural Gas Distribution segment. NJR Energy Services Company maintains and transacts around a portfolio of physical assets consisting of natural gas storage and transportation contracts primarily in the Gulf Coast, Mid-Continent, Appalachian, Northeastern, and Western market areas of the U.S., as well as Canada. NJRES also provides wholesale energy management services to other energy companies and natural gas producers. NJRES comprises the Company's Energy Services segment. NJR Clean Energy Ventures Corporation composes the Company's Clean Energy Ventures segment and reports the results of operations and assets related to the Company's capital investments in distributed power projects, including commercial and residential solar projects and onshore wind investments, and the Company's 18.7 percent ownership interest in OwnEnergy. NJR Energy Investments Corporation, an unregulated affiliate that consolidates the Company's unregulated energy- related investments, which includes the following subsidiaries: • 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, a natural gas storage facility, NJNR Pipeline Company, which holds the Company's 5.53 percent ownership interest in Iroquois and NJR Pipeline Company, which holds the Company's 20 percent ownership interest in PennEast. Steckman Ridge, Iroquois and PennEast comprise the Company's Midstream segment. On November 7, 2013, NJR Energy Holdings Corporation changed its name to NJR Midstream Holdings Corporation. • NJR Investment Company, a company that makes and holds certain energy-related investments, through equity instruments of public companies. • NJR Energy Corporation, a company that invests in energy-related ventures. NJR Retail Holdings Corporation, an unregulated affiliate that consolidates the Company's unregulated retail operations. Retail Holdings consists of the following subsidiaries: • NJR Home Services Company, a company that provides heating, ventilation and cooling service repair and contract services to approximately 118,000 service contract customers, as well as solar installation projects. • Commercial Realty & Resources Corp., a company that holds and develops commercial real estate. • NJR Plumbing Services, Inc., a company that provides plumbing repair and installation services. NJR Service Corporation, an unregulated company that provides shared administrative services, including corporate communications, finance and accounting, internal audit, legal, human resources and information technology for NJR and all subsidiaries. ITEM 1. BUSINESS (Continued) BUSINESS SEGMENTS Ventures and Midstream. The Company operates within four reportable business segments: Natural Gas Distribution, Energy Services, Clean Energy 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. Lastly, the Midstream segment consists of investments in the midstream natural gas market, such as natural gas transportation and storage facilities. Net income and assets by business segment at September 30, are as follows: (Thousands) 2014 2013 2012 Natural Gas Distribution Energy Services Clean Energy Ventures Midstream Net Income Assets Net Income Assets Net Income Assets $ $ $ $ 74,204 $ 2,143,684 $ 73,846 $ 2,094,940 $ 73,238 $ 2,005,520 44,394 $ 12,654 $ 7,498 $ 457,080 $ 380,707 $ 153,891 $ 20,725 $ 10,060 $ 7,199 $ 468,096 $ 253,663 $ 153,536 $ (8,605) $ 19,452 $ 6,749 $ 347,406 223,247 157,779 Additional financial information related to these business segments are set forth in Note 14. Business Segment and Other Operations Data in the accompanying Consolidated Financial Statements and Item 7. Management's Discussion and Analysis. Natural Gas Distribution General NJNG provides natural gas service to approximately 504,300 customers. NJNG's service territory covers New Jersey's Monmouth and Ocean counties and parts of Burlington, Morris, Middlesex and Sussex counties. It encompasses 1,516 square miles, covering 105 municipalities with an estimated population of 1.5 million people. It is primarily suburban, highlighted by approximately 100 miles of New Jersey coastline. It is in close proximity to New York City, Philadelphia and the metropolitan areas of northern New Jersey and is accessible through a network of major roadways and mass transportation. NJNG added 7,599 and 7,456 new customers and added natural gas heat and other services to another 627 and 619 existing customers in fiscal 2014 and 2013, respectively. NJNG's new customer annual growth rate of approximately 1.5 percent is expected to continue with projected additions in the range of approximately 15,000 to 17,000 new customers over the next two years. This anticipated customer growth represents approximately $4.1 million in new annual utility gross margin, a non-GAAP financial measure, as calculated under NJNG's CIP tariff. When assessing the potential for future growth in its service area, NJNG uses information derived from county and municipal planning boards that describes housing developments in various stages of approval. Furthermore, NJNG surveys builders in its service area to gain insight into future development plans. NJNG has periodically engaged outside consultants to assist in its customer growth projections. In addition to customer growth through new construction, NJNG's business strategy includes aggressively pursuing conversions from other fuels, such as oil, electricity and propane. The Company estimates that during fiscal 2015, approximately 50 percent of NJNG's projected customer growth will consist of conversions. NJNG's business is subject to various risks, such as those associated with adverse economic conditions, which can negatively impact customer growth, operating and financing costs, fluctuations in commodity prices, which can impact customer usage, customer conservation efforts, certain regulatory actions and environmental remediation. It is often difficult to predict the impact of trends associated with these risks. NJNG employs strategies to manage the challenges it faces, including pursuing customer conversions from other fuel sources and monitoring new construction markets through contact with developers, utilizing incentive programs through BPU-approved mechanisms to reduce gas costs, pursuing rate and other regulatory strategies designed to stabilize and decouple gross margin, and working actively with consultants and the NJDEP to manage expectations related to its obligations associated with its former MGP sites. Page 4 Page 5 New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1. BUSINESS (Continued) ITEM 1. BUSINESS (Continued) Operating Revenues/Throughput Firm Transportation and Storage Capacity For the fiscal year ended September 30, operating revenues and throughput by customer class were as follows: ($ in thousands) Residential Commercial and other Firm transportation Total residential and commercial Interruptible 2014 Operating Revenue $ 469,831 113,354 86,131 669,316 6,770 Bcf 43.1 8.2 17.7 69.0 10.5 2013 Operating Revenue $ 467,269 102,350 73,745 643,364 6,452 Bcf 38.3 7.5 15.2 61.0 10.9 2012 Operating Revenue $ 363,780 88,484 60,599 512,863 6,510 Bcf 32.9 6.5 11.2 50.6 10.3 Total system BGSS incentive programs (1) Total (1) Does not include 153.4, 105.5 and 63.5 Bcf for the capacity release program and related amounts of $5.4 million, $3.7 million and $3.4 million, which are recorded as a reduction of gas purchases on the Consolidated Statements of Operations for the fiscal years ended September 30, 2014, 2013 and 2012, respectively. 143,329 649,816 519,373 819,415 138,171 108,340 787,987 627,713 676,086 106.9 107.9 79.5 71.9 60.9 27.4 36.0 36.1 97.0 $ $ $ In fiscal 2014, no single customer represented more than 10 percent of total NJNG operating revenues. Seasonality of Gas Revenues Therm sales are significantly affected by weather conditions with customer demand being greatest during the winter months when natural gas is used for heating purposes. The relative measurement of the impact of weather is in degree-days. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each day's average temperature. A degree-day is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65 degrees Fahrenheit. Each degree of temperature below 65 degrees Fahrenheit is counted as one heating degree-day. Normal heating degree-days are based on a twenty-year average, calculated based on three reference areas representative of NJNG's service territory. The CIP, a mechanism authorized by the BPU, stabilizes NJNG's utility gross margin, as a result of variations in weather. In addition, the CIP decouples the link between utility gross margin and customer usage, allowing NJNG to promote energy conservation measures. Recovery of utility gross margin is subject to additional conditions, including an earnings test and an evaluation of BGSS-related savings achieved over a 12-month period. In March 2013, NJNG and South Jersey Gas Company filed a joint petition with the BPU requesting the continuation of the CIP with certain modifications. On May 21, 2014, the BPU approved the continuation of the CIP program with no expiration date; however, the program will be subject to review in a future rate filing in 2017. Concurrent with its annual BGSS filing, NJNG files for an annual review of its CIP, during which time it can request rate changes, as appropriate. For additional information regarding the CIP, including rate actions and impact to margin, see Note 3. Regulation in the accompanying Consolidated Financial Statements and Item 7. Management's Discussion and Analysis-Natural Gas Distribution Segment. Gas Supply Firm Natural Gas Supplies In fiscal 2014, NJNG purchased gas from approximately 93 suppliers under contracts ranging from one day to one year and purchased over 10 percent of its natural gas from only two suppliers. NJNG believes the loss of these suppliers would not have a material adverse impact on its results of operations, financial position or cash flows as an adequate number of alternative suppliers exist. NJNG believes that its supply strategy should adequately meet its expected firm load over the next several years. Page 6 Page 7 In order to take delivery of firm natural gas supplies, which ensures the ability to reliably service its customers, NJNG maintains agreements for firm transportation and storage capacity with several interstate pipeline companies. NJNG receives natural gas at ten citygate stations located in Middlesex, Morris and Passaic counties in New Jersey. The pipeline companies that provide firm transportation service to NJNG's citygate stations, the maximum daily deliverability of that capacity for the upcoming winter season, in dths and the contract expiration dates are as follows: Maximum daily deliverability (dths) (1) Expiration Various dates between 2016 and 2023 Various dates between 2015 and 2019 Various dates between 2015 and 2024 (1) Numbers are shown net of any capacity release contracted amounts. Iroquois, Dominion Transmission Corporation and Columbia Gulf Transmission Company provide NJNG firm contract transportation service and supply the above pipelines. In addition, NJNG has citygate delivered storage contracts that provide additional maximum daily deliverability to NJNG's citygate stations of 102,941 dths from storage fields in its Northeast market area. The storage suppliers, the maximum daily deliverability of that storage capacity and the contract expiration dates are as follows: Maximum daily deliverability (dths) Expiration Pipeline Texas Eastern Transmission, L.P. Tennessee Gas Pipeline Co. Columbia Gas Transmission Corp. Algonquin Gas Transmission Transcontinental Gas Pipe Line Corp. Total Pipeline Total Texas Eastern Transmission, L.P. Transcontinental Gas Pipe Line Corp. Company Dominion Transmission Corporation Steckman Ridge, L.P. Central New York Oil & Gas Total 270,738 25,166 20,000 12,000 3,931 331,835 94,557 8,384 102,941 128,714 38,000 25,337 192,051 2016 2015 2016 2016 2020 2015 NJNG also has upstream storage contracts. The maximum daily deliverability and contract expiration dates as follows: Maximum daily deliverability (dths) Expiration Various dates between 2016 and 2017 NJNG utilizes its transportation contracts to transport gas from the Dominion Transmission Corporation, Steckman Ridge and Central New York Oil & Gas storage fields to NJNG's citygates. NJNG has sufficient firm transportation, storage and supply capacity to fully meet its firm sales contract obligations. Citygate Supplies from NJRES NJNG has several citygate supply agreements with NJRES. NJNG can call upon a supply of up to 28,600 dths/day delivered to NJNG's Transco citygate and a supply of up to 20,000 dths/day delivered to NJNG's Texas Eastern citygate. NJNG and NJRES have an agreement where NJNG released its Central New York Oil & Gas storage capacity of 1.6 million dths to NJRES for the period from January 1, 2010 to March 31, 2015. NJRES manages the storage inventory and NJNG can call on that storage supply as needed at NJNG's Tennessee citygate or storage point. NJNG and NJRES also have agreements where NJNG releases 80,000 dths/day of its Texas Eastern Transmission capacity to NJRES for the period from April 1, 2014 to March 31, 2016, and where NJNG releases 80,000 dths/day of its Texas Eastern Transmission capacity to NJRES for the period from November 1, 2014 to October 31, 2015. NJNG can call upon a supply of up to 160,000 dths/day delivered to NJNG's Texas Eastern citygate as needed. See Note 15. Related Party Transactions in the accompanying Consolidated Financial Statements for additional information regarding these transactions. New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1. BUSINESS (Continued) ITEM 1. BUSINESS (Continued) Peaking Supply To manage its winter peak day demand, NJNG maintains two LNG facilities with a combined deliverability of approximately 170,000 dths/day, which represents approximately 19 percent of its estimated peak day sendout. See Item 2. Properties-NJNG for additional information regarding the LNG storage facilities. BGSS Wholesale natural gas prices are, by their nature, volatile. NJNG mitigates the impact of volatile price changes on customers through the use of financial derivative instruments, which are part of its FRM program, its storage incentive program and its BGSS clause. BGSS is a BPU-approved clause designed to allow for the recovery of natural gas commodity costs on an annual basis. The clause requires all New Jersey natural gas utilities to make an annual filing by each June 1 for review of BGSS rates and to request a potential rate change effective the following October 1. The BGSS is also designed to allow each natural gas utility to provisionally increase residential and small commercial customer BGSS rates on December 1 and February 1 for up to a 5 percent increase to the average residential heat customer's bill on a self-implementing basis, after proper notice and BPU action on the June filing. Such increases are subject to subsequent BPU review and final approval. Decreases in the BGSS rate and BGSS refunds can be implemented with five days notice to the BPU. The BPU, within the framework of the EDECA, fully opened NJNG's residential markets to competition, including third- party suppliers, and restructured rates to segregate its BGSS and delivery (i.e., transportation) prices. The state's natural gas utilities must provide BGSS in the absence of any third-party supplier. On September 30, 2014, NJNG had 46,282 residential and 10,496 commercial and industrial customers utilizing the transportation service. Energy Services NJRES provides unregulated physical natural gas services and engages in the business of optimizing natural gas storage and transportation assets. The rights to these assets are contractually acquired in anticipation of delivering natural gas or performing asset management activities for customers or in conjunction with identifying arbitrage opportunities that exist in the marketplace. These arbitrage opportunities occur as a result of price differences between market locations and/or time horizons. NJRES' activities are conducted in the market areas in which it has expertise and includes primarily the Gulf Coast, Mid-Continent, Appalachian, Northeastern, and Western market regions of the U.S., as well as Canada. NJRES competes based on price and quality of service execution. Its competitors include utility companies, natural gas producers and financial institutions that have wholesale marketing operations. NJRES' portfolio of end-use customers includes natural gas distribution companies, industrial companies, and electric generators, as well as retail aggregators, wholesale marketers and natural gas producers. While focusing on maintaining a low-risk operating and counterparty credit profile, NJRES activities specifically consist In addition to making periodic rate adjustments to reflect changes in commodity prices, NJNG is also permitted to refund or credit back a portion of the commodity costs to customers when the natural gas commodity costs decrease in comparison to amounts projected or to amounts previously collected from customers. Rate changes, as well as other regulatory actions related to BGSS, are discussed further in Note 3. Regulation in the accompanying Consolidated Financial Statements. of the following elements: and natural gas producers; • Providing natural gas portfolio management services to nonaffiliated and affiliated utilities, electric generation facilities Future Natural Gas Supplies NJNG expects to meet the natural gas requirements for existing and projected firm customers into the foreseeable future. If NJNG's long-term natural gas requirements change, NJNG expects to renegotiate and restructure its contract portfolio components to better match the changing needs of its customers and changing natural gas supply landscape. Regulation and Rates State NJNG is subject to the jurisdiction of the BPU with respect to a wide range of matters such as base tariff rates and regulatory rider rates, the issuance of securities, the adequacy of service, the manner of keeping its accounts and records, the sufficiency of natural gas supply, pipeline safety, environmental issues, compliance with affiliate standards and the sale or encumbrance of its properties. See Note 3. Regulation in the accompanying Consolidated Financial Statements for additional information regarding NJNG's rate proceedings. Federal The FERC regulates rates charged by interstate pipeline companies for the transportation and storage of natural gas. This affects NJNG's agreements with several interstate pipeline companies for the purchase of such services. Costs associated with these services are currently recoverable through the BGSS. Competition Although its franchises are nonexclusive, NJNG is not currently subject to competition from other natural gas distribution utilities with regard to the transportation of natural gas in its service territory. Due to significant distances between NJNG's current large industrial customers and the nearest interstate natural gas pipelines, as well as the availability of its transportation tariff, NJNG currently does not believe it has significant exposure to the risk that its distribution system will be bypassed. Competition does exist from suppliers of oil, coal, electricity and propane. At the present time, however, natural gas is used in favor of alternate fuels in over 95 percent of new construction due to its efficiency and reliability. Natural gas prices are a function of market supply and demand. Although NJNG believes natural gas will remain competitive with alternate fuels, no assurance can be given in this regard. • Managing new and existing natural gas transportation and storage assets to position for benefits from changes in prices due to location or timing differences as a means to generate financial margin (as defined below); • Leveraging transactions for the delivery of natural gas to customers by aggregating the natural gas commodity costs and transportation costs to minimize the total cost required to provide and deliver natural gas to NJRES' customers. These transactions identify the lowest-cost alternative with the natural gas supply, transportation availability and markets to which NJRES is able to access through its business footprint and contractual asset portfolio; and • Managing economic hedging programs that are designed to mitigate the impact of adverse market price fluctuations on its natural gas supply transportation and storage commitments. Transportation and Storage Transactions NJRES focuses on creating value from its natural gas assets, which are typically amassed through contractual rights to natural gas transportation and storage capacity. These assets become more valuable when prices change between these areas and across time periods. On a forward basis, NJRES may hedge these price differentials through the use of financial instruments. In addition, NJRES seeks to optimize these assets on a daily basis as market conditions change by evaluating all the natural gas supplies and transportation to which it has access. This enables NJRES to capture geographic pricing differences across these various regions as delivered natural gas prices change as a result of market conditions. NJRES initiates positions on which it earns financial margin, and then enhances that financial margin as prices change across regions or time periods. NJRES also participates in park-and-loan transactions with pipeline and storage counterparties, where NJRES will park (store) natural gas to be redelivered to NJRES at a later date or borrow (receive a loan of natural gas) to be returned to the pipeline or storage field at a later date. In these cases, NJRES evaluates the economics of the transaction to determine if it can capture pricing differentials in the marketplace to generate financial margin. In evaluating these transactions, NJRES will compare the fixed fee it will pay to or receive from the counterparty, along with other costs such as time value of money, and the resulting financial margin it can generate when considering the market price at the beginning and end of the time period of the park or loan. NJRES evaluates deal attributes such as fixed fees, calendar spread value from deal inception until volumes are scheduled to be returned and/or repaid, as well as the time value of money. If this evaluation demonstrates that NJRES is able to generate financial margin, NJRES will enter into the transaction and hedge with natural gas futures contracts, thereby locking in financial margin. The Company utilizes its transportation and storage capacity to manage various types of activity with these customers. As a result, the Company is able to capture additional value from this capacity due to the locational and/or time differences inherent in each transaction. Page 8 Page 9 New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1. BUSINESS (Continued) ITEM 1. BUSINESS (Continued) Inventory NJRES maintains inventory balances to satisfy its existing or anticipated sales of natural gas to its counterparties and/or to create additional value, as described above. During fiscal 2014 and 2013, NJRES managed and sold 609.3 and 630.7 Bcf of natural gas, respectively. In addition, as of September 30, 2014 and 2013, NJRES had 56.5 Bcf or $191.3 million of gas in storage and 62.3 Bcf or $209.5 million of gas in storage, respectively. Weather/Seasonality NJRES' activities can be seasonal in nature as a result of changes in demand for natural gas. Demand for NJRES' natural gas is generally strong during the winter months; however, during periods of milder temperatures, demand can decrease. In addition, demand for natural gas can be high during periods of extreme heat in the summer months, resulting from the need for additional natural gas supply for gas-fired electricity generation facilities. Accordingly, NJRES can be subject to variations in earnings and working capital during the year as a result of changes in weather. Volatility NJRES' activities are also subject to changes in price volatility or supply/demand dynamics within its wholesale markets, including in the Northeastern, Appalachian and Mid-continent regions, where shale gas has contributed to an increase in supply. Changes in the supply of gas can affect capacity values and NJRES' financial margin, described below, that is generated from the optimization of transportation and storage assets. With its focus on risk management, NJRES continues to diversify its revenue stream by identifying new growth opportunities in the producer services marketplace. In addition, NJRES has added new counterparties, as well as strategic storage and transportation assets, to its holdings and continues to expand its geographic footprint, adding to its existing portfolio, which includes approximately 41 Bcf of firm storage capacity and 1.5 Bcf/day of firm transportation. Financial Margin NJRES 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. These derivative instruments are accounted for at fair value with changes in fair value recognized in earnings as they occur. NJRES views “financial margin” as a key financial metric. NJRES' financial margin, which is a non-GAAP financial measure, represents revenues earned from the sale of natural gas less costs of natural gas sold including any transportation and storage costs, and excludes any accounting impact from the change in the fair value of certain derivative instruments. For additional information regarding financial margin, see Item 7. Management's Discussion and Analysis - Energy Services Segment. Risk Management In conducting its business, NJRES mitigates risk by following formal risk management guidelines, including transaction limits, segregation of duties, and formal contract and credit review approval processes. NJRES continuously monitors and seeks to reduce the risk associated with its credit exposures with its various counterparties. Accordingly, NJRES' counterparties are primarily investment grade companies. The Risk Management Committee of NJR oversees compliance with these established guidelines. Clean Energy Ventures NJRCEV is an unregulated company that invests in, owns and/or operates distributed power projects located in New Jersey, Montana, Iowa and Kansas. NJRCEV also owns a minority equity interest in OwnEnergy, an onshore wind project developer. to Long Island, New York; and NJRCEV invests in, owns and operates residential and commercial solar installations in New Jersey. As of September 30, 2014, NJRCEV has placed solar assets with a capacity of 83.4 MW into service, including a combination of residential and commercial net-metered and grid-connected solar systems. As part of its solar investment program, NJRCEV operates a residential lease program, The Sunlight Advantage®, that provides qualifying homeowners with the opportunity to have a solar system installed at their home with no installation or maintenance expenses. NJRCEV owns, operates and maintains the system over the life of the lease in exchange for monthly payments. In addition, certain qualified non-profit institutions are served under PPAs. The program is operated by NJRCEV using a group of qualified contracting partners in addition to strategic supplier relationships for material standardization and sourcing. The residential solar lease and PPA market is highly competitive with various other companies operating programs in New Jersey. NJRCEV competes on price, quality and brand reputation, leveraging its partner network and customer referrals. Page 10 Page 11 NJRCEV's commercial solar projects are sourced through various channels and include both net-metered and grid-connected systems. Net-metered projects involve the sale of energy to a host where grid-connected systems sell into the wholesale energy markets. Project construction is competitively sourced through third parties. New Jersey has the third largest solar market in the U.S. with a large number of firms competing in all facets of the market including development, financing and construction. The solar systems are registered with the BPU's Office of Clean Energy and are qualified to produce SRECs. An SREC represents the renewable attribute associated with one MWh of solar energy generated. NJRCEV sells the SRECs to a variety of counterparties including electric Load Serving Entities that serve electric customers in New Jersey and are required to comply with minimum state clean energy generation standards. Solar projects are also currently eligible for federal ITCs in the year that they are placed into service. In addition to its solar investments, NJRCEV acquires small to mid-size wind farms that fit its investment profile. On October 11, 2013, NJRCEV acquired the development rights to the Two Dot onshore wind project in Montana, which was its first onshore wind project. NJRCEV invested approximately $21.2 million to construct the 9.7 MW project that was completed in June 2014. On February 14, 2014, NJRCEV acquired the development rights to the Carroll Area onshore wind project in Carroll County, Iowa. NJRCEV expects to complete the $42 million, 20 MW project in fiscal 2015. On October 9, 2014, NJRCEV acquired the development rights to the $85 million, 48 MW Alexander onshore wind project in Rush County, Kansas that is currently under construction and expected to be operational in the first quarter of fiscal 2016. All of the wind projects are eligible for a per-kilowatt-hour PTC for a 10-year period following commencement of operation and have long-term power purchase agreements in place, through which all energy and renewable attributes will be sold. During the fourth quarter of fiscal 2014, due to its concerns surrounding the ability of OwnEnergy to fulfill its future obligation to present qualified projects to NJRCEV for investment, the Company reassessed the value of its investment in OwnEnergy and determined that it is unlikely that it would be able to recover the carrying value. Accordingly, as of September 30, 2014, NJRCEV recognized an impairment loss of $6.4 million. See Note 6. Investment in Equity Investees for more information. NJRCEV is subject to various risks including those associated with adverse federal and state legislation and regulatory policies, construction delays that can impact the timing or eligibility of tax incentives, technological changes, and the future market of SRECs. See Item 1A. Risk Factors for additional information regarding these risks. Midstream of the following subsidiaries: Midstream includes investments in FERC-regulated interstate natural gas transportation and storage assets and is composed • NJR Steckman Ridge Storage Company, which holds the Company's 50 percent equity investment in Steckman Ridge. Steckman Ridge is a Delaware limited partnership, jointly owned and controlled by subsidiaries of the Company and subsidiaries of Spectra Energy Corporation, that built, owns and operates a natural gas storage facility with up to 12 Bcf of working gas capacity in Bedford County, Pennsylvania. The facility has direct access to the Texas Eastern and Dominion Transmission pipelines and has access to the Northeast and Mid-Atlantic markets; • NJNR Pipeline Company, which consists of its 5.53 percent equity investment in Iroquois Gas Transmission System, which is a 416-mile FERC-regulated interstate natural gas pipeline system that runs from the New York-Canadian border • NJR Pipeline Company, which consists of its 20 percent equity investment in PennEast Pipeline Company, through which NJR and five other investors expect to construct a 108-mile FERC-regulated interstate natural gas pipeline system that will extend from northern Pennsylvania to western New Jersey, estimated to be completed and operational by November 2017. New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1. BUSINESS (Continued) ITEM 1. BUSINESS (Continued) OTHER BUSINESS OPERATIONS Home Services and Other (formerly Retail and Other) Home Services and Other operations consist primarily of the following unregulated affiliates: AVAILABLE INFORMATION AND CORPORATE GOVERNANCE DOCUMENTS The following reports and any amendments to those reports are available free of charge on our website at http:// njr360.client.shareholder.com/sec.cfm as soon as reasonably possible after filing or furnishing them with the SEC: • NJRHS, which provides heating, ventilation and cooling service, sales and installation of appliances to approximately • Annual reports on Form 10-K; 118,000 service contract customers, as well as installation of solar equipment; • CR&R, which holds and develops commercial real estate. As of September 30, 2014, CR&R's real estate portfolio consisted of 52.3 acres of undeveloped land in Atlantic County with a net book value of $2.1 million and a 56,400-square- foot office building on five acres of land in Monmouth County with a net book value of $8.3 million; • NJR Investment, which invests in and holds certain energy-related investments, primarily through equity instruments of public companies; • NJR Energy, which invests in energy-related ventures; and • NJR Service, which provides shared administrative and financial services to the Company and all its subsidiaries. • NJR Code of Conduct; and ENVIRONMENT The Company and its subsidiaries are subject to legislation and regulation by federal, state and local authorities with respect to environmental matters. The Company believes that it is in compliance in all material respects with all applicable environmental laws and regulations. NJNG is responsible for the environmental remediation of five MGP sites, which contain contaminated residues from former gas manufacturing operations that ceased at these sites by the mid-1950s and, in some cases, had been discontinued many years earlier. NJNG periodically and at least annually performs an environmental review of the MGP sites, including a review of potential estimated liabilities related to the investigation and remedial action on these sites. Based on this review, NJNG estimated that the total future expenditures to remediate and monitor the five MGP sites for which it is responsible 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 available information is sufficient to reasonably estimate the amount of the liability, it is NJNG's policy to accrue the full amount of such estimate. Where the information is sufficient only to establish a range of possible liability, NJNG accrues the most likely in the range, or if no point within the range is more likely than the other, it is NJNG's policy to accrue the lower end of the range. As of September 30, 2014, NJNG recorded an MGP remediation liability and a corresponding regulatory asset of $177 million on the Consolidated Balance Sheets, which represents its most likely of possible liability; however, actual costs may differ from these estimates. NJNG is currently recovering approximately $18.7 million annually and will continue to seek recovery of these costs through its remediation rider. In September 2014, NJNG submitted its SBC filing requesting approval of its MGP expenditures incurred through June 30, 2014, and to recover $8.5 million annually related to the RA. EMPLOYEE RELATIONS As of September 30, 2014, the Company and its subsidiaries employed 968 employees compared with 936 employees as of September 30, 2013. Of the total number of employees, NJNG had 410 and 405 and NJRHS had 113 and 111 Union or “Represented” employees as of September 30, 2014 and 2013, respectively. NJNG and NJRHS have collective bargaining agreements with the Union, which is affiliated with the American Federation of Labor and Congress of Industrial Organizations, that expire in December 2018 and April 2019, respectively. The labor agreements cover wage increases and other benefits, including the defined benefit pension (which was closed to all employees hired on or after January 1, 2012, with the exception of certain rehires who are eligible to resume active participation), the postemployment benefit plan (which was closed to all employees hired on or after January 1, 2012) and the enhanced 401(k) retirement savings plan. The Company considers its relationship with employees, including those covered by collective bargaining agreements, to be in good standing. Page 12 Page 13 In addition, on our website at http://njr360.client.shareholder.com/governance.cfm, the following documents are also • Quarterly reports on Form 10-Q; and • Current reports on Form 8-K. available free of charge: • Corporate Governance Guidelines; • Wholesale Trading Code of Conduct; • Charters of the following Board of Directors Committees: Audit, Leadership Development and Compensation and Nominating/Corporate Governance. In Part III of this Form 10-K, we incorporate certain information by reference from our Proxy Statement for our 2015 annual meeting of shareholders. We expect to file that Proxy Statement with the SEC on or about December 11, 2014, and we will make it available on our website as soon as reasonably possible following that filing date. Please refer to the Proxy Statement when it is available. A printed copy of each is available free of charge to any shareholder who requests it by contacting the Corporate Secretary at New Jersey Resources Corporation, 1415 Wyckoff Road, Wall, New Jersey 07719. ITEM 1A. RISK FACTORS When considering any investment in NJR's securities, investors should consider the following risk factors, as well as the information contained under the caption “Forward-Looking Statements,” in analyzing the Company's present and future business performance. While this list is not exhaustive, NJR's management also places no priority or likelihood based on their descriptions or order of presentation. Unless indicated otherwise or the content requires otherwise, references below to “we,” “us,” and “our” should be read to refer to NJR and its subsidiaries. Inability of NJR and/or NJNG to access the financial markets and conditions in the credit markets could affect management's ability to execute their respective business plans. We rely on access to both short-term and long-term credit markets as significant sources of liquidity for capital requirements not satisfied by our cash flow from operations. Any deterioration in our financial condition could hamper our ability to access the credit markets or otherwise obtain debt financing. Because certain state regulatory approvals may be necessary in order for NJNG to incur debt, NJNG may not be able to access credit markets on a timely basis. External events could also increase the cost of borrowing or adversely affect the ability to access the financial markets. Such external events could include the following: economic weakness and or political instability in the U.S. or in the regions where we operate; • • • political conditions, such as a shutdown of the U.S. federal government; financial difficulties of unrelated energy companies; New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1A. RISK FACTORS (Continued) ITEM 1A. RISK FACTORS (Continued) • capital market conditions generally; • market prices for natural gas; • • the overall health of the natural gas utility industry; and fluctuations in interest rates, particularly with respect to NJNG's variable rate debt instruments. Our ability to secure short-term financing is subject to conditions in the credit markets. A prolonged constriction of credit availability could affect management's ability to execute our business plan. An inability to access capital may limit the ability to pursue improvements or acquisitions that we may otherwise rely on for both current operations and future growth. NJRES and NJNG execute derivative transactions with financial institutions as a part of their economic hedging strategy and could incur losses associated with the inability of a financial counterparty to meet or perform under its obligations as a result of adverse conditions in the credit markets or their ability to access capital or post collateral. NJR is a holding company and depends on its operating subsidiaries to meet its financial obligations. NJR is a holding company with no significant assets other than possible cash investments and the stock of its operating subsidiaries. We rely exclusively on dividends from our subsidiaries, on intercompany loans from our non-regulated subsidiaries, and on the repayments of principal and interest from intercompany loans made to our subsidiaries for our cash flows. Our ability to pay dividends on our common stock and to pay principal and accrued interest on our outstanding debt depends on the payment of dividends to us by certain of our subsidiaries or the repayment of loans to us by our principal subsidiaries. The extent to which our subsidiaries do not pay dividends or repay funds to us may adversely affect our ability to pay dividends to holders of our common stock and principal and interest to holders of our debt. Credit rating downgrades could increase financing costs, limit access to the financial markets and negatively affect NJR and its subsidiaries. Rating agencies Moody's and S&P currently rate NJNG's debt as investment grade. If such ratings are downgraded below investment grade, borrowing costs could increase, as will the costs of maintaining certain contractual relationships and obtaining future financing. Even if ratings are downgraded without falling below investment grade, NJR and NJNG can face increased borrowing costs under their current credit facilities. Our ability to borrow and costs of borrowing have a direct impact on our subsidiaries' ability to execute their operating strategies. If we suffer a reduction in our credit and borrowing capacity or in our ability to issue parental guarantees, the business prospects of NJRES and NJRCEV, which rely on our creditworthiness, would be adversely affected. NJRES would possibly be required to comply with various margin or other credit enhancement obligations under its trading and marketing contracts, and it may be unable to continue to trade or be able to do so only on less favorable terms with certain counterparties. In addition, NJRCEV would be required to seek alternative financing for its projects. NJRCEV may be unable to obtain such financing or able to do so only on less favorable terms. Additionally, lower credit ratings could adversely affect relationships with NJNG's state regulators, who may be unwilling to allow NJNG to pass along increased costs to its natural gas customers. Failure by NJR and/or NJNG to comply with debt covenants may impact our financial condition. Our long-term debt obligations contain financial covenants related to debt-to-capital ratios and an interest coverage ratio in the case of NJNG. These debt obligations also contain provisions that put certain limitations on our ability to finance future operations or capital needs or to expand or pursue certain business activities. For example, certain of these agreements contain provisions that, among other things, put limitations on our ability to make loans or investments, make material changes to the nature of our businesses, merge, consolidate or engage in asset sales, grant liens or make negative pledges. Furthermore, the debt obligations contain covenants and other provisions requiring us to make timely delivery of accurate financial statements prepared in accordance with GAAP. The failure to comply with any of these covenants could result in an event of default, which, if not cured or waived, could result in the acceleration of outstanding debt obligations and/or the inability to borrow under existing revolving credit facilities. We have relied, and continue to rely, upon short-term bank borrowings or commercial paper supported by our revolving credit facilities to finance the execution of a portion of our operating strategies. NJNG is dependent on these capital sources to purchase its natural gas supply and maintain its properties. The acceleration of our outstanding debt obligations and our inability to borrow under the existing revolving credit facilities would cause a material adverse change in NJR's and NJNG's financial condition. The cost of providing pension and postemployment health care benefits to eligible former employees is subject to changes in pension fund values, interest rates and changing demographics and may have a material adverse effect on our financial results. We have two defined benefit pension plans and two OPEB plans for the benefit of eligible full-time employees and qualified retirees, which were closed to all employees hired on or after January 1, 2012. The cost of providing these benefits to eligible current and former employees is subject to changes in the market value of the pension and OPEB fund assets, changing discount rates and changing demographics, including longer life expectancy of beneficiaries, an expected increase in the number of eligible former employees over the next five years, impacts from healthcare legislation and increases in health care costs. Significant declines in equity markets and/or reductions in bond yields can have a material adverse effect on the funded status of our pension and OPEB plans. In these circumstances, we may be required to recognize increased pension and OPEB expenses and/or be required to make additional cash contributions into the plans. The funded status of these plans, and the related cost reflected in our financial statements, are affected by various factors that are subject to an inherent degree of uncertainty. Under the Pension Protection Act of 2006, losses of asset values may necessitate increased funding of the plans in the future to meet minimum federal government requirements. A significant decrease in the asset values of these plans can result in funding obligations earlier than we had originally planned, which would have a negative impact on cash flows from operations, decrease our borrowing capacity and increase our interest expense. Our economic hedging activities that are designed to protect against commodity and financial market risks, including the use of derivative contracts in the normal course of NJRES' business may cause fluctuations in reported financial results and financial losses that negatively impact results of operations and our stock price. We use derivatives, including futures, forwards, options, swaps and foreign exchange contracts to manage commodity, financial market and foreign currency risks. The timing of the recognition of gains or losses associated with our economic hedges in accordance with GAAP used in the U.S. does not always coincide with the gains or losses on the items being hedged. The difference in accounting can result in volatility in reported results, even though the expected profit margin is essentially unchanged from the dates the transactions were consummated. In addition, NJRES could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these financial instruments can involve management's judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could adversely affect the value of the reported fair value of these contracts. A change in our effective tax rate as a result of a failure to qualify for ITCs and PTCs or being delayed in qualifying for ITCs due to delays or failures to complete planned solar energy projects and wind projects within the safe harbor period may have a material impact on our earnings. GAAP requires NJR to apply an effective tax rate to interim periods that is consistent with our estimated annual effective tax rate. As a result, quarterly, NJR projects the annual effective tax rate and then adjusts the tax expense recorded in that quarter to reflect the projected annual effective tax rate. The amount of the quarterly adjustment is based on information and assumptions, which are subject to change and which may have a material impact on quarterly and annual NFE. Factors we consider in estimating the probability of projects being completed during the fiscal year include, but are not limited to, Board of Directors approval, execution of various contracts, including power purchase agreements, construction logistics, permitting and interconnection completion. If NJR fails to qualify for ITCs or is delayed in qualifying for some ITCs during the fiscal year due to delays or failures to complete planned solar energy projects as scheduled, our quarterly and annual net income and NFE may be materially impacted. For a wind facility to be considered a qualified facility for purposes of the PTCs, the construction of the facility must have begun prior to January 1, 2014. A taxpayer may establish that construction has begun by starting “physical work of a significant nature.” Only physical work of a significant nature on tangible personal property used as an integral part of the activity performed by the facility is considered for purposes of determining when construction begins. Alternatively, a taxpayer may establish that construction has begun by paying or incurring five percent of eligible project costs (the “5 percent safe harbor”). Page 14 Page 15 New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1A. RISK FACTORS (Continued) ITEM 1A. RISK FACTORS (Continued) NJNG's operations are subject to certain operating risks incidental to handling, storing, transporting and providing customers Changes in customer growth may affect earnings and cash flows. with natural gas. NJNG's operations are subject to all operating hazards and risks incidental to handling, storing, transporting and providing customers with natural gas. These risks include explosions, pollution, release of toxic substances, fires, storms and other adverse weather conditions and hazards, each of which could result in damage to or destruction of facilities or damage to persons and property. NJNG could suffer substantial losses should any of these events occur. Moreover, as a result, NJNG has been, and likely will be, a defendant in legal proceedings and litigation arising in the ordinary course of business. Although NJNG maintains insurance coverage, insurance may not be sufficient to cover all material expenses related to these risks. Major changes in the supply and price of natural gas may affect financial results. While NJNG expects to meet the demand for natural gas from its customers for the foreseeable future, factors impacting suppliers and other third parties, including increased competition, further deregulation, transportation costs, possible climate change legislation, transportation availability and drilling for new natural gas resources, may impact the supply and price of natural gas. NJNG actively hedges against the fluctuation in the price of natural gas by entering into forward and financial contracts with third parties. Should these third parties fail to perform and regulators not allow the pass-through of expended funds to customers, it may result in a loss that could have a material impact on our financial position, cash flows and statement of operations. NJNG and NJRES rely on storage, transportation assets and suppliers that they do not own or control to deliver natural gas. customers, the cash flows and earnings at NJRES, and ultimately NJR, could be adversely impacted. NJNG and NJRES depend on natural gas pipelines and other storage and transportation facilities owned and operated by third parties to deliver natural gas to wholesale markets and to provide retail energy services to customers. Their ability to provide natural gas for their present and projected sales will depend upon their suppliers' ability to obtain and deliver additional supplies of natural gas, as well as NJNG's ability to acquire supplies directly from new sources. Factors beyond the control of NJNG, its suppliers and the independent suppliers who have obligations to provide natural gas to certain NJNG customers, may affect NJNG's ability to deliver such supplies. These factors include other parties' control over the drilling of new wells and the facilities to transport natural gas to NJNG's citygate stations, competition for the acquisition of natural gas, priority allocations, impact of severe weather disruptions to natural gas supplies, the regulatory and pricing policies of federal and state regulatory agencies, as well as the availability of Canadian reserves for export to the United States. Energy deregulation legislation may increase competition among natural gas utilities and impact the quantities of natural gas requirements needed for sales service. NJRES also relies on a firm supply source to meet its energy management obligations to its customers. If supply, transportation or storage is disrupted, including for reasons of force majeure, the ability of NJNG and NJRES to sell and deliver their products and services may be hindered. As a result, they may be responsible for damages incurred by their customers, such as the additional cost of acquiring alternative supply at then-current market rates. Particularly for NJRES, these conditions could have a material impact on its cash flows and statement of operations. Adverse economic conditions, including inflation, increased natural gas costs, foreclosures and business failures, could adversely impact NJNG's customer collections and increase our level of indebtedness. We may be unable to obtain governmental approvals, property rights and/or financing for the construction, development and operation of our proposed energy investments and projects in a timely manner or at all. Inflation may cause increases in certain operating and capital costs. We continually review the adequacy of NJNG's tariff rates in relation to the increasing cost of providing service and the inherent regulatory lag in adjusting those rates. The ability to control operating expenses is an important factor that will influence future results. Rapid increases in the price of purchased gas may cause NJNG to experience a significant increase in short-term debt because it must pay suppliers for gas when it is purchased, which can be significantly in advance of when these costs may be recovered through the collection of monthly customer bills for gas delivered. Increases in purchased gas costs also slow collection efforts as customers are more likely to delay the payment of their gas bills, leading to higher-than-normal accounts receivable. Changes in weather conditions may affect earnings and cash flows. Weather conditions and other natural phenomena can have an adverse impact on our earnings and cash flows. Severe weather conditions can impact suppliers and the pipelines that deliver gas to NJNG's distribution system. Extended mild weather, during either the winter period or summer period, can have a significant impact on demand for and the cost of natural gas. While we believe the CIP mitigates the impact of weather variations on NJNG's gross margin, severe weather conditions may have an impact on the ability of suppliers and pipelines to deliver the natural gas to NJNG, which can negatively affect our earnings. The CIP does not mitigate the impact of severe weather conditions on our cash flows. Page 16 Page 17 NJNG's ability to increase its utility firm gross margin is dependent upon the new construction housing market, as well as the conversion of customers to natural gas from other fuel sources. During periods of extended economic downturns, prolonged weakness in housing markets or slowdowns in the conversion market, there could be an adverse impact on NJNG's utility firm gross margin, earnings and cash flows. Furthermore, our estimate regarding customer growth has not been verified by any independent source and is subject to the aforementioned risks and uncertainties, which could cause actual results to materially deviate from the estimate. NJRES' earnings and cash flows are dependent upon optimization of its physical assets using financial transactions. NJRES' earnings and cash flows are based, in part, on its ability to optimize its portfolio of contractual-based natural gas storage and pipeline assets. The optimization strategy involves utilizing its physical assets to take advantage of differences in natural gas prices between geographic locations and/or time periods. Any change among various pricing points could affect these differentials. In addition, significant increases in the supply of natural gas in NJRES' market areas, for example that can occur as a result of increased production along the Marcellus Shale in the Appalachian basin, can reduce NJRES' ability to find opportunities going forward. Changes in pricing dynamics and supply could have an adverse impact on NJRES' optimization activities, earnings and cash flows. NJRES incurs fixed demand fees to acquire its contractual rights to storage and transportation assets. Should commodity prices at various locations or time periods change in such a way that NJRES is not able to recoup these costs from its NJRES is exposed to market risk and may incur losses in wholesale services. The storage and transportation portfolios at NJRES consist of contracts to transport and store natural gas commodities. The value of NJRES' portfolio could be negatively impacted if the value of these contracts change in a direction or manner that NJRES does not anticipate. In addition, upon expiration of these storage and transportation contracts, to the extent that they are renewed or replaced at less favorable terms, our results of operations and cash flows could be negatively impacted. Investing through partnerships or joint ventures decreases our ability to manage risk. We have utilized joint ventures for certain midstream investments, including Steckman Ridge, Iroquois, and PennEast. Although we currently have no specific plans to do so, we may acquire interests in other joint ventures in the future. In these joint ventures, we may not have the right or power to direct the management and policies of the joint ventures, and other participants may take action contrary to our instructions or requests and against our policies and objectives. In addition, the other participants may become bankrupt or have economic or other business interests or goals that are inconsistent with those of NJR and our subsidiaries. Our financial condition, results of operations or cash flows could be harmed if a joint venture participant acts contrary to our interests. Construction, development and operation of energy investments, such as natural gas storage facilities, pipeline transportation systems, solar energy projects and onshore wind projects, are subject to federal and state regulatory oversight and require certain property rights, such as easements and rights-of-way from public and private property owners, as well as regulatory approvals, including permits and licenses for such facilities and systems. We or our joint venture partnerships may be unable to obtain, in a cost-efficient or timely manner, all such needed property rights, permits and licenses in order to successfully construct and develop our energy facilities and systems. Successful financing of our energy investments requires participation by willing financial institutions and lenders, as well as acquisition of capital at favorable interest rates. If we do not obtain the necessary regulatory approvals, property rights and financing, our equity investments could be impaired, and such impairment could have a materially adverse effect on our financial condition, results of operations or cash flows. Our investments in distributed power projects are subject to substantial risks. Commercial and residential solar energy projects and onshore wind projects, such as those in which we are investing, are dependent upon current regulatory and tax incentives and there is uncertainty about the extent to which such incentives will be available in the future. The potential return on investment of these projects is based substantially on our eligibility for ITCs, the future market for SRECs that are traded in a competitive marketplace in the State of New Jersey. As a result, these projects face the risk that the current regulatory regimes and tax laws may expire or be adversely modified during the life of the projects. Furthermore, a sustained decrease in the value of SRECs would negatively impact the return on investment of the solar projects. Legislative changes or declines in the price of SRECs could also lead to an impairment of the solar project assets. New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1A. RISK FACTORS (Continued) ITEM 1A. RISK FACTORS (Continued) In addition, there are risks associated with our ability to develop and manage such projects profitably, including logistical risks and potential delays related to construction, permitting, regulatory approvals (including any approvals by the BPU required pursuant to recently enacted solar energy legislation in the State of New Jersey) and electric grid interconnection, as well as the operational risk that the projects in service will not perform according to expectations due to equipment failure, suboptimal weather conditions or other factors beyond our control. All of the aforementioned risks could reduce the availability of viable solar energy projects for development. Furthermore, at the development or acquisition stage, because of the nascent nature of the renewable energy industry and the limited experience with the relevant technology, our ability to predict actual performance results may be hindered and the projects may not perform as predicted. Risks related to the regulation of NJNG could affect the rates it is able to charge, its costs and its profitability. NJNG is subject to regulation by federal, state and local authorities. These authorities regulate many aspects of NJNG's distribution operations, including construction and maintenance of facilities, operations, safety, tariff rates that NJNG can charge customers, rates of return, the authorized cost of capital, recovery of pipeline replacement and environmental remediation costs and relationships with its affiliates. NJNG's ability to obtain rate increases, including base rate increases, extend its BGSS incentive and CIP programs and maintain its currently authorized rates of return may be impacted by events, including regulatory or legislative actions. There can be no assurance that NJNG will be able to obtain rate increases, continue its BGSS incentive, CIP and SAVEGREEN programs or continue the opportunity to earn its currently authorized rates of return. Significant regulatory assets recorded by NJNG could be disallowed for recovery from customers in the future. NJNG records regulatory assets on its financial statements to reflect the ratemaking and regulatory decision-making authority of the BPU as allowed by current GAAP. The creation of a regulatory asset allows for the deferral of costs which, absent a mechanism to recover such costs from customers in rates approved by the BPU, would be charged to expense on its income statement in the period incurred. Primary regulatory assets that are subject to BPU approval include the recovery of BGSS and USF costs, remediation costs associated with its MGP sites, CIP, NJCEP, economic stimulus plans, certain deferred income tax and pension and other postemployment benefit plans. If there were to be a change in regulatory positions surrounding the collection of these deferred costs there could be a material impact on NJNG's financial position, results of operations and cash flows. We may be adversely impacted by natural disasters, pandemic illness, terrorist activities and other extreme events to which successfully compete in today's challenging marketplace. we may not be able to promptly respond. Local or national natural disasters, pandemic illness, terrorist activities and other extreme events are a threat to our assets and operations. Companies in our industry and located in our service territory may face a heightened risk due to exposure to acts of terrorism that could target or impact our natural gas distribution, transmission and storage facilities and result in a disruption in our operations and ability to meet customer requirements. In addition, the threat of terrorist activities could lead to increased economic instability and volatility in the price of natural gas that could affect our operations. Natural disasters or actual or threatened terrorist activities may also disrupt capital markets and our ability to raise capital, or impact our suppliers or our customers directly. A local disaster or pandemic illness could result in part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. In addition, these risks could result in loss of human life, significant damage to property, environmental damage, impairment of our operations and substantial loss to the Company. Our regulators may not allow us to recover from our customers part or all of the increased cost related to the foregoing events, which could negatively affect our earnings. We maintain emergency planning and training programs to remain ready to respond to events that could cause business interruption. However, a slow or inadequate response to events may have an adverse impact on operations and earnings. We may not be able to obtain sufficient insurance to cover all risks associated with local and national disasters, pandemic illness, terrorist activities and other events, which could increase the risk that an event could adversely affect our operations or financial results. Cyber-attack or failure of information technology systems could adversely affect our business operation, financial condition and results of operations. We continue to place greater reliance on technological tools that support our business operations and corporate functions, including tools that help us manage our natural gas distribution operations and infrastructure. The failure of, or security breaches related to, these technologies could materially adversely affect our business operations, our financial position, results of operations and cash flows. Page 18 Page 19 We rely on information technology to manage our natural gas distribution and other corporate operations, maintain customer, employee, Company and vendor data, prepare our financial statements and to perform other critical business processes. This technology may fail due to cyber-attack, physical disruption, design and implementation defects or human error. Disruption or failure of business operations and information technology systems could harm our facilities or otherwise adversely impact our ability to safely deliver natural gas to our customers, serve our customers effectively or manage our assets. Additionally, an attack on or failure of information technology systems could result in the unauthorized release of customer, employee or other confidential or sensitive data. Any of the foregoing events could adversely affect our business reputation, diminish customer confidence, disrupt operations, subject us to financial liability or increased regulation, increase our costs and expose us to material legal claims and liability. There is no guarantee that redundancies we have built into our networks and technology, or the procedures that we have implemented to protect against cyber-attack and other unauthorized access to secured data, are adequate to safeguard against all failures of technology or security breaches. Failure to attract and retain an appropriately qualified employee workforce could adversely affect operations. Our ability to implement our business strategy and serve our customers is dependent upon our continuing ability to attract and retain talented professionals and a technically skilled workforce, and being able to transfer the knowledge and expertise of our workforce to new employees as our aging employees retire. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the new employees, or the future availability and cost of contract labor could adversely affect the ability to manage and operate our business. Furthermore, the majority of our natural gas distribution segment workforce is represented by the Union and is covered by a collective bargaining agreement that will expire in December 2018. Disputes with the Union over terms and conditions of the agreement could result in instability in our labor relationship and work stoppages that could impact the timely delivery of gas and other services from our utility, which could strain relationships with customers and state regulators and cause a loss of revenues that could adversely affect our results of operations. Our collective bargaining agreement may also increase the cost of employing our natural gas distribution segment workforce, affect our ability to continue offering market-based salaries and employee benefits, limit our flexibility in dealing with our workforce, and limit our ability to change work rules and practices and implement other efficiency-related improvements to We are subject to governmental regulation. Compliance with current and future regulatory requirements and procurement of necessary approvals, permits and certificates may result in substantial costs to us. We are subject to substantial regulation from federal, state and local regulatory authorities. We are required to comply with numerous laws and regulations and to obtain numerous authorizations, permits, approvals and certificates from governmental agencies. These agencies regulate various aspects of our business, including customer rates, services and natural gas pipeline operations. The FERC has regulatory authority over some of our operations, including sales of natural gas in the wholesale market and the purchase and sale of interstate pipeline and storage capacity. Any Congressional legislation or agency regulation that would alter these or other similar statutory and regulatory structures in a way to significantly raise costs that could not be recovered in rates from customers, that would reduce the availability of supply or capacity or that would reduce our competitiveness could negatively impact our earnings. In addition, the U.S. Senate has passed the Pipeline Transportation Safety Improvement Act and if enacted will increase federal regulatory oversight and could also increase administrative costs that may not be recovered in rates from customers, which could have an adverse impact on our earnings. We cannot predict the impact of any future revisions or changes in interpretations of existing regulations or the adoption of new laws and applicable regulations. Changes in regulations or the imposition of additional regulations could influence our operating environment and may result in substantial costs to us. Our certificate of incorporation and bylaws may delay or prevent a transaction that stockholders would view as favorable. Our certificate of incorporation and bylaws, as well as New Jersey law, contain provisions that could delay, defer or prevent an unsolicited change in control of NJR, which may negatively affect the market price of our common stock or the ability of stockholders to participate in a transaction in which they might otherwise receive a premium for their shares over the then current market price. These provisions also may prevent changes in management. In addition, our Board of Directors is authorized to New Jersey Resources Corporation Part I New Jersey Resources Corporation Part I ITEM 1A. RISK FACTORS (Continued) ITEM 2. PROPERTIES (Continued) issue preferred stock without stockholder approval on such terms as our Board of Directors may determine. Our common stockholders will be subject to, and may be negatively affected by, the rights of any preferred stock that may be issued in the future. In addition, we are subject to the New Jersey Shareholders' Protection Act, which could delay or prevent a change of control of NJR. We are involved in legal or administrative proceedings before various courts and governmental bodies that could adversely affect our results of operations, cash flows and financial condition. We are involved in legal or administrative proceedings before various courts and governmental bodies with respect to general claims, rates, taxes, environmental issues, gas cost prudence reviews and other matters. Adverse decisions regarding these matters, to the extent they require us to make payments in excess of amounts provided for in our financial statements, could adversely affect our results of operations, cash flows and financial condition. Our costs of compliance with present and future environmental laws are significant and could adversely affect our cash flows and profitability. Our operations are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources and site remediation. Compliance with these laws and regulations may require us to expend significant financial resources to, among other things, conduct site remediation and perform environmental monitoring. If we fail to comply with applicable environmental laws and regulations, even if we are unable to do so due to factors beyond our control, we may be subject to civil liabilities or criminal penalties and may be required to incur significant expenditures to come into compliance. Additionally, any alleged violations of environmental laws and regulations may require us to expend significant resources in our defense against alleged violations. Furthermore, the U.S. Congress has for some time been considering various forms of climate change legislation. There is a possibility that, when and if enacted, the final form of such legislation could impact our costs and put upward pressure on wholesale natural gas prices. Higher cost levels could impact the competitive position of natural gas and negatively affect our growth opportunities, cash flows and earnings. ITEM 1B. UNRESOLVED STAFF COMMENTS None As of September 30, 2014, NJRES leases office space in Wall Township, New Jersey, as well as Houston, Texas and Charlotte, Energy Services Segment North Carolina for its business activities. Clean Energy Ventures Segment NJRCEV has various solar contracts, including lease agreements and easements, allowing the installation, operation and maintenance of solar equipment and access to the various properties, including commercial and residential rooftops with a total of 83.4 MW of solar capacity. In addition to the lease agreement and easements, NJRCEV owns 79.5 acres of land for its Vineland solar project. NJRCEV is also party to various land lease agreements and easements, which allow for the installation, operation and maintenance of wind turbines, associated electric collection facilities, substations, operation and maintenance buildings and access to the various properties. The Two Dot wind project in Two Dot, Montana is a 9.7 MW onshore wind project, which was completed in June 2014. The Carroll Area wind project located in Carroll County, Iowa is a 20 MW project and is currently under construction. In addition to the lease agreement and easements, NJRCEV owns 1.8 acres of land for its Carroll wind project. On October 22, 2014, NJRCEV purchased 7.14 acres of land in Rush County, Kansas for its 48 MW Alexander wind project. Midstream Segment As of September 30, 2014, the Steckman Ridge partnership owned and/or leased storage rights on approximately 6,300 acres of land in Bedford County, Pennsylvania, with a FERC-regulated natural gas storage facility with up to 12 Bcf of working gas capacity. Equipment on the property includes a compressor station, gathering pipelines and pipeline interconnections. As of September 30, 2014, Iroquois Gas Transmission System owned a 416-mile FERC-regulated interstate natural gas pipeline system with approximately 1.5 Bcf per day of capacity, which runs from the New York-Canadian border to Long Island, New York. All Other Business Operations As of September 30, 2014, CR&R's real estate portfolio consisted of 52.3 acres of undeveloped land in Atlantic County with a net book value of $2.1 million and a 56,400-square-foot office building on five acres of land in Monmouth County with a net book value of $8.3 million. ITEM 2. PROPERTIES NJRHS leases service centers in Dover, Morris County and Wall, Monmouth County, New Jersey. Natural Gas Distribution Segment (All properties are located in New Jersey) Capital Expenditure Program NJNG owns approximately 7,060 miles of distribution main, 7,168 miles of service main, 226 miles of transmission main and approximately 526,000 meters. Mains are primarily located under public roads. Where mains are located under private property, NJNG has obtained easements from the owners of record. Additionally, NJNG owns and operates two LNG storage plants in Stafford Township, Ocean County; and Howell Township, Monmouth County. The two LNG plants have an aggregate estimated maximum capacity of approximately 170,000 dths per day and 1 Bcf of total capacity. These facilities are used for peaking natural gas supply and emergencies. NJNG owns four service centers located in Rockaway Township, Morris County; Atlantic Highlands and Wall Township, Monmouth County; and Lakewood, Ocean County. These service centers house storerooms, garages, gas distribution and administrative offices. NJNG leases its headquarters and customer service facilities in Wall Township, Monmouth County, a customer service office in Asbury Park, Monmouth County and a service center in Manahawkin, Ocean County. These customer service offices support customer contact, marketing, economic development and other functions. Substantially all of NJNG's properties, not expressly excepted or duly released, are subject to the lien of the New Mortgage Indenture, dated as of September 1, 2014, as security for NJNG's mortgage bonds, which totaled $432.8 million as of September 30, 2014. In addition, under the terms of the Indenture, NJNG could have issued up to $841.2 million of additional first mortgage bonds as of September 30, 2014. See Item 7. Management Discussion and Analysis for a discussion of anticipated fiscal 2015 and 2016 capital expenditures as applicable to NJR's business segments and business operations. ITEM 3. LEGAL PROCEEDINGS Manufactured Gas Plant Remediation NJNG is responsible for the remedial cleanup of five MGP sites, dating back to gas operations in the late 1800s and early 1900s, which contain contaminated residues from former gas manufacturing operations. NJNG is currently involved in administrative proceedings with the NJDEP, 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 February 2012, NJNG filed its 2011 SBC filing, requesting approval of its MGP expenditures incurred through June 30, 2011, which would continue its existing overall SBC rate and recovery at approximately $20 million. In July 2013, NJNG requested approval of its MGP expenditures incurred through June 2013 as well as a reduction in the RA factor to Page 20 Page 21 New Jersey Resources Corporation Part I New Jersey Resources Corporation Part II ITEM 3. LEGAL PROCEEDINGS (Continued) $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 September 30, 2014, $30.9 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in regulatory assets on the Consolidated Balance Sheets. NJNG periodically and at least annually performs an environmental review of 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. However, NJNG expects actual costs to differ from these estimates. Where it is probable that costs will be incurred, and the information is sufficient to reasonably estimate a range of possible liability, NJNG accrues the most likely amount in the range. If no point within the range is more likely than the other, it is NJNG's policy to accrue the lower end of the range. Accordingly, as of September 30, 2014, NJNG recorded an MGP remediation liability and a corresponding regulatory asset of $177 million on the Consolidated Balance Sheets, based on our most likely amount of possible liability. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and any insurance recoveries. NJNG will continue to seek recovery of MGP-related costs through the RA. If any future regulatory position indicates that the recovery of such costs is not probable, the related cost would be charged to income in the period of such determination. However, because recovery of such costs is subject to BPU approval, there can be no assurance as to the ultimate recovery through the RA or the impact on the Company's results of operations, financial position or cash flows, which could be material. General The Company is party to various other claims, legal actions and complaints arising in the ordinary course of business. In the Company's opinion, other than as disclosed in this Item 3, the ultimate disposition of these matters will not have a material effect on its financial condition, results of operations or cash flows. ITEM 4. MINE SAFETY DISCLOSURES Not applicable ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY The Company's Executive Officers and their age, position and business experience during the past five years are set forth ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES NJR's Common Stock is traded on the New York Stock Exchange under the ticker symbol NJR. As of September 30, 2014, NJR had 42,252 holders of record of its common stock. NJR's common stock high and low sales prices and dividends paid per share were as follows: Fiscal Quarter First Second Third Fourth 2014 2013 Dividends Paid High Low High Low 2014 2013 $46.95 $50.47 $57.68 $57.79 $42.54 $43.75 $47.70 $48.63 $46.28 $45.63 $47.60 $46.00 $38.51 $39.06 $40.97 $40.60 $0.42 $0.42 $0.42 $0.42 $0.40 $0.40 $0.40 $0.40 In 1996, the Board of Directors authorized the Company to implement a share repurchase program, which has been expanded seven times since the inception of the program. In July 2013, the Board of Directors approved an increase in the number of shares of NJR common stock authorized for repurchase under NJR's Share Repurchase Plan by one million shares to a total of 9.75 million shares. The Share Repurchase Plan allows the Company to purchase its shares on the open market or in negotiated transactions, based on market and other conditions. The Company is not required to purchase any specific number of shares and may discontinue or suspend the program at any time. The Share Repurchase Plan will expire when we have repurchased all shares authorized for repurchase thereunder, unless it is earlier terminated by action of our Board of Directors or additional shares are authorized for repurchase. The following table sets forth NJR's repurchase activity for the quarter ended September 30, 2014: Period 07/01/14 - 07/31/14 08/01/14 - 08/31/14 09/01/14 - 09/30/14 Total Total Number of Shares (or Units) Purchased Average Price Paid per Share (or Unit) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the or Programs Plans or Programs — — 46,700 46,700 $ $ $ $ — — 50.60 50.60 — — 46,700 46,700 1,552,127 1,552,127 1,505,427 1,505,427 below. Name Laurence M. Downes Age 57 Kathleen T. Ellis Glenn C. Lockwood Mariellen Dugan Stephen Westhoven 61 53 48 46 2004 1990 2005 2004 Stanley M. Kosierowski 62 2008 Officer since Office held during last five years 1986 Chairman of the Board (September 1996 - present) President and Chief Executive Officer (July 1995 - present) Executive Vice President and Chief Operating Officer, NJNG (February 2008 - present) Senior Vice President, Corporate Affairs (December 2004 - present) Executive Vice President (January 2011 - present) Chief Financial Officer (September 1995 - present) Senior Vice President (January 1996 - December 2010) Senior Vice President and General Counsel (February 2008 - present) Senior Vice President, NJRES (May 2010 - present) Vice President of Energy Trading, NJRES (January 2004 - May 2010) President, NJRCEV and NJRHS (May 2010 - present) Vice President, Strategy and Operations (July 2009 - May 2010) Vice President, NJRCEV (September 2008 - April 2010) Deborah G. Zilai 61 1996 Vice President, Corporate Services, NJR Service (June 2005 - present) Page 22 Page 23 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 6. SELECTED FINANCIAL DATA ITEM 6. SELECTED FINANCIAL DATA (Continued) CONSOLIDATED FINANCIAL STATISTICS (Thousands, except per share data) Fiscal Years Ended September 30, SELECTED FINANCIAL DATA Operating revenues Operating expenses Gas purchases Operation and maintenance Regulatory rider expenses Depreciation and amortization Energy and other taxes Total operating expenses Operating income Other income, net Interest expense, net of capitalized interest Income before income taxes Income tax provision Equity in earnings of affiliates Net income Total assets CAPITALIZATION Common stock equity Long-term debt Total capitalization COMMON STOCK DATA Earnings per share-Basic Earnings per share-Diluted Dividends declared per share 2014 2013 2012 2011 2010 $ 3,738,145 $ 3,198,068 $ 2,248,923 $ 3,009,209 $ 2,639,304 3,139,525 215,180 72,164 52,742 57,344 3,536,955 201,190 7,551 25,463 183,278 51,840 10,532 141,970 $ 2,167,558 148,565 45,966 32,267 56,823 2,451,179 188,125 5,258 21,251 172,132 64,692 10,017 $ 117,457 $ 3,158,804 $ 3,004,783 $ 2,770,005 $ 2,649,444 $ 2,563,133 2,550,571 163,111 51,246 34,370 66,910 2,866,208 143,001 3,747 19,623 127,125 37,665 11,839 101,299 $ 1,841,408 171,045 40,350 41,643 45,787 2,140,233 108,690 2,128 20,844 89,974 7,729 10,634 92,879 $ 2,712,223 173,473 48,417 47,310 57,414 3,038,837 159,231 4,783 23,979 140,035 35,575 10,349 114,809 $ $ 966,166 $ 598,209 725,483 428,925 $ 1,564,375 $ 1,400,270 $ 1,339,034 $ 1,203,054 $ 1,154,408 887,384 $ 512,886 813,865 $ 525,169 776,257 $ 426,797 $3.37 $3.34 $1.71 $2.76 $2.75 $1.62 $2.24 $2.23 $1.54 $2.45 $2.44 $1.44 $2.84 $2.82 $1.36 NON-GAAP RECONCILIATION Net income Add: Consolidated unrealized loss (gain) on derivative instruments Effects of economic hedging related to natural gas inventory Tax adjustments Net financial earnings (1) $ 141,970 $ 114,809 $ 92,879 $ 101,299 $ 117,457 28,534 (9,418) 35,790 36,875 (27,446) 26,639 (20,286) 176,857 $ 7,635 655 113,681 $ (4,891) (11,361) 112,417 $ (28,604) (3,037) 106,533 $ 3,469 8,284 101,764 $ Net financial earnings per share-Basic (1) Net financial earnings per share-Diluted (1) $4.20 $4.17 $2.73 $2.72 $2.71 $2.70 $2.58 $2.56 $2.46 $2.44 (1) NFE is a financial measure not calculated in accordance with GAAP. NFE eliminates the timing differences surrounding the recognition of certain gains or losses, to effectively match the earnings effects of economic hedges associated with the physical sale or purchase of gas and, therefore, eliminates the impact of volatility to GAAP earnings associated with the related derivative instruments. For further discussion of this financial measure, see the Energy Services segment in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Page 24 Page 25 NJNG OPERATING STATISTICS Fiscal Years Ended September 30, Operating revenues ($ in thousands) Residential Commercial, industrial and other Firm transportation Total residential and commercial Interruptible Total system BGSS incentive programs Total operating revenues Throughput (Bcf) Residential Commercial, industrial and other Firm transportation Total residential and commercial Interruptible Total system BGSS incentive programs Total throughput Customers at year-end Residential Commercial, industrial and other Firm transportation Total residential and commercial Interruptible BGSS incentive programs Total customers at year-end Interest coverage ratio (1) Average therm use per customer Residential Commercial, industrial and other Degree days Weather as a percent of normal (2) Number of employees 2014 2013 2012 2011 2010 $ 469,831 $ 467,269 $ 363,780 $ 579,038 $ 471,056 $ 819,415 $ 787,987 $ 627,713 $ 971,724 $ 945,480 102,350 73,745 643,364 6,452 649,816 138,171 38.3 7.5 15.2 61.0 10.9 71.9 141.5 213.4 408,399 24,302 64,652 497,353 40 38 88,484 60,599 512,863 6,510 519,373 108,340 116,043 57,126 752,207 7,029 759,236 212,488 112,582 45,616 629,254 8,454 637,708 307,772 32.9 6.5 11.2 50.6 10.3 60.9 99.6 42.3 8.3 12.2 62.8 8.3 71.1 107 40.3 8.2 10.1 58.6 7.7 66.3 83.9 160.5 178.1 150.2 423,871 24,985 51,214 500,070 41 32 428,694 25,666 40,523 494,883 41 40 438,274 26,312 25,724 490,310 43 40 113,354 86,131 669,316 6,770 676,086 143,329 43.1 8.2 17.7 69.0 10.5 79.5 180.8 260.3 422,742 24,684 56,778 504,204 36 34 504,274 10.24 497,431 10.82 500,143 10.85 494,964 10.73 490,393 9.43 1,020 4,466 5,080 109.6% 626 937 3,773 4,664 99.9% 611 775 3,675 3,698 77.9% 611 986 4,350 4,686 99.3% 590 919 4,986 4,341 91.4% 582 (1) (2) NJNG's income from operations divided by interest expense. Normal heating degree days are based on a twenty-year average, calculated based upon three reference areas representative of NJNG's service territory. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Forward-looking and Cautionary Statements From time to time, we may make statements that may constitute “forward-looking statements” within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company's then-current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. Information concerning forward-looking statements is set forth on page 3 of this annual report and is incorporated herein. A detailed discussion of risk and uncertainties that could cause actual results to differ materially from such forward-looking statements is included in Item 1A. Risk Factors and are incorporated herein. We undertake no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise. Critical Accounting Policies We prepare our financial statements in accordance with GAAP. Application of these accounting principles requires the use of estimates and assumptions that affect the reported amounts of liabilities, revenues and expenses, and related disclosures of contingencies during the reporting period. We regularly evaluate our estimates, including those related to the calculation of the fair value of derivative instruments, unbilled revenues, provisions for depreciation and amortization, regulatory assets, income taxes, pension and postemployment benefits other than pensions and contingencies related to environmental matters and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In the normal course of business, estimated amounts are subsequently adjusted to actual results that may differ from estimates. Regulatory Accounting NJNG maintains its accounts in accordance with the FERC Uniform System of Accounts as prescribed by the BPU and recognizes the impact of regulatory decisions on its financial statements. As a result of the ratemaking process, NJNG is required to apply the accounting principles in ASC 980, Regulated Operations, which differ in certain respects from those applied by unregulated businesses. Specifically, NJNG records assets when it is probable that certain operating costs will be recoverable from customers in future periods and records liabilities associated with probable future obligations to customers. NJNG's BGSS requires it to project its annual natural gas costs and provides the ability, subject to BPU approval, to recover or refund the difference, if any, of such actual costs compared with the projected costs included in prices through a BGSS charge to customers. Any underrecovery or overrecovery is recorded as a regulatory asset or liability on the Consolidated Balance Sheets and reflected in the BGSS charge to customers in subsequent years. As recovery of regulatory assets is subject to BPU approval, if there are any changes in future regulatory positions that indicate recovery of all or a portion of a regulatory asset is not probable, the related cost would be charged to income in the period of such determination. Derivative Instruments We record our derivative instruments held as assets and liabilities at fair value on the Consolidated Balance Sheets. In addition, since we choose not to designate any of our physical and financial commodity derivatives as accounting hedges, changes in the fair value of NJRES' commodity derivatives are recognized in earnings, as they occur, as a component of operating revenues or gas purchases on the Consolidated Statements of Operations. Changes in the fair value of foreign exchange contracts that NJRES utilizes as cash flow hedges are recorded to OCI, a component of stockholders' equity, and reclassified to gas purchases on the Consolidated Statements of Operations when they settle. The fair value of derivative instruments is determined by reference to quoted market prices of listed exchange-traded contracts, published price quotations, pipeline tariff information and/or a combination of those items. NJRES' portfolio is valued using the most current and reasonable market information. If the price underlying a physical commodity transaction does not represent a visible and liquid market, NJRES may utilize additional published pipeline tariff information and/or other services to determine an equivalent market price. As of September 30, 2014, fair value of its derivative assets and liabilities reported on the Consolidated Balance Sheets that is based on such pricing is immaterial. Should there be a significant change in the underlying market prices or pricing assumptions, NJRES may experience a significant impact on its financial position, results of operations and cash flows. Refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risks for sensitivity analysis related to the impact to derivative fair values resulting from changes in commodity prices. The valuation methods NJR uses to determine fair values remained consistent for fiscal 2014, 2013 and 2012. NJR applies a discount to its derivative assets to factor in an adjustment associated with the credit risk of its physical natural gas counterparties and to its derivative liabilities to factor in an adjustment associated with its own credit risk. NJR determines this amount by using historical default probabilities corresponding to the appropriate S&P issuer ratings. Since the majority of NJR's counterparties are rated investment grade, this results in an immaterial credit risk adjustment. Gains and losses associated with derivatives utilized by NJNG to manage the price risk inherent in its natural gas purchasing activities are recoverable through its BGSS, subject to BPU approval. Accordingly, the offset to the change in fair value of these derivatives is recorded as either a regulatory asset or liability on the Consolidated Balance Sheets. NJRCEV hedges certain of its expected production of SRECs through the sale of forward and futures contracts. Accounting guidance permits companies to apply an exception for certain contracts intended for NPNS for which physical delivery is probable. NJRCEV intends to physically deliver all SRECs it sells and therefore applies NPNS accounting treatment to the contracts and recognizes SREC revenue as operating revenue on the Consolidated Statements of Operations upon delivery of the underlying SREC. Income Taxes and Credits We have not designated any derivatives as fair value hedges as of September 30, 2014 and 2013. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We use the asset and liability method to determine and record deferred tax assets, representing future tax benefits, and deferred tax liabilities, representing future taxes payable, resulting from the differences between the financial reporting amount and the corresponding tax basis of the assets and liabilities using the enacted rates expected to be in effect at the time the differences are settled. An offsetting valuation allowance is recorded when it is more likely than not some or all of the deferred income tax assets won't be realized. NJR had net deferred tax liabilities of $382 million and $362.7 million and a valuation allowance of $212,000 and $262,000 related to certain deferred state tax assets as of September 30, 2014 and 2013, respectively. Any significant changes to the estimates and judgments with respect to the interpretations, timing or deductibility could result in a material change on earnings and cash flows. For state income tax and other taxes, estimates and judgments are also required with respect to the apportionment among the various jurisdictions. In addition, we operate within multiple tax jurisdictions and are subject to audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We maintain a liability for the estimate of potential income tax exposure and, in our opinion, adequate provisions for income taxes have been made for all years reported. Any significant changes to the estimates and judgments with respect to the apportionment factor could result in a material change on earnings and cash flows. Accounting guidance also requires that we establish reserves for uncertain tax positions when it is more likely than not that the positions will not be sustained when challenged by taxing authorities. We have no reason to believe that we have any future obligations associated with unrecognized tax benefits, therefore, as of September 30, 2014 and 2013, we have not recorded any liabilities related to uncertain tax positions. Any significant changes to the estimates and judgments with respect to the interpretations, timing or deductibility could result in a material change on earnings and cash flows. To the extent that NJNG invests in property that qualifies for ITCs, the ITC is deferred and amortized to income over the life of the equipment in accordance with regulatory treatment. For our unregulated subsidiaries, we recognize ITCs as a reduction to income tax expense when the property is placed in service. Changes in the federal statutes related to the ITC could have a negative impact on earnings and cash flows. To the extent that the Company invests in property that qualifies for PTCs, the PTC is recognized as a reduction to current federal income tax expense as the PTCs are generated through the production activities of the assets. Changes to the federal statutes related to PTCs could have a negative impact on earnings and cash flows. Page 26 Page 27 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Increase/(Decrease) on PBO Increase/(Decrease) to Expense Other Postemployment Benefits Actuarial Assumptions Discount rate Discount rate Rate of return on plan assets Rate of return on plan assets Actuarial Assumptions Health care cost trend rate Health care cost trend rate Increase/ (Decrease) 1.00 % (1.00) % 1.00 % (1.00) % Increase/ (Decrease) 1.00 % (1.00) % Estimated (Thousands) $(18,053) $ 22,891 n/a n/a Estimated (Thousands) $ 20,965 $(16,932) Estimated (Thousands) $ (1,701) $ $ $ 2,094 (487) 491 Estimated (Thousands) $ 3,199 $ (2,561) Increase/(Decrease) on PBO Increase/(Decrease) to Expense Recently Issued Accounting Standards Refer to Note 2. Summary of Significant Accounting Policies in the accompanying Consolidated Financial Statements for discussion of recently issued accounting standards. Management's Overview Consolidated NJR is an energy services holding company providing retail natural gas service in New Jersey and wholesale natural gas and related energy services to customers primarily in the Gulf Coast, Mid-Continent, Appalachian, Northeastern and Western market areas of the U.S., as well as Canada, through its subsidiaries NJNG and NJRES. In addition, NJR invests in distributed power projects, midstream assets and provides various repair, sales and installations services. A more detailed description of NJR's organizational structure can be found in Item 1. Business. Business Segments NJR has four primary business segments as presented in the chart below: Environmental Costs At the end of each fiscal year, NJNG updates the environmental review of its MGP sites, including a review of its potential liability for investigation and remedial action, based on assistance from an independent external consulting firm. From this review, NJNG estimates expenditures necessary to remediate and monitor these MGP sites. As of September 30, 2014, NJNG estimated these expenditures will range from approximately $151.3 million to $249.8 million. NJNG's estimate of these liabilities is developed from then currently available facts, existing technology and current laws and regulations. In accordance with accounting standards for contingencies, NJNG's policy is to record a liability when it is probable that the cost will be incurred and can be reasonably estimated. NJNG will determine a range of liabilities and will record the most likely amount. If no point within the range is more likely than any other, NJNG will accrue the lower end of the range. Since we believe that recovery of these expenditures, as well as related litigation costs, is possible through the regulatory process, we have recorded a regulatory asset corresponding to the related accrued liability. Accordingly, NJNG recorded an MGP remediation liability and a corresponding regulatory asset of $177 million on the Consolidated Balance Sheets, which is based on the most likely amount. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay, as well as the potential impact of any litigation and any insurance recoveries. As of September 30, 2014 and 2013, $30.9 million and $47 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds received, are included in regulatory assets on the Consolidated Balance Sheets, respectively. If there are changes in the regulatory position surrounding these costs, or should actual expenditures vary significantly from estimates in that these costs are disallowed for recovery by the BPU, such costs would be charged to income in the period of such determination. Postemployment Employee Benefits NJR's costs of providing postemployment employee benefits are dependent upon numerous factors including actual plan experience and assumptions of future experience. Postemployment employee benefit costs are impacted by actual employee demographics including age, compensation levels and employment periods, the level of contributions made to the plans, changes in long-term interest rates and the return on plan assets. Changes made to the provisions of the plans or healthcare legislation may also impact current and future postemployment employee benefit costs. Postemployment employee benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets, health care cost trends and discount rates used in determining the PBO. In determining the PBO and cost amounts, assumptions can change from period to period and could result in material changes to net postemployment employee benefit periodic costs and the related liability recognized by NJR. NJR's postemployment employee benefit plan assets consist primarily of U.S. equity securities, international equity securities and fixed-income investments, with a targeted allocation of 40 percent, 20 percent and 40 percent, respectively. Fluctuations in actual market returns, as well as changes in interest rates, may result in increased or decreased postemployment employee benefit costs in future periods. Postemployment employee benefit expenses are included in O&M expense on the Consolidated Statements of Operations. The following is a summary of a sensitivity analysis for each actuarial assumption: Pension Plans Actuarial Assumptions Discount rate Discount rate Rate of return on plan assets Rate of return on plan assets Increase/ (Decrease) 1.00 % (1.00) % 1.00 % (1.00) % Estimated Increase/(Decrease) on PBO (Thousands) $(29,403) $ 36,855 n/a n/a Estimated Increase/(Decrease) to Expense (Thousands) $ (2,964) $ 3,332 $ (1,877) 1,876 $ Page 28 Page 29 Net Income $ $ 141,970 $ 3,158,804 $ 114,809 $ 3,004,783 $ Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation. Assets Net Income Assets Net Income Assets 74,204 $ 2,143,684 $ 44,394 12,654 7,498 2,798 422 457,080 380,707 153,891 82,413 (58,971) 73,846 $ 2,094,940 $ 20,725 10,060 7,199 3,292 (313) 468,096 253,663 153,536 85,293 (50,745) 73,238 $ 2,005,520 347,406 (8,605) 223,247 19,452 157,779 6,749 73,298 2,366 (37,245) (321) 92,879 $ 2,770,005 Natural Gas Distribution Energy Services Clean Energy Ventures Midstream Home Services and Other Intercompany (1) Total (1) New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In addition to the four business segments, NJR has other non-utility operations that either provide corporate support services or do not meet management's criteria to be treated as a separate business segment. These operations, which comprise Home Services and Other (formerly Retail and Other), include: appliance repair services, sales and installations at NJRHS; energy-related ventures at NJR Energy and commercial real estate holdings at CR&R. A summary of the company's consolidated results in net income and assets by business segment and operations at for the fiscal years ended September 30, is as follows: ($ in thousands) 2014 2013 2012 NFE by business segment and other operations for the fiscal years ended September 30, discussed in more detail within the operating results sections of each segment, is summarized as follows: (Thousands) Natural Gas Distribution Energy Services Clean Energy Ventures Midstream Home Services and Other Eliminations (1) Total Natural Gas Distribution Segment Overview (1) Consists of transactions between subsidiaries that are eliminated in consolidation. $ 42% $ 65% $ 2014 74,204 79,735 12,654 7,498 2,798 45 7 4 2 2013 73,846 19,311 10,060 7,199 3,292 17 9 6 3 2012 73,238 10,791 19,452 6,749 2,366 65% 10 17 6 2 (32) — (27) — (179) — $ 176,857 100% $ 113,681 100% $ 112,417 100% Our Natural Gas Distribution segment is comprised of NJNG, a natural gas utility that provides regulated retail natural gas service in central and northern New Jersey and also participates in the off-system sales and capacity release markets. As a regulated company, NJNG is required to recognize the impact of regulatory decisions on its financial statements. See Note 3. Regulation in the accompanying Consolidated Financial Statements for a more detailed discussion on regulatory actions, including filings related to programs and associated expenditures as well as rate requests related to recovery of costs. Our Natural Gas Distribution segment has approximately 504,300 residential and commercial customers in its service territory. The business is subject to various risks, such as those associated with adverse economic conditions, that can negatively impact customer growth, operating and financing costs, fluctuations in commodity prices and customer conservation efforts, which can impact customer usage, certain regulatory actions, environmental remediation and severe weather conditions. It is often difficult to predict the impact of events or trends associated with these risks. In addition, NJNG's business is seasonal by nature, as weather conditions directly influence the volume of natural gas delivered. Specifically, customer demand substantially increases during the winter months when natural gas is used for heating purposes. As a result, NJNG receives most of its gas distribution revenues during the first and second fiscal quarters and is subject to variations in earnings and working capital during the year. NJNG's operations are managed with the goal of providing safe and reliable service, growing its customer base, diversifying its margin, promoting clean energy programs and mitigating the risks discussed above, through several key initiatives including: • Earning a reasonable rate of return on the investments in its natural gas distribution and transmission systems, as well as timely recovery of all prudently incurred costs in order to provide safe and reliable service throughout NJNG's territory: - NJNG is required by the BPU to file a base rate case no later than November 15, 2015; • Continuing to invest in the safety and integrity of its infrastructure; • Managing its customer growth rate, which NJNG expects to be approximately 1.5 percent annually over the next two • Maintaining a collaborative relationship with the BPU on regulatory initiatives, including: - planning and authorization of infrastructure investments; - pursuing rate and regulatory strategies to stabilize and decouple margin, including CIP; years; - and The primary drivers of the changes noted above, which are described in more detail in the individual segment discussions, are as follows: The increase in net income during fiscal 2014, compared with fiscal 2013, was primarily driven by: • • increases at NJRES due primarily to higher gross margin due to increased demand caused by the extreme cold weather; increases at NJRCEV due to the receipt of a credit support payment related to a change in ownership at the site of one of NJRCEV's commercial solar projects along with ITCs associated with solar projects; and The increase in net income during fiscal 2013, compared with fiscal 2012, was primarily driven by: • • increases at NJRES due primarily to changes in realized and unrealized derivative gains; partially offset by decreases in ITCs associated with a reduction in solar projects placed in service at NJRCEV. The increase in assets during fiscal 2014 and 2013, included additional utility plant expenditures at our Natural Gas Distribution segment and solar and wind expenditures at Clean Energy Ventures. In addition, higher commodity prices contributed to the increase in gas in storage and accounts receivable at Energy Services during fiscal 2013. Management of the Company uses NFE, a non-GAAP financial measure, when evaluating the operating results of its Energy Services segment, related to financial derivative instruments that have settled and are designed to economically hedge natural gas still in inventory. NFE is a measure of the earnings based on eliminating timing differences surrounding the recognition of certain gains or losses, to effectively match the earnings effects of the economic hedges with the physical sale of gas and, therefore, eliminates the impact of volatility to GAAP earnings associated with the derivative instruments. Non-GAAP financial measures are not in accordance with, or an alternative to GAAP, and should be considered in addition to, and not as a substitute for, the comparable GAAP measure. The following is a reconciliation of consolidated net income, the most directly comparable GAAP measure, to NFE: (Thousands) Net income Add: Consolidated unrealized loss (gain) on derivative instruments Effects of economic hedging related to natural gas inventory Tax adjustments NFE Basic earnings per share Basic NFE per share 2014 2013 $ 141,970 $ 114,809 $ 2012 92,879 28,534 26,639 (20,286) 35,790 (4,891) (11,361) $ 176,857 $ 113,681 $ 112,417 (9,418) 7,635 655 $ $ 3.37 $ 4.20 $ 2.76 $ 2.73 $ 2.24 2.71 utilizing BGSS incentive programs through BPU-approved mechanisms to reduce gas costs and generate earnings; Page 30 Page 31 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - administering and promoting NJNG's BPU-approved SAVEGREEN project; • Managing the volatility of wholesale natural gas prices through a hedging program designed to keep customers' BGSS of its service territory, referred to as the Southern Reliability Link. rates as stable as possible; and NJNG is exploring additional system enhancements that are designed to support improved reliability in the southern portion Below is a summary of NJNG's capital expenditures, including estimates for expected investments over the next two fiscal • Working to manage its financial obligations related to remediation activities associated with its MGP sites. Infrastructure projects NJNG has significant annual capital expenditures associated with the management of its natural gas distribution and transmission system, including new utility plant for customer growth and its associated PIM and infrastructure programs. AIP and SAFE NJNG has implemented BPU-approved infrastructure projects that are designed to enhance the reliability of NJNG's gas distribution system, including AIP and SAFE. As of September 30, 2014, NJNG has received regulatory approval to recover approximately $15.3 million annually through its base tariff rates related to AIP. On October 23, 2012, the BPU approved a stipulation allowing NJNG to implement the SAFE program whereby NJNG is replacing portions of its gas distribution unprotected steel and cast iron infrastructure over a four-year period. NJNG will seek to recover $130 million, plus a weighted average cost of capital of 6.9 percent, with a return on equity of 9.75 percent, in its next base rate case to be filed no later than November 15, 2015. NGV Advantage On June 18, 2012, the BPU approved a pilot program for NJNG to invest up to $10 million to build NGV refueling stations in Monmouth, Ocean and Morris counties. As of September 30, 2013, NJNG has begun development of three NGV stations. On April 23, 2014, the BPU approved NJNG's request to include the cost recovery of its NGV capital investments in its next base rate case to be filed no later than November 15, 2015. In addition, the BPU approved a deferred accounting methodology related to the NGV investment costs consistent with NJNG's SAFE Program. The NGV program was authorized by the BPU to earn an overall weighted average cost of capital of 7.1 percent, including a return on equity of 10.3 percent. A portion of the proceeds from the utilization of the compressed natural gas equipment, along with any available federal and state incentives, will be credited back to ratepayers to help offset the cost of this investment. NJ RISE NJNG filed a petition with the BPU on September 3, 2013, seeking approval of NJ RISE, which consists of six capital investment projects estimated to cost $102.5 million, excluding AFUDC, for gas distribution storm hardening and mitigation projects, along with associated O&M expenses. The submission was made in response to a March 2013 BPU order, initiating a proceeding to investigate prudent, cost efficient and effective opportunities to protect New Jersey's utility infrastructure from future major storm events. These system enhancements are intended to minimize service impacts during extreme weather events to customers that live in the most storm prone areas of NJNG's service territory. In the filing, NJNG proposed the recovery of its capital costs associated with NJ RISE through an annual adjustment to its base rate. On July 23, 2014, the BPU approved a Stipulation of Settlement related to the recovery of the proposed NJ RISE capital infrastructure program to include a May 2015 filing to recover costs through July 31, 2015, through an adjustment to base rates as of November 1, 2015. Additional capital and O&M cost recovery will be included in NJNG's next base rate case scheduled to be filed no later than November 15, 2015. Liquefaction NJNG is in the design and procurement phase of its Liquefaction project, which when completed, will allow NJNG to convert natural gas into LNG, which will then be used to fill NJNG's existing LNG storage tanks. Capital cost recovery will be included in NJNG's next base rate case scheduled to be filed no later than November 15, 2015. Page 32 Page 33 Other System maintenance and other years: (Millions) Customer growth AIP/SAFE Superstorm Sandy NGV Advantage NJ RISE Liquefaction/LNG Southern Reliability Total Customer growth 2013 2014 2015 2016 $ 24.5 $ 30.1 $ 26.8 $ 42.5 45.3 26.1 1.0 — — — 61.8 40.3 9.8 4.8 — 10.1 — 66.9 41.2 5.0 4.2 7.0 11.9 19.3 26.9 54.4 39.0 — — 14.7 11.8 86.9 $ 139.4 $ 156.9 $ 182.3 $ 233.7 Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory oversight, environmental regulations, unforeseen events and the ability to access capital. In conducting NJNG's business, management focuses on factors it believes may have significant influence on its future financial results. NJNG's policy is to work with all stakeholders, including customers, regulators and policymakers, to achieve favorable results. These factors include the rate of NJNG's customer growth in its service territory, which can be influenced by political and regulatory policies, the delivered cost of natural gas compared with competing fuels, interest rates and general economic and business conditions. During fiscal 2014, NJNG added 7,599 new customers, which represents a customer growth rate of approximately 1.5 percent. During that same time period, NJNG converted 627 existing customers to natural gas heat and other services. This customer growth represents an estimated increase of approximately $4.3 million annually to utility gross margin assuming normal weather and usage. In addition, NJNG currently expects to add approximately 15,000 to 17,000 new customers during the two-year period of fiscal 2015 and 2016. Based on information from municipalities and developers, as well as external industry analysts and management's experience, NJNG estimates that approximately 50 percent of the growth will come from new construction markets and another 50 percent from customer conversions to natural gas from other fuel sources. This new customer and conversion growth would increase utility gross margin under NJNG's base rates by approximately $4.1 million annually, as calculated under NJNG's CIP tariff. See the Natural Gas Distribution Operating Results section that follows for a definition and further discussion of utility gross margin. SAVEGREEN SAVEGREEN conducts home energy audits and provides various grants, incentives and financing alternatives, that are designed to encourage the installation of high efficiency heating and cooling equipment and other energy efficiency upgrades. Depending on the specific incentive or approval, NJNG recovers costs associated with the programs over a two to 10-year period through a tariff rider mechanism. The recovery includes a weighted average cost of capital that ranges from 6.9 percent, with a return on equity of 9.75 percent, to 7.76 percent, with a return on equity of 10.3 percent. On June 21, 2013, the BPU approved NJNG's 2012 request to extend and expand the current SAVEGREEN program through June 30, 2015, with certain modifications, resulting in grants, incentives and financing investments of more than $85 million, earning a weighted average return of 6.9 percent. Since inception, the BPU has approved total SAVEGREEN investments of approximately $149.5 million, of which $91.6 million in grants, rebates and loans has been provided to customers, with a total annual recovery of approximately $20 million. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Conservation Incentive Program The CIP facilitates normalizing NJNG's utility gross margin for variances not only due to weather but also for other factors affecting usage, such as conservation and energy efficiency. Recovery of utility gross margin for the non-weather variance through the CIP is limited to the amount of certain gas supply cost savings achieved and is subject to an annual earnings test. An annual review of the CIP must be filed by June 1, coincident with NJNG's annual BGSS filing, during which NJNG can request rate changes to CIP. In March 2013, NJNG and South Jersey Gas Company filed a joint petition with the BPU requesting the continuation of the CIP with certain modifications. On May 21, 2014, the BPU approved the continuation of the CIP program with no expiration date; however, it will be subject to review in a 2017 rate filing. On June 2, 2014, NJNG filed for reductions to its CIP rates, resulting in a 4.3 percent reduction to the average residential heat customer's bill. On September 30, 2014, the BPU provisionally approved these rates to be effective October 1, 2014. NJNG's total utility firm gross margin includes the following adjustments related to the CIP mechanism: (Thousands) Weather (1) Usage Total (1) 2014 2013 2012 $ $ (10,396) $ 6,580 (3,816) $ 4,463 $ 11,284 15,747 $ 30,243 14,745 44,988 Compared with the CIP 20-year average, weather was 9.6 percent colder-than-normal during fiscal 2014 and .1 percent and 22.1 percent warmer-than- normal during fiscal 2013 and 2012, respectively. As of September 30, 2014 and 2013, NJNG has $5.8 million in regulatory liabilities and $18.9 million in regulatory assets on the Consolidated Balance Sheets related to CIP to be returned to or recovered from customers, respectively, in future periods. Commodity prices Our Natural Gas Distribution segment is affected by the price of natural gas, which can have a significant impact on our cash flows, short-term financing costs, the price of natural gas charged to our customers through the BGSS clause, our ability to collect accounts receivable, which impacts our bad debt expense, and our ability to maintain a competitive advantage over other fuel sources. Natural gas commodity prices may experience high volatility as shown in the graph below, which illustrates the daily natural gas prices(1) in the northeast market region, also known as Tetco M-3: (1) Data source from Platts, a division of McGraw Hill Financial. Page 34 Page 35 The maximum daily price was $81.30, $11.59 and $5.12 and the minimum daily price was $1.61, $3.11 and $1.98 for the fiscal years ended September 30, 2014, 2013 and 2012, respectively. The volatility and increase in commodity prices during the second quarter of fiscal 2014 was due primarily to a significant increase in the demand for natural gas as a result of extreme cold weather in the northeast. A more detailed discussion of the impacts of the price of natural gas on operating revenues, gas purchases and cash flows can be found in the Results of Operations and Cash Flow sections of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. BGSS Recovery of natural gas costs NJNG's cost of gas is passed through to our customers, without markup, by applying NJNG's authorized BGSS tariff rate to actual therms delivered. There is no utility gross margin associated with BGSS costs; therefore, changes in such costs do not impact NJNG's earnings. NJNG monitors its actual gas costs in comparison to its tariff rates to manage its cash flows associated with its allowed recovery of gas costs, which is facilitated through BPU-approved deferred accounting and the BGSS pricing mechanism. Accordingly, NJNG occasionally adjusts its periodic BGSS tariff rates or can issue credits or refunds, as appropriate, for its residential and small commercial customers when the commodity cost varies from the existing BGSS tariff rate. BGSS tariff rates for its large commercial customers are adjusted monthly based on NYMEX prices. During fiscal 2012, NJNG issued bill credits of $85.9 million to residential and small commercial customers as a result of the decline in the wholesale price of natural gas and a change in the methodology used to develop estimates of unaccounted-for gas. There were no bill credits during fiscal 2013 and 2014. NJNG reduced its BGSS tariff rate in fiscal 2012, resulting in a 3.6 percent decrease to the average residential heat customer's bill, which was approved by the BPU on a final basis in June 2013. In addition, NJNG reduced its BGSS tariff rate in fiscal 2013, resulting in 5.2 percent decrease to the average residential heat customer's bill and reduced its BGSS tariff rate in fiscal 2014, resulting in a 6 percent decrease to the average residential heat customer's bill effective December 1, 2013. On July 23, 2014, the BPU approved the fiscal 2013 and 2014 rates on a final basis. NJNG filed its fiscal 2015 BGSS/CIP filing on June 2, 2014 with no change to the current BGSS tariff rate. On October 1, 2014, NJNG implemented a decrease to its BGSS rate for residential sales and general service small sales customers resulting in a 5 percent decrease to the average residential heat customer's bill. Refer to Note 3. Regulation in the accompanying Consolidated Financial Statements, for a discussion of BGSS rate actions and or bill credits. BGSS Incentive Programs NJNG is eligible to receive financial incentives through October 2015, for reducing BGSS costs through a series of utility gross margin-sharing programs that include off-system sales, capacity release, storage incentive and FRM programs that are designed to encourage better utilization and hedging of its natural gas supply, transportation and storage assets. Depending on the program, NJNG shares 80 or 85 percent of utility gross margin generated by these programs with firm customers. Should performance of the existing incentives or market conditions warrant, NJNG is permitted to propose a process to re-evaluate and discuss alternative incentive programs annually. Utility gross margin from incentive programs was $16 million, $8.8 million and $9.4 million during the fiscal years ended September 30, 2014, 2013 and 2012, respectively. A more detailed discussion of the impacts on utility gross margin can be found in the Natural Gas Distribution Operating Results section that follows. Hedging In order to provide relative price stability to its natural gas supply portfolio, NJNG employs a hedging strategy with the goal of having at least 75 percent of the Company's projected winter gas purchase volumes hedged by each November 1 and at least 25 percent of the gas purchase requirements hedged for the following April through March period. This is accomplished with the use of various financial instruments including futures, swaps and options used in conjunction with commodity and/or weather- related hedging activity. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Environmental remediation NJNG's operating results for the fiscal years ended September 30, are as follows: NJNG is responsible for the environmental remediation of five MGP sites, which contain contaminated residues from former gas manufacturing operations that ceased operating at these sites by the mid-1950s and, in some cases, had been discontinued many years earlier. Actual MGP remediation costs may vary from management's estimates due to the developing nature of remediation requirements, regulatory decisions by the NJDEP and related litigation. NJNG reviews these costs at the end of each fiscal year and adjusts its liability and corresponding regulatory asset as necessary to reflect its expected future remediation obligation. Accordingly, NJNG recognized a regulatory asset and an obligation of $177 million as of September 30, 2014, a decrease of $6.6 million, compared with the prior fiscal year. NJNG is currently authorized to recover remediation costs of approximately $18.7 million annually, which is based on expenditures incurred through June 30, 2013. In September 2014, NJNG submitted its SBC filing requesting approval of its MGP expenditures incurred through June 30, 2014, and to recover $8.5 million annually related to the RA and $16.3 million related to NJCEP, resulting in a 3 percent reduction to the average residential heat customer's bill. Superstorm Sandy In November 2012, NJNG filed a petition with the BPU requesting deferral accounting for uninsured incremental O&M costs associated with Superstorm Sandy, which was subsequently approved in May 2013. In addition, NJNG requested that the review of and the appropriate recovery period for such deferred expenses be addressed in NJNG's next base rate case. As of September 30, 2014, NJNG has deferred $15.2 million of these costs as a regulatory asset. On October 22, 2014, the BPU approved, as prudent and reasonable, the deferred O&M storm costs to be recovered in NJNG's next base rate case to be filed no later than November 15, 2015. Interest Rate Risk Due to the capital-intensive nature of NJNG's operations and the seasonal nature of its working capital requirements, significant changes in interest rates can also impact NJNG's results. A more detailed discussion can be found in the Liquidity and Capital Resources and Cash Flow sections of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Operating Results Utility Gross Margin The EDECA, which was enacted in 1999, provides the framework for New Jersey's retail energy markets, which are open to competition from other electric and natural gas suppliers. NJNG's residential and commercial markets are currently open to competition, and its rates are segregated between BGSS (i.e., natural gas commodity) and delivery (i.e., transportation) components. NJNG does not earn utility gross margin on the commodity portion of its natural gas sales. NJNG earns utility gross margin through the delivery of natural gas to its customers and, therefore, is not negatively affected by customers who use its transportation service and purchase natural gas from another supplier. Under an existing order from the BPU, BGSS can be provided by suppliers other than the state's natural gas utilities, however, all customers who purchase natural gas from another supplier continue to use NJNG for transportation service. NJNG's utility gross margin is a non-GAAP financial measure defined as natural gas revenues less natural gas purchases, sales tax, and regulatory rider expenses, and may not be comparable to the definition of gross margin used by others in the natural gas distribution business and other industries. Management believes that utility gross margin provides a more meaningful basis than revenue for evaluating utility operations since natural gas costs, sales tax and regulatory rider expenses are included in operating revenue and passed through to customers and, therefore, have no effect on utility gross margin. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure. (Thousands) Utility gross margin Operating revenues Less: Gas purchases (1) Energy and other taxes (2) Regulatory rider expense (3) Total utility gross margin Operation and maintenance expenses Depreciation and amortization Other taxes not reflected in utility gross margin Interest expense, net of capitalized interest Operating income Other income Income tax provision Net income (1) (2) (3) by January 2014. (Millions) Firm sales Average BGSS rates (1) CIP adjustments SAVEGREEN Fiscal 2012 BGSS bill credits Off-system sales AIP Other 2014 2013 2012 $ 819,415 $ 787,987 $ 627,713 402,552 414,594 274,370 47,440 72,164 297,259 124,717 40,540 4,573 2,832 16,683 39,374 48,037 48,417 276,939 113,174 37,999 4,373 2,847 14,995 35,399 37,241 40,350 275,752 111,998 35,247 3,899 1,655 14,890 38,135 127,429 121,393 124,608 $ 74,204 $ 73,846 $ 73,238 2014 v. 2013 2013 v. 2012 Operating revenue Gas purchases Operating revenue Gas purchases $ 65.5 $ $ 91.9 $ (47.4) (19.6) 14.2 — 7.7 6.5 4.5 33.1 (44.4) — — — 7.0 — (7.7) (12.0) (10.9) (29.2) 2.4 85.9 28.8 0.6 (9.2) 44.3 (10.2) — — 80.2 29.9 — (3.7) Includes the purchased cost of the natural gas, fees paid to pipelines and storage facilities, adjustments as a result of BGSS incentive programs and hedging transactions. These expenses are passed through to customers and offset by corresponding revenues. Consists primarily of sales taxes and TEFA, both of which are passed through to customers and offset by corresponding revenues. TEFA was phased out Consists of expenses associated with state-mandated programs, the RA and energy efficiency programs and are calculated on a per-therm basis. These expenses are passed through to customers and offset by corresponding revenues. Operating revenues increased 4 percent during fiscal 2014 and increased 25.5 percent during fiscal 2013. Gas purchases decreased 2.9 percent during fiscal 2014 and increased 51.1 percent during fiscal 2013. A description of the factors contributing to the increases (decreases) in operating revenues and gas purchases during fiscal 2014 and 2013, are as follows: Total increase (decrease) $ 31.4 $ $ 160.3 $ 140.5 (1) Operating revenue includes changes in sales tax of $3 million and $700,000 during fiscal 2014 and 2013, respectively. Fiscal 2014 compared with fiscal 2013 An increase in usage related primarily to weather being 8.9 percent colder, based on degree days, during fiscal 2014 than fiscal 2013, contributed to increases in operating revenues associated with firm sales, along with higher off-system sales, due primarily to a 36.8 percent increase in the average price of gas sold, offset by a 23.2 percent reduction in volumes. These increases were partially offset by lower BGSS rates during fiscal 2014 and a decrease in CIP adjustments of $14.9 million related to the colder weather and $4.7 million related to usage. The decrease in gas purchases was due primarily to lower BGSS rates as discussed above. Other, in the above table, includes increases in rider rates, including those related to NJCEP, impacts from BGSS incentive programs and Superstorm Sandy. Page 36 Page 37 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Fiscal 2013 compared with fiscal 2012 NJNG's total customers as of September 30, include the following: An increase in usage related primarily to weather being 26.1 percent colder, based on degree days, during fiscal 2013 than fiscal 2012, contributed to increases in operating revenues and gas purchases associated with firm sales, partially offset by decrease in CIP adjustments of $25.7 million related to weather and $3.5 million related to usage. Also factoring into the overall increase in operating revenues and gas purchases were BGSS bill credits issued to customers during fiscal 2012 that did not recur during fiscal 2013 and higher off-system revenue driven by a 21.1 percent increase in the average price of gas sold. These increases were partially offset by lower BGSS rates during fiscal 2013 and decreases related to the temporary disruption of service to customers that were impacted by Superstorm Sandy. The following provides more information on the components of Utility Gross Margin and associated throughput (Bcf) of Firm customers Residential Commercial, industrial & other Residential transport Commercial transport Total firm customers Other Total customers natural gas delivered to customers: ($ in thousands) Utility gross margin/throughput Residential Commercial, industrial and other Firm transportation Total utility firm gross margin/throughput BGSS incentive programs Interruptible 2014 2013 2012 Margin Bcf Margin Bcf Margin Bcf $ 173,879 45,971 60,811 280,661 43.1 8.2 17.7 69.0 15,957 180.8 641 10.5 $ 167,530 44,896 55,169 267,595 38.3 7.5 15.2 61.0 8,777 141.5 567 10.9 $ 173,451 45,673 46,773 265,897 9,385 470 32.9 6.5 11.2 50.6 99.6 10.3 Total utility gross margin/throughput $ 297,259 260.3 $ 276,939 213.4 $ 275,752 160.5 Utility Firm Gross Margin Utility firm gross margin is earned from residential and commercial customers who receive natural gas service from NJNG through either sales tariffs, which include a commodity and delivery component, or transportation tariffs, which include a delivery component only. The transfer of customers between sales and throughput has no impact on NJNG's total utility firm gross margin since distribution tariff rates are the same for these customer classes. A description of the factors contributing to the increases (decreases) in utility firm gross margin during fiscal 2014 and 2013, are as follows: (Thousands) AIP Customer growth SAVEGREEN Superstorm Sandy Total increase 2014 v. 2013 2013 v. 2012 $ 6,103 4,253 1,883 827 $ 13,066 $ $ 586 3,456 1,018 (3,362) 1,698 The increase in utility firm gross margin during both fiscal 2014 and 2013, was due primarily to increases in revenue related to infrastructure investments along with customer growth. Partially offsetting the increase in utility firm gross margin during fiscal 2013, was the impact of temporarily suspending service to the areas within NJNG's distribution territory that were affected by Superstorm Sandy. Page 38 Page 39 (1) Excludes customers whose service was impacted by the effects of Superstorm Sandy. NJNG added 7,599, 7,456 and 6,704 new customers and converted 627, 619 and 539 existing customers to natural gas heat and other services during the fiscal years ended September 30, 2014, 2013 and 2012, respectively. The customer growth during fiscal 2014 represents an estimated annual increase of approximately 1 Bcf in sales to firm customers, which, assuming normal weather and usage, would contribute approximately $4.3 million annually to utility gross margin. A description of the factors contributing to the increases (decreases) in utility gross margin generated by NJNG's BGSS incentive programs during fiscal 2014 and 2013, are as follows: Lower natural gas prices, as well as timing of storage injections, increased the storage incentive program margin. NJNG's capacity release margins also increased due primarily to an increase in the amount of volumes released and the value of capacity An increase in gas supply in the northeast region resulting in lower volatility contributed to a decrease in transport capacity values and reduced margins in off-system sales, partially offset by a combination of lower pricing at storage injection points and an increase in volume in the capacity release program, which factored into the increase in margin from our storage incentive and A summary and description of the factors contributing to the increases (decreases) in O&M during fiscal 2014 and 2013, BGSS Incentive Programs (Thousands) Storage Capacity release Off-system sales FRM Total increase (decrease) Fiscal 2014 compared with fiscal 2013 as a result of increased market area volatility. Fiscal 2013 compared with fiscal 2012 capacity release programs. Operation and Maintenance Expense are as follows: (Thousands) Compensation and benefits Consulting Maintenance and repairs Shared corporate costs Bad debt Other Total increase 2014 2013 (1) 2012 422,742 24,684 46,282 10,496 504,204 70 408,399 24,302 54,253 10,399 497,353 78 423,871 24,985 41,820 9,394 500,070 73 504,274 497,431 500,143 2014 v. 2013 2013 v. 2012 $ 4,602 1,681 637 260 $ 7,180 $ $ 300 294 (1,159) (43) (608) 2014 v. 2013 2013 v. 2012 $ 6,698 $ 2,172 2,718 1,783 6 (180) 518 $ 11,543 264 593 (99) 112 (1,866) $ 1,176 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Fiscal 2014 compared with fiscal 2013 The increase in O&M during fiscal 2014 was due primarily to increased compensation and benefits as a result of higher labor costs related to additional overtime and incentives along with additional expenses related to a voluntary early retirement program, partially offset by lower pension benefit costs due to an increase in the discount rate used to calculate costs. In addition, there was an increase in consulting expenses due to additional tax, customer service and technical consulting along with an increase in maintenance and repairs, including additional repairs and snow removal, related to the extreme cold weather that occurred during the second fiscal quarter, and increased software maintenance contracts. Fiscal 2013 compared with fiscal 2012 The increase in O&M during fiscal 2013 was due primarily to increases in compensation and benefits, which were driven primarily by an increase in the number of employees and increased pension and health benefit costs resulting from a lower discount rate, partially offset by lower incentive compensation accruals and various other O&M expenses. New Jersey Resources Corporation Part II date, all of which were contemplated as part of an entire forecasted transaction. The financial derivative contracts serve to protect the cash flows of the transaction from volatility in commodity prices and primarily include exchange-traded futures, options, and swap contracts. Typically, periods of increased price volatility provide NJRES with additional arbitrage opportunities to generate margin by improving the respective time or locational spreads on a forward basis. See Item 1. Business for more detailed discussion of operations at Energy Services. Predominantly all of NJRES' physical purchases and sales of natural gas result in the physical delivery of natural gas. NJRES accounts for its physical commodity contracts and its financial derivative instruments at fair value on the Consolidated Balance Sheets. Changes in the fair value of these contracts are included in earnings as a component of operating revenue or gas purchases, as appropriate, on the Consolidated Statements of Operations.Volatility in reported net income at NJRES can occur over periods of time due to changes in the fair value of derivatives, as well as timing differences related to certain transactions. Unrealized gains and losses can fluctuate as a result of changes in the price of natural gas from the original hedge price compared with the market price of natural gas at each reporting date. Volatility in earnings also occurs as a result of timing differences between the settlement of financial derivatives and the sale of the corresponding physical natural gas that was economically hedged. When a financial instrument settles and the natural gas is placed in inventory, the realized gains and losses associated with the financial instrument are recognized in earnings. However, the gains and losses associated with the economically hedged natural gas are not recognized in earnings until the natural gas inventory is sold, at which time NJRES realizes the entire margin on the transaction. Depreciation Expense Operating Results Depreciation expense increased $2.5 million and $2.8 million in fiscal 2014 and 2013, respectively, as a result of additional NJRES' financial results for the fiscal years ended September 30, are summarized as follows: utility plant being placed into service. Operating Income Operating income increased $6 million, or 5 percent, in fiscal 2014, compared with fiscal 2013, due primarily to the increase in total utility gross margin of $20.3 million, as previously discussed, partially offset by the increases in O&M and depreciation expense, as previously discussed. Operating income decreased $3.2 million or 2.6 percent, in fiscal 2013, compared with fiscal 2012, due primarily to an increase in O&M and depreciation expense, partially offset by an increase in total utility gross margin of $1.2 million, as previously discussed. Net Income Net income increased $358,000 to $74.2 million in fiscal 2014, compared with fiscal 2013, due primarily to the factors discussed above, partially offset by an increase in the income tax provision due to a higher effective tax rate as a result of a lower cost of retiring assets placed in service before 1981, an increase in interest expense associated with new long-term debt issued in March 2014 and April 2013, and a decrease in other income due to lower AFUDC interest earned on AIP and SAFE. In addition to the factors discussed above, net income increased $608,000, or 1 percent, to $73.8 million in fiscal 2013, compared with fiscal 2012, due partially to an increase in other income related to AFUDC interest earned on AIP and SAFE and a lower effective tax rate. Contributing to the decrease in the effective tax rate during fiscal 2013 compared with fiscal 2012 was an increase in costs associated with the removal of distribution main that was placed into service prior to 1981, for which the tax benefit is passed on to customers in base rates. Energy Services Segment Overview NJRES is a non-regulated provider of physical natural gas services and customized energy solutions. The market areas in which it operates include the Gulf Coast, Mid-Continent, Appalachian, Northeastern and Western regions in the U.S., as well as Canada. NJRES focuses on creating value from its natural gas assets, which are typically amassed through contractual rights to natural gas transportation and storage capacity within the regions that encompass its market area. Through the use of its capacity contracts, NJRES is able to take advantage of pricing differences between geographic locations, commonly referred to as “locational” or “basis” spreads in addition to pricing differences over specific periods of time commonly referred to as “time spreads.” To monetize these differences, NJRES may enter into contracts that call for the future delivery and/or sale of physical natural gas and simultaneously enters into financial derivative contracts to establish an initial financial margin for each of its forecasted physical commodity transactions. Financial instruments are utilized to economically hedge natural gas inventory that will be sold at a future Page 40 (Thousands) Operating revenues Gas purchases (including demand charges (1)) Gross margin Operation and maintenance expenses Depreciation and amortization Other taxes Operating income (loss) Other income Interest expense, net Income tax provision (benefit) Net income (loss) 2014 2013 2012 $ 2,930,817 $ 2,356,578 $ 1,580,611 2,814,300 2,307,072 1,574,246 116,517 42,607 59 1,496 72,355 222 1,725 26,458 49,506 14,390 44 1,298 33,774 1 2,534 10,516 $ 44,394 $ 20,725 $ 6,365 17,759 59 1,043 (12,496) 37 1,096 (4,950) (8,605) (1) Costs associated with pipeline and storage capacity that are expensed over the term of the related contracts, which vary from less than one year to 10 years. As of September 30, 2014, NJRES' portfolio of financial derivative instruments was composed of: As of September 30, 2013, NJRES' portfolio of financial derivative instruments was composed of: 62.1 Bcf of net short futures contracts, and 1.2 Bcf of net long options. 64.2 Bcf of net short futures contracts, and 1.5 Bcf of net long options. • • • • • • As of September 30, 2012, NJRES' portfolio of financial derivative instruments was composed of: 42.5 Bcf of net short futures contracts and fixed swap positions, and 27.1 Bcf of net long basis swap positions. Page 41 Operating Revenues and Gas Purchases New Jersey Resources Corporation Part II During fiscal 2014, operating revenues increased $574.2 million and gas purchases increased $507.2 million, due primarily to the sustained extreme cold weather across the U.S., especially in the Midwest, which contributed to an increase in natural gas demand and market volatility resulting in opportunities for NJRES to capture increased sales volume and higher pricing through optimization of NJRES' transportation and storage assets across North America. During fiscal 2013, operating revenues and gas purchases increased $776 million and $732.8 million, respectively, compared with fiscal 2012, due primarily to higher average prices as well as increases in volumes. Gross Margin Gross margin during fiscal 2014 was higher by approximately $67 million, compared with fiscal 2013, due primarily to the increased prices and volumes as described above, partially offset by a decrease of $58.1 million related to changes in the value of financial hedges during fiscal 2014, compared with fiscal 2013. Gross margin during fiscal 2013 was higher by approximately $43.1 million, compared with fiscal 2012, due primarily to an increase of $32.9 million related to changes in the value of financial hedges during fiscal 2013, compared with fiscal 2012. Changes in the value of financial hedges impact gross margin and are related to changes in prices of natural gas at various market locations. Operation and Maintenance Expense O&M increased $28.2 million, or 196 percent, during fiscal 2014, compared with fiscal 2013, due primarily to increases in incentive compensation costs and shared services costs. O&M decreased $3.4 million, or 19 percent, during fiscal 2013, compared with fiscal 2012, due primarily to the $1.4 million bad debt reserve that was made in fiscal 2012 relating to the bankruptcy of NJRES' clearing broker and a $1 million decrease in charitable contributions, as well as decreases in shared corporate service costs and legal fees. Non-GAAP financial measures Management uses non-GAAP financial measures, noted as “financial margin” and “NFE,” when evaluating the operating results of NJRES. Financial margin and NFE are measures of margin and earnings based on eliminating timing differences associated with certain derivative instruments, as discussed above. Management views these measures as more representative of the overall expected economic result and uses these measures to compare NJRES' results against established benchmarks and earnings targets as these measures eliminate the impact of volatility on GAAP earnings as a result of timing differences associated with these derivative instruments. To the extent that there are unanticipated changes in the markets or to the effectiveness of the economic hedges, NJRES' non-GAAP results can differ from what was originally planned at the beginning of the transaction. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure. When NJRES reconciles the most directly comparable GAAP measure to both financial margin and NFE, the current period unrealized gains and losses on the derivatives are excluded as a reconciling item. Financial margin and NFE also exclude the effects of economic hedging of the value of our natural gas in storage and, therefore, only include realized gains and losses related to natural gas sold out of inventory, effectively matching the full earnings effects of the derivatives with realized margins on the related physical gas flows. Financial Margin operating income. The following table is a computation of NJRES' financial margin for the fiscal years ended September 30: (Thousands) Operating revenues Less: Gas purchases Add: 2014 2013 $ 2,930,817 $ 2,356,578 $ 1,580,611 1,574,246 2,307,072 2,814,300 2012 Unrealized loss (gain) on derivative instruments and related transactions Effects of economic hedging related to natural gas inventory Financial margin 29,251 26,639 172,407 $ $ (9,872) 7,635 47,269 $ 35,566 (4,891) 37,040 Page 42 Page 43 New Jersey Resources Corporation Part II A reconciliation of operating income, the most directly comparable GAAP financial measurement to NJRES' financial margin, is as follows for the fiscal years ended September 30: (Thousands) Operating income (loss) Add: Operation and maintenance expense Depreciation and amortization Other taxes Subtotal - Gross margin Add: Unrealized loss (gain) on derivative instruments and related transactions Effects of economic hedging related to natural gas inventory Financial margin 2014 2013 2012 $ 72,355 $ 33,774 $ (12,496) 42,607 59 1,496 116,517 14,390 17,759 44 1,298 49,506 59 1,043 6,365 29,251 26,639 (9,872) 7,635 35,566 (4,891) $ 172,407 $ 47,269 $ 37,040 Financial margin increased $125.1 million during fiscal 2014, compared with fiscal 2013, due primarily to the sustained extreme cold weather across the U.S., especially in the Midwest that contributed to an increase in natural gas demand and market volatility resulting in higher prices and opportunities for NJRES to effectively utilize its strategically located assets across North America to generate additional financial margin during the second fiscal quarter, as well as the increases in gross margin discussed above. Financial margin increased $10.2 million during fiscal 2013, compared with fiscal 2012, due primarily to higher financial margin from storage assets, offset by the timing of certain transactions related to storage and narrower price spreads resulting in lower financial margin from transportation assets. Net Financial Earnings A reconciliation of NJRES' net income (loss), the most directly comparable GAAP financial measurement to NFE, is as follows for the fiscal years ended September 30: (Thousands) Net income (loss) Add: Tax adjustments Net financial earnings Unrealized loss (gain) from derivative instruments and related transactions (1) Effects of economic hedging related to natural gas inventory 2014 2013 2012 $ 44,394 $ 20,725 $ (8,605) 29,251 26,639 (9,872) 35,566 7,635 (4,891) (20,549) 823 (11,279) $ 79,735 $ 19,311 $ 10,791 (1) Includes unrealized losses related to an intercompany transaction between NJNG and NJRES that have been eliminated in consolidation of approximately $(454,000), $286,000 and $142,000 for the fiscal years ended September 30, 2014, 2013 and 2012, respectively. NFE increased $60.4 million during fiscal 2014, compared with fiscal 2013, due primarily to an increase in financial margin of $125.1 million as discussed above, offset by higher O&M, as previously discussed and higher taxes related to the increase in NFE increased $8.5 million during fiscal 2013, compared with fiscal 2012, due primarily to an increase in financial margin of $10.2 million, and lower O&M, as previously discussed, along with a refund of $1.1 million related to the completion of tax audits conducted by the State of New Jersey for fiscal 2008 through fiscal 2010. Future results are subject to NJRES' ability to expand its wholesale marketing activities and are contingent upon many other factors, including an adequate number of appropriate and credit qualified counterparties, volatility in the natural gas market, availability of transportation and storage arbitrage opportunities, sufficient liquidity in the overall energy trading market, supply and demand for natural gas and continued access to liquidity in the capital markets. Represents the portion of capital expenditures eligible for ITCs. ($ in Thousands) Placed in service Net-metered: Commercial Residential Grid-connected Total placed in service (1) 2013 Projects MW Costs(1) Projects MW Costs(1) Projects MW Costs(1) 2012 2014 1 1,049 3 1,053 995 0.3 $ 32,002 10.4 16.7 42,459 27.4 $ 75,456 3 959 1 963 4.8 $ 13,693 28,693 8.6 6.7 19,407 20.1 $ 61,793 2 778 2 782 6,780 1.3 $ 20,506 5.9 18.9 86,512 26.1 $ 113,798 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Clean Energy Ventures Segment Overview Our Clean Energy Ventures segment actively pursues opportunities in the clean energy markets, including solar, wind and combined heat and power. Clean Energy Ventures has entered into various agreements to install solar equipment involving net- metered residential and commercial projects, as well as grid-connected projects. In addition, Clean Energy Ventures has entered various PPAs to supply energy from wind projects. Solar Solar projects placed in service and related ITC eligible expenditures for the fiscal years ended September 30, are as follows: All of the wind projects are eligible for a per-kilowatt-hour PTC for a 10-year period following commencement of operation and have power purchase agreements of various terms in place, through which all energy and renewable attributes will be sold to the customer. During the fourth quarter of fiscal 2014, due to its concerns surrounding the ability of OwnEnergy to fulfill its future obligation to present qualified projects to NJRCEV for investment, the Company reassessed the value of its investment and determined that it was unlikely that it would be able to recover the carrying value. As a result, NJRCEV recognized an impairment loss of $6.4 million, which is included in other income, net on the Consolidated Statements of Operations. Clean Energy Ventures' investments are subject to a variety of factors, such as timing of construction schedules, the permitting and regulatory process, delays related to electric grid interconnection, which can affect our ability to commence operations on a timely basis or, at all, economic trends, the ability to access capital or allocation of capital to other investments or business opportunities and other unforeseen events. Solar projects not placed in service, as originally planned prior to the end of a reporting period, would result in a failure to qualify for ITCs and changes in SREC values and could have a significant adverse impact on that period's annual earnings. Wind projects for which physical work of a significant nature has not begun, or have not qualified for the “safe harbor”, would result in a failure to qualify for PTCs, and could have a significant adverse impact on ten years of annual earnings. In addition, since the primary contributors toward the value of qualifying distributed power projects are tax incentives and SRECs, changes in the federal statutes related to the ITC or PTC or in the markets surrounding clean energy credits, which can be traded or sold to load serving entities that need to comply with state clean energy standards, could also significantly NJRCEV's financial results for the fiscal years ended September 30, are summarized as follows: affect earnings. Operating Results (Thousands) Operating revenues Operation and maintenance expenses Depreciation and amortization Other taxes Operating (loss) Other income, net Interest expense, net Income tax (benefit) Net income (Thousands) SREC sales Electricity sales and other Sunlight Advantage Total operating revenues Operating revenues for the fiscal years ended September 30, consisted of the following: 2014 2013 2012 $ 14,575 $ 11,988 $ 10,668 11,295 285 (7,673) 3,690 5,300 8,831 8,477 153 1,209 3,387 (5,473) (12,201) 2,257 8,505 5,680 273 — 854 (21,937) (17,711) (32,507) $ 12,654 $ 10,060 $ 19,452 2014 2013 2012 9,608 $ 9,506 $ 1,137 2,479 2,488 1,388 1,094 728 392 14,575 $ 11,988 $ 2,257 $ $ Since its inception, Clean Energy Ventures has placed a total of 83.4 MW of solar capacity into service and as of September 30, 2014, has 16.7 commercial and .6 residential MW under construction. The Company estimates solar-related capital expenditures for projects placed in service during fiscal 2015 to be between $100 million and $110 million. As part of its solar investment program, NJRCEV operates a residential solar program, The Sunlight Advantage®, that provides qualifying homeowners the opportunity to have a solar system installed at their home with no installation or maintenance expenses. NJRCEV owns, operates and maintains the system over the life of the contract in exchange for monthly payments. Once a solar installation commences operations and is properly registered, each MWh of electricity produced creates an SREC that represents the renewable attribute of the solar-electricity generated and is sold to counterparties, including certain electric utilities that are required to comply with New Jersey's renewable portfolio standards. In addition, under current federal tax guidelines, projects that are placed in service up through December 31, 2016, qualify for a 30 percent federal ITC. SREC activity for the fiscal years ended September 30, is as follows: Beginning balance as of October 1, SRECs generated SRECs sold Ending balance as of September 30, 2014 2013 2012 11,351 81,668 63,049 29,970 28,358 57,231 74,238 11,351 595 35,126 7,363 28,358 NJRCEV economically hedges a portion of its expected SREC production through forward sale contracts. As of September 30, 2014, NJRCEV has hedged approximately 64 percent and 21 percent of its SREC inventory and projected SREC production related to its existing commercial assets for fiscal years 2015 and 2016, respectively. Wind Clean Energy Ventures has also invested in small to mid-size wind projects that fit its investment profile, including the following as of September 30, 2014: The average SREC sales price was $152 in fiscal 2014, $128 in fiscal 2013 and $154 in fiscal 2012. • • a $21.2 million, 9.7 MW project in Two Dot, Montana that was completed in June 2014; and a $42 million, 20 MW project in Carroll County, Iowa that is currently under construction and that NJRCEV expects to be operational in the second quarter of fiscal 2015. panel maintenance and various fees. There are no production costs associated with the revenue generation by our solar assets. All related costs are included as a component of operation and maintenance expenses in the Consolidated Statements of Operations, including such expenses as solar On October 9, 2014, NJRCEV also acquired the development rights to a $85 million, 48 MW wind project in Rush County, Kansas that is currently under construction and expected to commence commercial operation in the first quarter of fiscal 2016. Page 44 Page 45 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operation and Maintenance Expense Operating Results O&M increased during fiscal 2014, compared with fiscal 2013, due primarily to increases in compensation and incentives, as well as increased software maintenance and administrative costs relating to solar project support for projects placed in service, and additional lease, insurance and support costs for wind projects placed in service and under construction. O&M increased during fiscal 2013, as compared with fiscal 2012, due primarily to increases in compensation, shared corporate services costs and other administrative expenses. Depreciation Expense Depreciation expense increased $2.8 million for both fiscal 2014 and 2013, as a result of additional solar projects being placed into service. Income Tax Provision (Benefit) Income tax benefit during fiscal 2014, 2013 and 2012 includes $22.6 million, $18.5 million and $34.1 million, respectively, of ITCs associated with solar projects that were completed and placed into service during the corresponding fiscal year. NJRCEV recognized $18 million related to tax credits, net of deferred taxes related to the 15 percent basis adjustments taken on the ITC eligible projects, during fiscal 2014, compared with $14.7 million, net of deferred taxes, recognized during fiscal 2013. Net Income Net income in fiscal 2014 increased $2.6 million, compared with fiscal 2013, due primarily to an increase in ITCs and an increase in other income, net. The increase in ITCs was due primarily to an increase in capital expenditures placed into service and the increase in other income, net, was due primarily to the receipt of a credit support payment related to a change in ownership at the site of one of NJRCEV's commercial solar projects, partially offset by the write-off of its investment in OwnEnergy. The increases were partially offset by increased costs related to depreciation and O&M, as previously discussed, along with an increase in interest expense due to higher debt associated with its capital expenditures. Net income during fiscal 2013 decreased $9.4 million, compared with fiscal 2012, due primarily to a decrease in ITCs during fiscal 2013. A delay in the regulatory approval process for grid-connected projects slowed construction on two of NJRCEV's planned solar projects with a total capacity of 15.3 MW and ITC-eligible expenditures of approximately $37.7 million. As a result, these grid-connected projects were not completed until fiscal 2014. Higher interest and depreciation expenses, partially offset by an increase in revenue from SREC sales and other income also contributed to the decrease in net income during fiscal 2013. The increase in interest expense was due primarily to the issuance of additional fixed-rate long-term debt during the fourth quarter of fiscal 2012, in addition to a higher overall weighted average interest rate during fiscal 2013 compared with fiscal 2012. Other income during fiscal 2013 includes $1 million related to the settlement of a legal claim, as well as an insurance recovery of $997,000, which represents the replacement value of solar assets that were damaged by Superstorm Sandy, offset by the loss of $766,000 NJRCEV recognized upon disposal of the damaged equipment. Midstream Segment Overview Our Midstream segment invests in natural gas assets, such as natural gas transportation and storage facilities. NJR believes that acquiring, owning and developing these midstream assets, which operate under a tariff structure that has either regulated or market-based rates, can provide a growth opportunity for the Company. To that end, NJR has a 50 percent ownership interest in Steckman Ridge, a storage facility that operates under market-based rates, a 5.53 percent ownership interest in Iroquois, a natural gas pipeline operating with regulated rates and a 20 percent ownership interest in PennEast, a natural gas pipeline, which the Company estimates will be completed and operational by November 2017. NJR is pursuing other potential opportunities that meet its investment and development criteria. As of September 30, 2014, NJR's net investments in Steckman Ridge and Iroquois were $128.4 million and $24 million, respectively. The financial results of Midstream for the fiscal years ended September 30, are summarized as follows: (Thousands) Equity in earnings of affiliates Operation and maintenance expenses Interest expense, net Income tax provision Net income (Thousands) Steckman Ridge Iroquois Total equity in earnings of affiliates 2014 2013 2012 14,078 $ 13,868 $ 14,308 860 $ 446 $ 5,227 $ 7,498 $ 547 $ 897 $ 4,993 $ 7,199 $ 1,008 1,567 4,978 6,749 2014 2013 2012 9,250 $ 8,671 $ 4,828 5,197 9,294 5,014 14,078 $ 13,868 $ 14,308 $ $ $ $ $ $ $ Equity in earnings of affiliates, which is driven primarily by storage revenues generated by Steckman Ridge and transportation revenues generated by Iroquois, is as follows for the fiscal years ended September 30: Equity in earnings of affiliates increased $210,000 during fiscal 2014, compared with 2013 due primarily to increases in storage service revenue and demand for hub services at Steckman Ridge during fiscal 2014. Equity in earnings of affiliates decreased $440,000 during fiscal 2013, compared with 2012, due to lower earnings at Steckman Ridge due primarily to lower demand for storage services and competing market dynamics in the geographic locations of the facility. O&M increased $313,000 during fiscal 2014, compared with fiscal 2013, due primarily to increased shared services costs. O&M decreased $461,000 during fiscal 2013, compared with fiscal 2012, due primarily to decreased shared services costs as well as decreased charitable contributions. Interest expense, net decreased $451,000 and $670,000 during fiscal 2014 and 2013, respectively, compared with the prior fiscal years due primarily to cash flow generated by the investments being used for reducing debt. Net income in fiscal 2014 increased $299,000, compared with fiscal 2013, due to the increase in equity in earnings of affiliates and the decrease in interest expense, offset by the increase in O&M. Net income in fiscal 2013 increased $450,000 compared with fiscal 2012 due to the decreases in O&M and interest expense, offset by the decrease in equity in earnings of Home Services and Other Operations (formerly Retail and Other Operations) affiliates. Overview The financial results of Home Services and Other consist primarily of NJRHS, CR&R and NJR Energy operating results. NJRHS provides service, sales and installation of appliances to approximately 118,000 service contract customers and has been focused on growing its installation business and expanding its service contract customer base. CR&R seeks additional opportunities to enhance the value of its building and undeveloped land. NJR Energy invests in other energy-related ventures. Home Services and Other also includes organizational expenses incurred at NJR. Page 46 Page 47 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Results Debt The consolidated financial results of Home Services and Other for the fiscal years ended September 30, are summarized as follows: (Thousands) Operating revenues Operation and maintenance expense Energy and other taxes Income tax provision Net income 2014 2013 2012 $ $ $ $ $ 46,687 $ 37,522 $ 3,508 $ 2,460 $ 2,798 $ 47,954 $ 37,443 $ 3,508 $ 2,550 $ 3,292 $ 42,195 32,655 3,331 2,178 2,366 Operating revenue decreased $1.3 million during fiscal 2014, compared with fiscal 2013, due primarily to the increase in the demand for equipment installations following Superstorm Sandy, which generated higher revenue in fiscal 2013. Operating revenue increased $5.8 million during fiscal 2013, compared with fiscal 2012, due primarily to increased NJRHS installations primarily as a result of an increase in demand for generators and other equipment following Superstorm Sandy. Taxes remained relatively flat during fiscal 2014, compared with fiscal 2013 and fiscal 2012. O&M remained relatively flat during fiscal 2014, compared with fiscal 2013. O&M increased by $4.8 million during fiscal 2013, compared with fiscal 2012, due primarily to higher equipment and labor costs corresponding to the increase in installations following Superstorm Sandy, as discussed above. Net income during fiscal 2014, decreased $494,000, compared with fiscal 2013, due primarily to decreased revenues, as discussed above, partially offset by a gain after taxes of $186,000 during fiscal 2014 associated with the sale of 25.4 acres of undeveloped land at CR&R. Net income during fiscal 2013 increased $926,000, compared with fiscal 2012, due primarily to the factors noted above. Liquidity and Capital Resources NJR's objective is to maintain an efficient consolidated capital structure that reflects the different characteristics of each business segment and business operations and provides adequate financial flexibility for accessing capital markets as required. Short-term borrowings were as follows: NJR's consolidated capital structure at September 30, was as follows: Common stock equity Long-term debt Short-term debt Total Common stock equity 2014 51% 31 18 100% 2013 48% 28 24 100% NJR satisfies its external common equity requirements, if any, through issuances of its common stock, including the proceeds from stock issuances under its DRP and proceeds from the exercise of options issued under the Company's long-term incentive program. The DRP allows NJR, at its option, to use treasury shares or newly issued shares to raise capital. NJR raised $14.1 million and $13.7 million of equity through the DRP by issuing 292,000 and 319,000 shares of treasury stock during fiscal 2014 and 2013, respectively. During fiscal 2013, NJR also raised approximately $23.8 million of equity through the DRP by issuing 571,000 new shares. NJR issued no new shares during fiscal 2014. In 1996, the Board of Directors authorized the Company to implement a share repurchase program, which was expanded seven times since the inception of the program. In July 2013, the Board of Directors approved an increase in the number of shares of NJR common stock authorized for repurchase under NJR's Share Repurchase Plan by one million shares to a total of 9.75 million shares. As of September 30, 2014, the Company repurchased a total of 8.2 million of those shares and may repurchase an additional 1.51 million shares under the approved program. There were 144,300 shares repurchased during fiscal 2014. Page 48 Page 49 NJR and its unregulated subsidiaries generally rely on cash flows generated from operating activities and the utilization of committed credit facilities to provide liquidity to meet working capital and short-term debt financing requirements. NJNG also relies on the issuance of commercial paper for short-term funding. NJR and NJNG periodically access the capital markets to fund long-life assets through the issuance of long-term debt securities. NJR believes that its existing borrowing availability and cash flow from operations will be sufficient to satisfy its and its subsidiaries' working capital, capital expenditures and dividend requirements for the next 12 months. NJR, NJNG, NJRCEV and NJRES currently anticipate that each of their financing requirements for the next 12 months will be met primarily through the issuance of short and long-term debt, meter sale-leasebacks and proceeds from the Company's DRP. NJR believes that as of September 30, 2014, NJR and NJNG were, and currently are, in compliance with all existing debt covenants, both financial and non-financial. Short-Term Debt NJR uses its short-term borrowings primarily to finance its share repurchases, NJRES' short-term liquidity needs and, on an initial basis, NJRCEV's investments. NJRES' use of high volume storage facilities and anticipated pipeline park-and-loan arrangements, combined with related economic hedging activities in the volatile wholesale natural gas market, create significant short-term cash requirements. NJNG satisfies its debt needs by issuing short- and long-term debt based upon its financial profile. The seasonal nature of NJNG's operations creates large short-term cash requirements, primarily to finance natural gas purchases and customer accounts receivable. NJNG obtains working capital for these requirements, and for the temporary financing of construction and MGP remediation expenditures and energy tax payments, based on its financial profile, through the issuance of commercial paper supported by the NJNG Credit Facility or through short-term bank loans under the NJNG Credit Facility. As of September 30, 2014, NJR and NJNG had revolving credit facilities totaling $425 million and $250 million, respectively, as described below, with $256.5 million and $96.3 million, respectively, available under the facilities. Due to the seasonal nature of natural gas prices and demand, NJR and NJNG's short-term borrowings tend to peak in the winter months. ($ in thousands) NJR Notes Payable to banks: Balance at end of period Weighted average interest rate at end of period Average balance for the period Weighted average interest rate for average balance Month end maximum for the period NJNG Commercial Paper and Notes Payable to banks: Balance at end of period Weighted average interest rate at end of period Average balance for the period Weighted average interest rate for average balance Month end maximum for the period NJR Three Months Twelve Months Ended Ended September 30, 2014 $ $ $ $ $ $ 148,000 1.08% 97,412 1.08% 148,000 153,000 0.12% 116,903 0.12% 153,000 $ $ $ $ $ $ 148,000 1.08% 161,092 1.04% 324,900 153,000 0.12% 118,227 0.13% 204,500 In August 2012, NJR, entered into a $325 million Amended and Restated Credit Agreement, that terminates on August 22, 2017. Effective January 31, 2014, NJR utilized the accordion option available under the NJR Credit Facility to increase the amount of credit available from $325 million to $425 million, primarily to provide additional working capital to NJRES to meet any New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) potential margin calls that may arise in NJRES' normal course of business. Borrowings under the NJR Credit Facility bear interest, at NJR's option at (i) a rate per annum equal to the greatest of (A) PNC Bank N.A.'s prime rate, (B) the Federal Funds Open Rate, plus .5 percent, or (C) the Daily LIBOR Rate (as defined in the agreement) plus 1 percent, plus in the case of (A), (B) and (C), an applicable margin between 0 percent and .625 percent, depending upon the credit rating of NJNG, or (ii) a rate per annum equal to the Daily LIBOR Rate plus an applicable margin of .875 percent to 1.625 percent, depending on NJNG's credit rating. As of September 30, 2014, the Commitment Fee Rate was .1 percent, the applicable margin for loans described in (i) above was 0 percent and the applicable margin for loans described in (ii) above was .875 percent. Certain of NJR's unregulated subsidiaries have guaranteed to the lenders all of NJR's obligations under the credit facility. The NJR Credit Facility permits the borrowing of revolving loans and swingline loans, as well as the issuance of letters of credit. As of September 30, 2014, the consolidated total indebtedness to total capitalization ratio, as defined in the NJR Credit Facility, was 50 percent after adjustments for the fair value of derivative assets and liabilities and standby letters of credit. As of September 30, 2014, NJR had $148 million outstanding under the NJR Credit Facility. Neither NJNG nor its assets ensure payment of principal and interest. This credit facility was no longer needed due to the recent change in interest rate mode are obligated or pledged to support the NJR Credit Facility. of the EDA Bonds and was terminated on September 26, 2014. During fiscal 2014, NJR's average interest rate under the NJR Credit Facility was 1.04 percent, resulting in interest expense of $1.6 million. Based on average borrowings under the facilities of $161.1 million during the period, a 100 basis point change in the underlying average interest rate would have caused a change in interest expense of approximately $1.6 million during fiscal 2014. As of September 30, 2014, NJR has six letters of credit outstanding totaling $20.5 million. One letter of credit for $15 million is on behalf of NJRES and five letters of credit are on behalf of NJRCEV totaling $5.5 million. These letters of credit reduce the amount available under NJR's committed credit facility by the same amount. NJR does not anticipate that these letters of credit will be drawn upon by the counterparties, and they will be renewed as necessary. NJRES' letter of credit is used for margin requirements for natural gas transactions and expires on December 31, 2014. NJRCEV's letters of credit are used to secure construction of ground-mounted solar projects and to secure obligations pursuant to an Interconnection Services Agreement; they expire on dates ranging from November 27, 2014 to August 21, 2015. On September 13, 2013, NJR entered into a $100 million Term Loan Credit Agreement, with JPMorgan Chase Bank, N.A., as a Lender and Administrative Agent, which expired on September 15, 2014, and was not renewed. On June 5, 2013, NJR entered into an agreement with Santander Bank, N.A. permitting the issuance of stand-alone letters of credit for up to $10 million, which expired on June 5, 2014. On October 24, 2014, NJR entered into a $100 million uncommitted Line of Credit Agreement, with Santander Bank, N.A., expiring on October 23, 2015. Loans under the Line of Credit Agreement are made at the discretion of the Lender and, when made, will bear interest at the Eurodollar Rate (as defined in the Agreement) plus an applicable margin to be determined at the time a borrowing is requested. NJNG NJNG's commercial paper is sold through several commercial banks under an issuing and paying agency agreement and is supported by the NJNG Credit Facility. On May 15, 2014, NJNG entered into a $250 million, five-year, revolving, unsecured credit facility expiring in May 2019, which replaced an existing $250 million credit facility that was scheduled to expire in August 2014. The new NJNG Credit Facility permits the borrowing of revolving loans and swing loans, as well as the issuance of letters of credit. It also permits an increase to the facility, from time to time, with the existing or new lenders, in a minimum of $15 million increments up to a maximum of $50 million at the lending banks' discretion. The commitment fee for the NJNG Credit Facility may range from .075 percent to .20 percent, depending upon NJNG's credit rating. As of September 30, 2014, the commitment fee was .075 percent. Depending on borrowing levels and credit ratings, NJNG's interest rate can either be, at its discretion, based upon Prime Rate, the Federal Funds Open Rate or the Daily LIBOR Rate, in each case, plus an applicable spread and facility fee. In addition, borrowings under NJNG's credit facility are conditioned upon compliance with a maximum leverage ratio (consolidated total indebtedness to consolidated total capitalization as defined in the NJNG Credit Facility) of not more than .65 to 1.00 at any time. As of September 30, 2014, the consolidated total indebtedness to total capitalization ratio was 47 percent and the applicable margin for loans described above was zero. As of September 30, 2014, the unused amount available Page 50 under the NJNG Credit Facility, including amounts allocated to the backstop under the commercial paper program and the issuance of letters of credit, was $96.3 million. During fiscal 2014, NJNG's weighted average interest rate on outstanding commercial paper was .13 percent, resulting in interest expense of $162,000. Based on average borrowings under the facility of $118.2 million during the period, a 100 basis point change in the underlying average interest rate would have caused a change in interest expense of approximately $1.2 million during fiscal 2014. As of September 30, 2014, NJNG has two letters of credit outstanding for $731,000. These letters of credit reduce the amount available under NJNG's committed credit facility by the same amount. NJNG does not anticipate that these letters of credit will be drawn upon by the counterparties. These letters of credit are used as collateral for soil remediation systems and expire on August 11, 2015. NJNG entered into a $100 million, four-year credit facility with JPMorgan Chase Bank, N.A., in August 2011. The JPMC Facility was available to the Company to provide liquidity support in the event of a failed remarketing of the EDA Bonds and to Short-Term Debt Covenants Borrowings under the NJR Credit Facility and NJNG Credit Facility are conditioned upon compliance with a maximum leverage ratio (consolidated total indebtedness to consolidated total capitalization as defined in the applicable agreements), of not more than .65 to 1.00 at any time. These revolving credit facilities contain customary representations and warranties for transactions of this type. They also contain customary events of default and certain covenants that will limit NJR or NJNG's ability beyond agreed upon thresholds, to, among other things: • incur additional debt; • incur liens and encumbrances; • make dispositions of assets; • enter into transactions with affiliates; and • merge, consolidate, transfer, sell or lease all or substantially all of the borrower's or guarantors' assets. These covenants are subject to a number of exceptions and qualifications set forth in the applicable agreements. Default Provisions The agreements governing our long-term and short-term debt obligations include provisions that, if not complied with, could require early payment or similar actions. Default events include, but are not limited to, the following: • defaults for non-payment; • defaults for breach of representations and warranties; • defaults for insolvency; • defaults for non-performance of covenants; • cross-defaults to other debt obligations of the borrower; and • guarantor defaults. The occurrence of an event of default under these agreements could result in all loans and other obligations of the borrower becoming immediately due and payable and the termination of the credit facilities or term loan. Page 51 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Long-Term Debt NJR As of September 30, 2014, NJNG's long-term debt consisted of $335.8 million in fixed-rate debt issuances secured by the New Mortgage Indenture, with maturities ranging from 2018 to 2044, $97 million in secured variable rate debt with maturities ranging from 2027 to 2041 and $40.4 million in capital leases with various maturities ranging from 2015 to 2021. NJR has $50 million of 6.05 percent senior unsecured notes, issued through the private placement market, maturing in On May 27, 2014, NJNG redeemed the $12 million, 5 percent Series HH bonds, which were callable as of December 1, September 2017. 2013. On September 26, 2013, NJR entered into an unsecured, uncommitted $100 million private placement shelf note agreement with MetLife. The MetLife Facility, subject to the terms and conditions set forth therein, allows NJR to issue senior notes to MetLife or certain of MetLife's affiliates from time to time during a three-year issuance period ending September 26, 2016, on terms and conditions, including interest rates and maturity dates, to be agreed upon in connection with each note issuance. Any notes issued under the MetLife Facility will be guaranteed by certain unregulated subsidiaries of NJR. As of September 30, 2014, $100 million remains available for borrowing under the MetLife Facility. NJR has outstanding $25 million of 1.94 percent senior notes due September 15, 2015, and $25 million of 2.51 percent entered into on February 7, 2014. The notes are secured by an equal principal amount of NJNG's FMBs (Series QQ and RR, senior notes due September 15, 2018, which were issued under a now-expired facility with MetLife. In June 2011, NJR entered into an unsecured, uncommitted $75 million private placement shelf note agreement with Prudential, which was amended effective July 25, 2014, by the First Amendment to the Prudential Facility, as discussed below. The Prudential Facility, subject to the terms and conditions set forth therein, allows NJR to issue senior notes to Prudential or certain of Prudential's affiliates from time to time during a three-year issuance period that ended on June 30, 2014, on terms and conditions, including interest rates and maturity dates, to be agreed upon in connection with each note issuance. In September 2012, NJR issued $50 million of 3.25 percent senior notes due September 17, 2022. The notes issued under the Prudential Facility are guaranteed by certain unregulated subsidiaries of NJR. Effective July 25, 2014, NJR entered into a First Amendment to the Prudential Facility allowing the issuance of up to an additional $100 million in notes. On November 7, 2014, NJR issued $100 million in 3.48 percent senior notes due November 7, 2024 NJNG NJNG and Trustee, entered into the New Mortgage Indenture, dated September 1, 2014, which amends and restates the Old Mortgage Indenture in its entirety and names the Trustee, by virtue of an Omnibus Agreement dated as of September 24, 2014, by and among the Former Trustee, U.S. Bank National Association, the holders of more than 66-2/3 percent in aggregate principal amount of the outstanding bonds under the Old Mortgage Indenture, the collateral agents for the holders of certain of NJNG's senior notes, the owner of the EDA Bonds and the EDA Bond Trustee. The New Mortgage Indenture secures all of the outstanding FMBs issued under the Old Mortgage Indenture. The New Mortgage Indenture provides a direct first mortgage lien upon substantially all of the operating properties and franchises of NJNG (other than excepted property, such as cash on hand, choses-in-action, securities, rent, natural gas meters and certain materials, supplies, appliances and vehicles), subject only to certain permitted encumbrances. The New Mortgage Indenture contains provisions subjecting after-acquired property (other than excepted property and subject to pre-existing liens, if any, at the time of acquisition) to the lien thereof. The New Mortgage Indenture provides that additional FMBs may be issued, subject to the provisions of the New Mortgage Indenture, in principal amounts equal to (1) 70 percent of the Net Amount of Property Additions (as defined in the New Mortgage Indenture and described below); (2) the amount of cash deposited with the Trustee for the purpose of obtaining the authentication of such additional FMBs; or (3) the aggregate principal amount of FMBs delivered to the Trustee by NJNG or otherwise to be retired, and which have not previously been used by NJNG for any purpose under the New Mortgage Indenture. The New Mortgage Indenture permits the release of mortgaged property upon compliance with certain conditions. One alternative basis for the release of mortgaged property is if the value of the Trust Estate (as defined in the New Mortgage Indenture) exceeds ten-sevenths (10/7) of the outstanding principal amount of the FMBs. This ability to release mortgaged property is subject to the release not materially adversely affecting NJNG's business nor impairing the security of the FMBs. Page 52 Page 53 On April 23, 2014, the BPU approved a petition filed by NJNG requesting authorization over a three-year period to issue up to $300 million of medium-term notes with a maturity of not more than 30 years, renew its revolving credit facility expiring August 2014 for up to five years, enter into interest rate risk management transactions related to debt securities and redeem, refinance or defease any of NJNG's outstanding long-term debt securities. On March 13, 2014, NJNG issued $70 million of 3.58 percent senior secured notes due March 13, 2024, and $55 million of 4.61 percent senior secured notes due March 13, 2044, in the private placement market pursuant to a note purchase agreement respectively) issued under NJNG's Mortgage Indenture. The proceeds from the notes were used to pay down short-term debt and redeem its $60 million, 4.77 percent private placement bonds. The notes are subject to required prepayments upon the occurrence of certain events and NJNG may at any time prepay all or a portion of the notes at a make-whole prepayment price. On April 15, 2013, NJNG issued $50 million of 3.15 percent senior secured notes (3.15 percent notes) due April 15, 2028, in the private placement market pursuant to a note purchase agreement entered into on February 8, 2013. The 3.15 percent notes are secured by an equal principal amount of NJNG's FMBs (Series PP) issued under NJNG's Mortgage Indenture. The proceeds from the 3.15 percent notes were used to refinance short-term debt and to fund capital expenditure requirements. The 3.15 percent notes are subject to required prepayments upon the occurrence of certain events. NJNG may at any time prepay all or a portion of the 3.15 percent notes at a make-whole prepayment price. NJR is not obligated directly or contingently with respect to the notes or the FMBs. Long-Term Debt Covenants and Default Provisions The NJR and NJNG long-term debt instruments contain customary representations and warranties for transaction of their type. They also contain customary events of default and certain covenants that will limit NJR or NJNG's ability beyond agreed upon thresholds to, among other things: • Incur additional debt (including a covenant that limits the amount of consolidated total debt of the borrower at the end of a fiscal quarter to 65 percent of the consolidated total capitalization of the borrower, as those terms are defined in the applicable agreements, and a covenant limiting priority debt to 20 percent of the borrower's consolidated total capitalization, as those terms are defined in the applicable agreements); • Incur liens and encumbrances; • Make loans and investments; • Make dispositions of assets; • Make dividends or restricted payments; • Enter into transactions with affiliates; and • Merge, consolidate, transfer, sell or lease substantially all of the borrower's assets. The aforementioned covenants are subject to a number of important exceptions and qualifications set forth in the applicable note purchase agreements. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In addition, the FMBs issued by NJNG under the New Mortgage Indenture are subject to certain default provisions. Events of Default, as defined in the New Mortgage Indenture, consist mainly of (1) failure for 30 days to pay interest when due; (2) failure to pay principal or premium when due and payable; (3) failure to make sinking fund payments when due; (4) failure to comply with any other covenants of the New Mortgage Indenture after 30 days' written notice from the Trustee; (5) failure to pay or provide for judgments in excess of $30,000,000 in aggregate amount within 60 days of the entry thereof; or (6) certain events that are or could be the basis of a bankruptcy, reorganization, insolvency or receivership proceeding. Upon the occurrence and continuance of such an Event of Default, the New Mortgage Indenture, subject to any provisions of law applicable thereto, provides that the Trustee may take possession and conduct the business of the NJNG, may sell the trust estate, or proceed to foreclose the lien of the New Mortgage Indenture. The interest rate on defaulted principal and interest, to the extent permitted by law, on the FMBs issued under the New Mortgage Indenture is the rate stated in the applicable supplement or, if no such rate is stated, six percent per annum. NJNG Variable-Rate Long-Term Debt In August 2011, NJNG completed a refunding of its outstanding Auction-Rate Securities whereby the EDA issued a total of $97 million of Natural Gas Facilities Refunding Revenue Bonds (New Jersey Natural Gas Company Project) composed of three series of bonds: the $9.5 million principal amount Series 2011A Bonds (Non-AMT) due September 1, 2027, the $41 million principal amount Series 2011B Bonds (AMT) due August 1, 2035 and the $46.5 million principal amount Series 2011C Bonds (AMT) due August 1, 2041. EDA Bonds are special, limited obligations of the EDA payable solely from payments made by NJNG pursuant to a Loan Agreement between the EDA and the Company, and are secured by the pledge of $97 million principal amount First Mortgage Bonds issued by the Company. Prior to September 24, 2014, each series of the EDA Bonds accrued interest at a daily interest rate. On September 24, 2014, NJNG completed a change in interest rate mode for all of the EDA Bonds. In connection with the change in interest rate mode, NJNG entered into a CCA dated as of September 24, 2014 with Wells Fargo, pursuant to which Wells Fargo agreed to buy the EDA Bonds. Each series of EDA Bonds is expected to accrue interest for five years at a variable rate determined monthly, which rate is initially calculated as .55 percent plus 70 percent of one month LIBOR, subject to earlier redemption or conversion to another interest rate mode. The maximum interest rate on the EDA Bonds is 12 percent per annum. NJNG's obligations under the Loan Agreement (and its corresponding obligations under the FMBs) match the respective principal amounts, interest rates and maturity dates of the EDA Bonds. The EDA Bonds are not subject to optional tender while they bear interest at a LIBOR index rate. The weighted average interest rate as of September 30, 2014, on the EDA Bonds was .66 percent. The interest rate on the EDA Bonds may vary based upon market conditions. Sudden increases in the interest rate could cause a change in interest expense and cash flow for NJNG in the future. The CCA also contains representations, warranties, covenants and defaults consistent with those contained in similar NJNG loan agreements, including but not limited to: (a) a maximum leverage ratio (consolidated total indebtedness to consolidated total capitalization as defined in the CCA) of not more than 0.65 to 1.00 at any time; (b) limitations on liens and incurrence of debt, investments, and mergers and asset dispositions, and the use of the proceeds of the CCA; (c) requirements to preserve corporate existence and comply with laws; and (d) default provisions, including defaults for non-payment, defaults for breach of representations and warranties, defaults for insolvency, defaults for non-performance of covenants, cross-defaults and guarantor defaults. As a result of the change in the interest rate mode on the EDA Bonds from a daily rate, on September 26, 2014, NJNG terminated the $100 million four-year credit facility with JPMorgan Chase Bank, N.A., dated August 29, 2011, which had previously provided additional liquidity for its obligations under the Loan Agreement. Sale-Leaseback NJNG received $7.6 million, $7.1 million and $6.5 million in fiscal 2014, 2013 and 2012, respectively, in connection with the sale-leaseback of its natural gas meters. During fiscal 2014, 2013 and 2012, NJNG exercised early purchase options with respect to meter leases by making final principal payments of $956,000, $752,000 and $1 million, respectively. NJNG expects to continue this sale-leaseback program on an annual basis, subject to market conditions. Contractual Obligations The following table is a summary of NJR, NJNG and NJRES contractual cash obligations and financial commitments and their applicable payment due dates as of September 30, 2014: (Thousands) Long-term debt (1) Capital lease obligations (1) Operating leases (1) Short-term debt New Jersey Clean Energy Program (1) Construction obligations Remediation expenditures (2) Natural gas supply purchase obligations-NJNG Demand fee commitments-NJNG Natural gas supply purchase obligations-NJRES Demand fee commitments-NJRES Total contractual cash obligations (1) (2) Expenditures are estimated. Up to 1 Year 2-3 Years 4-5 Years After 5 Years $ 795,522 $ 46,683 $ 92,378 $ 176,105 $ 480,356 Total 57,963 32,351 301,000 14,285 55,144 177,000 105,580 1,248,842 316,965 219,955 11,897 2,616 301,000 14,285 54,327 13,000 100,218 78,337 298,563 104,406 23,124 4,073 — — 817 47,000 5,362 114,122 18,402 79,670 15,354 2,877 7,588 22,785 — — — — — 15,000 102,000 191,523 864,860 26,420 9,459 — — — — — These obligations include an interest component, as defined under the related governing agreements or in accordance with the applicable tax statute. $ 3,324,607 $ 1,025,332 $ 384,948 $ 427,279 $ 1,487,048 NJR does not expect to be required to make additional contributions to fund its 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 and changes in the demographics of eligible employees and covered dependents. In addition, as in the past, NJR may elect to make contributions to the plans in excess of the minimum required amount. NJR made no discretionary contributions to the pension plans in fiscal 2014, and made a discretionary contribution of $20 million in fiscal 2013. This contribution brought the plan to the Transition Target Funding level under the Pension Protection Act. There are no Federal requirements to pre-fund OPEB benefits. However, the Company is required to fund certain amounts due to regulatory agreements with the BPU. NJR anticipates that the annual funding level to the OPEB plans will range from $4 million to $6 million annually over the next five years subject to review in NJNG's next base rate case to be filed no later than November 15, 2015. Additional contributions may vary based on market conditions and various assumptions. As of September 30, 2014, there were NJR guarantees covering approximately $323.6 million of natural gas purchases and demand fee commitments of NJRES and NJNG included in natural gas supply purchase obligations above, not yet reflected in Accounts payable on the Consolidated Balance Sheets. NJNG's incurs significant capital expenditures consisting primarily of its construction program to support customer growth, maintenance of its distribution and transmission system and replacement needed under pipeline safety regulations. During fiscal 2014, committed and spent capital expenditures totaled $156.9 million, of which $40.3 million was related to SAFE and approximately $9.8 million was related to restoration of storm damages. In fiscal 2015 and 2016, NJNG's total capital expenditures are projected to be $182.3 million and $233.7 million, respectively, and include estimated SAFE costs of $41.2 million and $39 million, respectively. In November 2012, NJNG filed a petition with the BPU requesting deferral accounting for incurred uninsured incremental O&M costs associated with Superstorm Sandy. As of September 30, 2014, NJNG has deferred $15.2 million in regulatory assets for future recovery. On October 22, 2014, the BPU approved the deferred assets as prudent and reasonable for recovery with the appropriate amortization period for such deferred expenses to be addressed in the Company's next base rate case to be filed no later than November 15, 2015. However, there can be no assurances that such recovery mechanisms will be available or, if available, no assurances can be given relative to the timing or amount of such recovery. NJNG expects to fund its obligations with a combination of cash flow from operations, cash on hand, issuance of commercial paper, available capacity under its revolving credit facility, the issuance of long-term debt and contributions from NJR. As of September 30, 2014, NJNG's future MGP expenditures are estimated to total $177 million. For a more detailed description of MGP see Note 13. Commitments and Contingent Liabilities in the accompanying Consolidated Financial Statements. Page 54 Page 55 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory The increase of $242.8 million during fiscal 2014, compared with fiscal 2013, was due primarily to unusually cold weather constraints, environmental regulations, unforeseen events and the ability to access capital. NJRCEV's expenditures include distributed power projects that support NJR's goal to promote clean energy. Accordingly, NJRCEV enters into agreements to install solar equipment involving both residential and commercial projects. During fiscal 2014, capital expenditures spent related to the purchase and installation of the solar equipment were $95.8 million and an additional $33.1 million has been committed or accrued for solar projects to be placed into service during fiscal 2015 and beyond. The Company estimates solar-related capital expenditures placed in service in fiscal 2015 to be between $100 million and $110 million. On October 11, 2013, NJRCEV acquired the development rights of the Two Dot wind project in Montana, which was its first onshore wind project. NJRCEV invested approximately $21.2 million to construct the 9.7 MW wind project that was completed in June 2014. In the second fiscal quarter of 2014, NJRCEV acquired the development rights to its second wind project, a $42 million, 20 MW wind farm currently under construction in Carroll County, Iowa and on October 9, 2014, NJRCEV acquired the development rights to an $85 million, 48 MW wind project in Rush County, Kansas that is currently under construction. During fiscal 2014, $39.7 million has been spent and, as of September 30, 2014, an additional $19.3 million has been committed or accrued for these wind projects. In fiscal 2015, NJRCEV estimates that its wind-related capital expenditures will range between $90 million and $110 million. Capital expenditures related to distributed power projects are subject to change due to a variety of factors that may affect our ability to commence operations at these projects on a timely basis or, at all, including logistics associated with the start-up of residential and commercial solar projects, such as timing of construction schedules, the permitting and regulatory process, any delays related to electric grid interconnection, economic trends, unforeseen events and the ability to access capital or allocation of capital to other investments or business opportunities. NJRES does not currently anticipate any significant capital expenditures in fiscal 2015 and 2016. Off-Balance-Sheet Arrangements The Company does not have any off-balance-sheet arrangements, with the exception of guarantees covering approximately $323.6 million of natural gas purchases and demand fee commitments, see Note 13. Commitments and Contingent Liabilities, and eight outstanding letters of credit totaling $21.2 million, that secures operational activities at certain unregulated subsidiaries, see Note 8. Debt. Cash Flow Operating Activities Operating cash flows are primarily affected by variations in working capital, which can be impacted by several factors, totaled $135.5 million and $59.1 million, respectively. including: • • • • • • • • • seasonality of NJR's business; fluctuations in wholesale natural gas prices, including changes in derivative asset and liability values; timing of storage injections and withdrawals; the deferral and recovery of gas costs; changes in contractual assets utilized to optimize margins related to natural gas transactions; broker margin requirements; timing of the collections of receivables and payments of current liabilities; volumes of natural gas purchased and sold; and timing of SREC deliveries. Page 56 Page 57 during fiscal 2014, which resulted in a significant increase in sales of natural gas out of storage at NJRES, as well as an increase in volatility and natural gas prices that factored into the overall profitability and positive changes in working capital at NJRES. The increase in operating cash flows also consisted of lower contributions to the postemployment benefit plans, partially offset by a decrease of $34 million in broker margin balances due primarily to a decrease in the value of open positions and related increase in cash requirements. The $62.9 million increase in cash generated from operations during fiscal 2013, compared with fiscal 2012, was impacted by: • credits of $85.9 million issued to NJNG's customers during the first quarter of fiscal 2012 for overrecovered gas costs • cash received totaling $17.9 million due to the sale of NJRES' MF Global bankruptcy claim and related distributions; • additional expenditures of approximately $15.2 million related to Superstorm Sandy restoration efforts at NJNG that that did not recur during fiscal 2013; partially offset by have been deferred as a regulatory asset. Investing Activities Cash flows used in investing activities totaled $282.6 million during fiscal 2014, compared with $193.6 million during fiscal 2013. The increase of $89 million was due primarily to an increase in capital expenditures of $39.7 million related to wind projects, $36.7 million related to solar projects at NJRCEV and $15.5 million related to utility plant, including cost of removal at NJNG, partially offset by proceeds of $6 million from the sale of land at CR&R. Cash flow used in investing activities totaled $193.6 million during fiscal 2013, compared with $217.1 million during fiscal 2012. The decrease was due primarily to lower solar equipment expenditures at NJRCEV, partially offset by higher utility plant asset expenditures at NJNG. NJR also received a distribution, in excess of its equity in earnings, of $3.1 million from Steckman Ridge and received proceeds of $482,000 from the sale of available for sale shares during fiscal 2013. NJNG's capital expenditures result primarily from the need for services, mains and meters to support its continued customer growth, mandated pipeline safety rulemaking, general system improvements and approved infrastructure programs. During fiscal 2014 and fiscal 2013, NJNG's capital expenditures, including cost of removal, totaled $152.6 million and $137.1 million, respectively, including $40.3 million and $33.4 million related to SAFE. Fiscal 2013 also included expenditures of $11.9 million related to AIP. The Company entered into various agreements to install solar equipment involving both residential and commercial projects and to build , operate and maintain wind projects. During fiscal 2014 and fiscal 2013, capital expenditures spent on these projects, Home Services and Other capital expenditures in past years have been made primarily in connection with investments made to preserve the value of real estate holdings. As of September 30, 2014, CR&R owned 52 acres of undeveloped land and a 56,400 square-foot office building on five acres of land. On October 22, 2013, CR&R sold approximately 25.4 acres of its undeveloped land for $6 million, generating a pre-tax gain of $313,000, after closing costs. Financing Activities Financing cash flows generally are seasonal in nature and are impacted by the volatility in pricing in the natural gas markets. NJNG's inventory levels are built up during its natural gas injection season (April through October) and reduced during withdrawal season (November through March) in response to the supply requirements of its customers. Changes in financing cash flows can also be impacted by gas management and marketing activities at NJRES and distributed power investments at NJRCEV. Cash flows (used in) financing activities during fiscal 2014 totaled $(75) million, compared with $78.1 million generated during fiscal 2013. The decrease of $153.1 million was due primarily to a decrease in short-term borrowings at NJR and NJNG. NJNG also issued $125 million in senior notes during fiscal 2014, which was used to reduce short-term borrowings and redeem $60 million, 4.77 percent private placement bonds that matured in March 2014 and $12 million Series HH bonds, which were callable as of December 1, 2013 and redeemed in May 2014. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Cash from financing activities decreased $85 million during fiscal 2013, from $163.1 million during fiscal 2012, due primarily to a combination of lower proceeds received from the issuance of long- and short-term debt, partially offset by an increase in proceeds from the issuance of common shares. NJNG received $7.6 million, $7.1 million and $6.5 million for fiscal 2014, 2013 and 2012, respectively, in connection with the sale-leaseback of its natural gas meters. During fiscal 2014, 2013 and 2012, NJNG exercised early purchase options with respect to meter leases by making final principal payments of $956,000, $752,000 and $1 million, respectively. This sale-leaseback program is expected to continue on an annual basis. Credit Ratings On January 30, 2014, Moody's upgraded NJNG's senior secured rating from Aa3 to Aa2, while maintaining a stable outlook. The rating upgrade was driven primarily by the overall credit supportiveness of the regulatory environment under which NJNG operates. In its review of NJNG's credit rating, Moody's considered the BPU's continued support of NJNG's rate mechanisms, which allows for timely recovery of costs, including those associated with NJNG's BGSS and CIP. In addition, the favorable recovery of investments related to NJNG's infrastructure and energy efficiency programs factored into the rating upgrade. (Thousands) NJNG NJRES Total This table summarizes NJNG's credit ratings, issued by two rating entities, S&P and Moody's, as of September 30, 2014: There were no changes in methods of valuations during the year ended September 30, 2014. Corporate Rating Commercial Paper Senior Secured Ratings Outlook S&P A A-1 A+ Stable Moody's N/A P-1 Aa2 Stable NJNG's S&P and Moody's ratings are investment-grade ratings. NJR is not a rated entity. Although NJNG is not party to any lending agreements that would accelerate the maturity date of any obligation caused by a failure to maintain any specific credit rating, if such ratings are downgraded below investment grade, borrowing costs could increase, as would the costs of maintaining certain contractual relationships and future financing and reduce our access to capital markets. Even if ratings are downgraded without falling below investment grade, NJR and NJNG could face increased borrowing costs under their credit facilities. A rating set forth above is not a recommendation to buy, sell or hold the Company's or NJNG's securities and may be subject to revision or withdrawal at any time. Each rating set forth above should be evaluated independently of any other rating. The timing and mix of any external financings will target a common equity ratio that is consistent with maintaining the Company's current short-term and long-term credit ratings. (1) Million Metric British thermal unit ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following table reflects the changes in the fair market value of physical commodity contracts from September 30, 2013 Financial Risk Management Commodity Market Risks Natural gas is a nationally traded commodity. Its prices are determined effectively by the NYMEX and over-the-counter markets. The prices on the NYMEX/CME, ICE and over-the-counter markets generally reflect the national balance of natural gas supply and demand, but are also significantly influenced from time to time by other events. Foreign Currency Market Risks The regulated and deregulated natural gas businesses of NJR and its subsidiaries are subject to market risk due to fluctuations in the price of natural gas. To economically hedge against such fluctuations, NJR and its subsidiaries have entered into forwards, futures, options and swap agreements. To manage these derivative instruments, NJR has well-defined risk management policies and procedures that include daily monitoring of volumetric limits and monetary guidelines. NJR's natural gas businesses are conducted through three of its operating subsidiaries. NJNG is a regulated utility that uses futures, options and swaps to economically hedge against price fluctuations, and its recovery of natural gas costs is governed by the BPU. NJRES uses futures, options, swaps Page 58 The following table reflects the changes in the fair market value of financial derivatives related to foreign currency hedges from September 30, 2013 to September 30, 2014: Balance Increase September 30, (Decrease) in Fair Market Value Less Amounts Settled Balance September 30, 2014 (432) (266) $ (155) 2013 $ 11 Page 59 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued) and physical contracts to economically hedge purchases and sales of natural gas. Financial derivatives have historically been transacted on an exchange and cleared through an FCM, thus requiring daily cash margining for a majority of NJRES' and NJNG's positions. As a result of the Dodd-Frank Act, certain NJRES' and NJNG's other transactions that were previously executed in the over-the-counter markets are now cleared through an FCM, resulting in increased margin requirements. The related cash flow impact from the increased requirements is expected to be minimal. Non-financial (i.e., physical) derivatives utilized by the Company have received statutory exclusion from similar Dodd-Frank provisions due to the element of physical settlement. The following table reflects the changes in the fair market value of financial derivatives related to natural gas purchases and sales from September 30, 2013 to September 30, 2014: Balance Increase September 30, (Decrease) in Fair 2013 Market Value Less Amounts Settled Balance September 30, 2014 $ 1,438 14,563 $ 16,001 $ 10,815 $ 11,876 $ 377 (135,711) (119,734) (1,414) $ (124,896) $ (107,858) $ (1,037) The following is a summary of fair market value of financial derivatives as of September 30, 2014, excluding foreign exchange contracts discussed below, by method of valuation and by maturity for each fiscal year period: (Thousands) Price based on NYMEX/CME Price based on ICE Total 2015 2016 2017 - 2019 After 2019 $ $ (431) $ 334 (97) $ (87) (809) (896) $ $ 18 (62) (44) $ — — $ — Total Fair Value $ (500) (537) $ (1,037) The following is a summary of financial derivatives by type as of September 30, 2014: Volume Bcf Price per MMBtu (1) Futures Futures Options 17.3 $2.92 - $4.78 (62.1) $2.19 - $8.85 1.2 $0.24 - $0.24 Amounts included in Derivatives (Thousands) $ $ 377 (1,431) 17 $ (1,037) NJRES - Prices based on other external data $ (2,772) (90,330) (77,618) $ (15,484) Balance Increase September 30, (Decrease) in Fair 2013 Market Value Less Amounts Settled Balance September 30, 2014 NJNG NJRES Total to September 30, 2014: (Thousands) (Thousands) NJRES New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued) ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued) There were no changes in methods of valuations during the fiscal year ended September 30, 2014. Unregulated counterparty credit exposure as of September 30, 2014, is as follows: The following is a summary of fair market value of financial derivatives related to foreign currency hedges at September 30, 2014, by method of valuation and by maturity for each fiscal year period: (Thousands) 2015 2016 2017 - 2019 After 2019 Total Fair Value Prices based on other external data $ (155) — — — $ (155) The Company's market price risk is predominately related to changes in the price of natural gas at Henry Hub, which is the delivery point for the NYMEX natural gas futures contracts. As the fair value of futures and fixed price swaps is derived from this location, the price sensitivity analysis below has been prepared for all open Henry Hub natural gas futures and fixed swap positions. Based on this, an illustrative 10 percent movement in Henry Hub natural gas futures contract prices, for example, increases (decreases) the reported derivative fair value of all open, unadjusted Henry Hub natural gas futures and fixed swap positions by approximately $25 million. This analysis does not include potential changes to reported credit adjustments embedded in the $7.9 million reported fair value. Derivative Fair Value Sensitivity Analysis (Thousands) Henry Hub Futures and Fixed Price Swaps Percent increase in NYMEX natural gas futures prices 0% 5% 10% 15% 20% Estimated change in derivative fair value Ending derivative fair value Percent decrease in NYMEX natural gas futures prices Estimated change in derivative fair value Ending derivative fair value Wholesale Credit Risk $ $ $ $ — $ (12,486) $ (24,972) $ (37,458) $ (49,945) (4,621) $ (17,107) $ (29,593) $ (42,080) 7,865 $ 0% (5)% (10)% (15)% (20)% — $ 12,486 $ 24,972 $ 37,458 $ 49,945 7,865 $ 20,351 $ 32,837 $ 45,323 $ 57,810 NJNG and NJRES engage in wholesale marketing activities and NJRCEV engages in SREC sales. NJR monitors and manages the credit risk of its operations through credit policies and procedures that management believes reduce overall credit risk. These policies include a review and evaluation of prospective counterparties' financial statements and/or credit ratings, daily monitoring of counterparties' credit limits, daily communication with traders regarding credit status and the use of credit mitigation measures, such as minimum margin requirements, collateral requirements and netting agreements. Examples of collateral include letters of credit and cash received for either prepayment or margin deposit. The Company's Risk Management Committee continuously monitors NJR's credit risk management policies and procedures and is composed of individuals from NJR-affiliated companies. The Risk Management Committee meets twice a month and, among other things, evaluates the effectiveness of existing credit policies and procedures, reviews material transactions and discusses emerging issues. The following is a summary of gross and net credit exposures, grouped by investment and noninvestment grade counterparties, as of September 30, 2014. Gross credit exposure is defined as the unrealized fair value of derivative and energy trading 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. Net credit exposure is defined as gross credit exposure reduced by collateral received from counterparties and/or payables, where netting agreements exist. The amounts presented below exclude accounts receivable for NJNG retail natural gas sales and services. (Thousands) Investment grade Noninvestment grade Internally-rated investment grade Internally-rated noninvestment grade Total (Thousands) Investment grade Noninvestment grade Internally-rated investment grade Internally-rated noninvestment grade Total NJNG's counterparty credit exposure as of September 30, 2014, is as follows: Gross Credit Exposure Net Credit Exposure $ 138,308 $ 102,348 5,971 9,256 9,271 814 3,000 2,526 $ 162,806 $ 108,688 Gross Credit Exposure Net Credit Exposure $ 4,762 $ 4,225 491 78 95 — 51 67 $ 5,426 $ 4,343 Due to the inherent volatility in the prices of natural gas commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty failed to perform the obligations under its contract (for example, failed to deliver or pay for natural gas), the Company could sustain a loss. This loss would comprise the loss on natural gas delivered but not paid for and/or the cost of replacing natural gas not delivered or received at a price that is unfavorable to the price in the original contract. Any such loss could have a material impact on the Company's financial condition, results of operations or cash flows. Interest Rate Risk As of September 30, 2014, NJNG is obligated to make principal and interest payments under a loan agreement securing $97 million of variable rate debt issued by the EDA. The bonds are in a LIBOR-based monthly interest rate mode and will accrue interest for five years at a variable rate determined monthly, which was initially calculated at .55 percent plus 70 percent of one- month LIBOR. As of September 30, 2014, the EDA Bonds had a weighted average interest rate of .66 percent. The EDA Bonds are subject to changes in market conditions for tax-exempt bonds and there can be no assurance that the interest rate will remain stable and not increase significantly due to market conditions, which could adversely affect NJNG's borrowing costs. A 100 basis point change in the EDA Bonds' average interest rate would have caused a change in interest expense for these variable rate bonds by approximately $679,000 during fiscal 2014, assuming that they were outstanding for the entire year. At September 30, 2014, the Company, excluding NJNG, had no variable-rate long-term debt. For more information regarding the interest rate risk related to our short-term debt, please see the Liquidity and Capital Resources - Debt section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Effects of Inflation Although inflation rates have been relatively low to moderate in recent years, including the three most recent fiscal years, any change in price levels has an effect on operating results due to the capital-intensive and regulated nature of the Company's utility subsidiary. The Company attempts to minimize the effects of inflation through cost control, productivity improvements and regulatory actions when appropriate. Page 60 Page 61 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of New Jersey Resources Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Securities and Exchange Act of 1934, as amended. The Company's internal control over financial reporting is a process designed to provide reasonable assurance to the Company's Management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes policies and procedures that: • • • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of September 30, 2014. In making this assessment, management used the criteria for effective internal control over financial reporting described in the Internal Control-Integrated Framework (1992) set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management concluded that, as of September 30, 2014, the Company's internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the Unites States of America. The conclusion of the Company's principal executive officer and principal financial officer is based on the recognition that there are inherent limitations in all systems of internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, errors or fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company's independent registered public accounting firm, Deloitte & Touche LLP, has issued its report on the effectiveness of the Company's internal control over financial reporting as of September 30, 2014, which appears herein. November 25, 2014 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of New Jersey Resources Corporation: We have audited the accompanying consolidated balance sheets of New Jersey Resources Corporation and subsidiaries (the “Company”) as of September 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, common stock equity, and cash flows for each of the three years in the period ended September 30, 2014. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of September 30, 2014, based on the criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 25, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey November 25, 2014 Page 62 Page 63 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSOLIDATED STATEMENTS OF OPERATIONS To the Board of Directors and Stockholders of New Jersey Resources Corporation We have audited the internal control over financial reporting of New Jersey Resources Corporation and subsidiaries (the “Company”) as of September 30, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended September 30, 2014 of the Company and our report dated November 25, 2014 expressed an unqualified opinion on those financial statements and financial statement schedules. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey November 25, 2014 Page 64 (Thousands, except per share data) Fiscal years ended September 30, OPERATING REVENUES Utility Nonutility Total operating revenues OPERATING EXPENSES Gas purchases: Utility Nonutility Related parties Operation and maintenance Regulatory rider expenses Depreciation and amortization Energy and other taxes Total operating expenses OPERATING INCOME Other income, net AFFILIATES Income tax provision Equity in earnings of affiliates NET INCOME Interest expense, net of capitalized interest INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF EARNINGS PER COMMON SHARE DIVIDENDS DECLARED PER COMMON SHARE WEIGHTED AVERAGE SHARES OUTSTANDING Basic Diluted Basic Diluted 2014 2013 2012 $ 819,415 $ 787,987 $ 627,713 2,918,730 3,738,145 2,410,081 3,198,068 1,621,210 2,248,923 319,897 400,307 262,858 2,807,008 2,299,974 1,566,396 3,536,955 3,038,837 2,140,233 12,620 215,180 72,164 52,742 57,344 201,190 7,551 25,463 11,942 173,473 48,417 47,310 57,414 159,231 4,783 23,979 183,278 140,035 51,840 10,532 35,575 10,349 $ 141,970 $ 114,809 $ 12,154 171,045 40,350 41,643 45,787 108,690 2,128 20,844 89,974 7,729 10,634 92,879 $3.37 $3.34 $1.71 $2.76 $2.75 $1.62 $2.24 $2.23 $1.54 42,099 42,461 41,658 41,814 41,527 41,632 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Thousands) Net income Fiscal years ended September 30, Other comprehensive income, net of tax Unrealized (loss) gain on available for sale securities, net of tax of $426, $(330) and $(270), respectively (1) Net unrealized (loss) on derivatives, net of tax of $61, $23 and $71, respectively Adjustment to postemployment benefit obligation, net of tax of $2,162, $(5,934) and $345, respectively Other comprehensive (loss) income Comprehensive income (1) Available for sale securities are included in other noncurrent assets on the Consolidated Balance Sheets. 2014 2013 2012 $ 141,970 $ 114,809 $ 92,879 (618) (105) (3,250) (3,973) 479 (39) 8,710 9,150 391 (122) (436) (167) $ 137,997 $ 123,959 $ 92,712 See Notes to Consolidated Financial Statements Page 65 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) Fiscal years ended September 30, CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to cash flows from operating activities Unrealized loss (gain) on derivative instruments Depreciation and amortization Impairment loss on investment Allowance for equity used during construction Allowance for bad debt expense Deferred income taxes Manufactured gas plant remediation costs Equity in earnings of equity investees, net of distributions received Cost of removal - asset retirement obligations Contributions to postemployment benefit plans Changes in: Components of working capital Other noncurrent assets Other noncurrent liabilities Cash flows from operating activities CASH FLOWS (USED IN) INVESTING ACTIVITIES Expenditures for: Utility plant Solar and wind equipment Real estate properties and other Cost of removal Investments in equity investees Distribution from equity investees in excess of equity in earnings Withdrawal from restricted cash construction fund Proceeds from sale of asset Proceeds from sale of available for sale securities Cash flows (used in) investing activities CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES Proceeds from issuance of common stock Tax benefit from stock options exercised Proceeds from sale-leaseback transaction Proceeds from long-term debt Payments of long-term debt Purchases of treasury stock Payments of common stock dividends Net proceeds from short-term debt Cash flows (used in) from financing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period CHANGES IN COMPONENTS OF WORKING CAPITAL Receivables Inventories Recovery of gas costs Gas purchases payable Gas purchases payable - related parties Prepaid and accrued taxes Accounts payable and other Restricted broker margin accounts Customers' credit balances and deposits Other current assets Total SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid for: Interest (net of amounts capitalized) Income taxes SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Accrued capital expenditures See Notes to Consolidated Financial Statements Page 66 2014 2013 2012 $ 141,970 $ 114,809 $ 92,879 ASSETS (Thousands) September 30, CONSOLIDATED BALANCE SHEETS 28,534 52,742 6,351 (1,562) 2,504 18,421 (4,396) 2,589 (1,153) (4,953) 85,480 10,484 19,775 356,786 (128,254) (135,543) (1,179) (24,312) (555) 1,150 88 6,010 — (282,595) 15,373 414 7,576 125,000 (82,586) (5,522) (70,664) (64,600) (75,009) (818) 2,969 2,151 48,032 43,130 13,015 (47,528) 14 21,133 34,716 (20,758) (2,058) (4,216) 85,480 (9,417) 47,310 — (2,037) 2,627 41,075 (6,166) 3,299 (1,697) (26,028) (60,316) 9,496 1,039 113,994 (110,482) (59,125) (1,042) (26,601) — 3,079 56 — 482 (193,633) 37,839 173 7,076 50,000 (8,953) (26,606) (67,230) 85,800 78,099 (1,540) 4,509 2,969 $ 35,789 41,643 — (638) 3,932 (5,323) (7,965) 6,799 (1,196) (25,874) (95,357) (20,539) 26,931 51,081 (104,277) (89,726) (1,334) (12,178) (8,800) — (802) — — (217,117) 13,834 780 6,522 100,000 (8,025) (8,768) (61,688) 120,450 163,105 (2,931) 7,440 4,509 $ $ (72,244) (55,755) 6,100 72,415 (16) (8,182) 726 15,348 (24,059) 5,351 $ (60,316) $ 36,670 28,814 (11,686) (70,216) (61) 23,036 (3,418) 666 (65,324) (33,838) $ (95,357) 22,458 22,447 9,655 $ $ $ 20,414 12,039 (7,103) $ $ $ 16,670 10,053 8,257 $ $ $ $ $ $ PROPERTY, PLANT AND EQUIPMENT Utility plant, at cost Construction work in progress Solar and wind equipment, real estate properties and other, at cost Construction work in progress Total property, plant and equipment Accumulated depreciation and amortization, utility plant Accumulated depreciation and amortization, solar and wind equipment, real estate properties and other Property, plant and equipment, net CURRENT ASSETS Cash and cash equivalents Customer accounts receivable Billed Unbilled revenues Allowance for doubtful accounts Regulatory assets Gas in storage, at average cost Materials and supplies, at average cost Prepaid and accrued taxes Derivatives, at fair value Restricted broker margin accounts Deferred taxes Asset held for sale Other current assets Total current assets NONCURRENT ASSETS Investments in equity investees Regulatory assets Derivatives, at fair value Prepaid pension asset Other noncurrent assets Total noncurrent assets Total assets See Notes to Consolidated Financial Statements Page 67 2014 2013 $ 1,791,009 $ 1,681,585 139,624 347,285 55,625 114,961 249,516 9,093 2,333,543 2,055,155 (409,135) (383,895) (40,298) (28,144) 1,884,110 1,643,116 2,151 2,969 189,970 240,281 7,231 (5,357) 26,862 7,429 (5,330) 34,372 277,516 314,477 8,165 22,269 64,223 27,339 36,451 — 25,911 682,731 153,010 377,575 5,654 — 55,724 591,963 14,334 42,645 53,327 6,581 8,432 5,428 20,953 745,898 161,591 402,202 2,761 6,287 42,928 615,769 $ 3,158,804 $ 3,004,783 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) CAPITALIZATION AND LIABILITIES CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY Balance at September 30, 2011 41,422 $ 110,258 $ 265,524 $ (10,604) $ (117,683) $ 528,762 $ 776,257 Number of Shares Premium Accumulated on Other Common Common Stock Stock Comprehensive (Loss) Income Treasury Stock And Other Retained Earnings Total (Thousands) Net income Other comprehensive (loss) Common stock issued under stock plans 445 698 11,681 Balance at September 30, 2012 41,620 110,956 272,566 (10,771) (116,551) 557,665 813,865 Common stock issued under stock plans 958 1,607 12,934 Tax benefits from stock plans Cash dividend declared ($1.54 per share) Treasury stock and other (247) Net income Other comprehensive income Tax benefits from stock plans Cash dividend declared ($1.62 per share) Treasury stock and other (616) Net income Other comprehensive income Tax benefits from stock plans Cash dividend declared ($1.71 per share) Treasury stock and other (165) Balance at September 30, 2013 41,962 112,563 300,196 (1,621) (128,638) 604,884 887,384 Common stock issued under stock plans 381 214 12,050 Balance at September 30, 2014 42,178 $ 112,777 $ 305,185 $ (5,594) $ (121,031) $ 674,829 $ 966,166 See Notes to Consolidated Financial Statements (167) 9,150 6,262 780 25,455 2,175 (3,973) 5,173 (184) 92,879 92,879 (63,976) (63,976) (10,549) (10,549) 114,809 114,809 (67,590) (67,590) (25,021) (25,021) 141,970 141,970 (167) 18,641 780 9,150 39,996 2,175 (3,973) 17,437 (184) (72,025) (72,025) (4,443) (4,443) (Thousands) September 30, CAPITALIZATION Common stock, $2.50 par value; authorized 75,000,000 shares; outstanding 2014 — 42,178,156; 2013 — 41,961,534 Premium on common stock Accumulated other comprehensive (loss), net of tax Treasury stock at cost and other; shares 2014 — 2,932,775; 2013 — 3,060,356 Retained earnings Common stock equity Long-term debt Total capitalization CURRENT LIABILITIES Current maturities of long-term debt Short-term debt Gas purchases payable Gas purchases payable to related parties Accounts payable and other Dividends payable Deferred and accrued taxes Regulatory liabilities New Jersey clean energy program Derivatives, at fair value Customers' credit balances and deposits Total current liabilities NONCURRENT LIABILITIES Deferred income taxes Deferred investment tax credits Deferred revenue Derivatives, at fair value Manufactured gas plant remediation Postemployment employee benefit liability Regulatory liabilities Asset retirement obligation Other noncurrent liabilities Total noncurrent liabilities Commitments and contingent liabilities (Note 13) Total capitalization and liabilities 2014 2013 $ 112,777 $ 305,185 (5,594) (121,031) 674,829 966,166 598,209 112,563 300,196 (1,621) (128,638) 604,884 887,384 512,886 1,564,375 1,400,270 34,505 301,000 205,901 1,398 104,005 19,001 2,721 6,072 14,285 79,863 22,335 68,643 365,600 253,429 1,384 60,342 17,624 4,040 1,456 14,532 40,390 24,393 791,086 851,833 423,213 372,773 5,262 4,042 6,690 5,584 4,763 2,458 177,000 183,600 86,674 61,326 30,495 8,641 67,897 79,647 28,711 7,247 803,343 752,680 $ 3,158,804 $ 3,004,783 See Notes to Consolidated Financial Statements Page 68 Page 69 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) 1. NATURE OF THE BUSINESS New Jersey Resources Corporation provides regulated gas distribution services and operates certain non-regulated businesses primarily through the following subsidiaries: New Jersey Natural Gas Company provides natural gas utility service to approximately 504,300 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 unregulated 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. On November 7, 2013, NJR Energy Holdings Corporation changed its name to NJR Midstream Holdings Corporation; 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 (formerly Retail and Other operations). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. NJRES expenses demand charges ratably over the term of the contract. Other financial investments or contractual interests that lack the characteristics of a voting interest entity, which are commonly referred to as variable interest entities, are evaluated by NJR to determine if it has the power to direct business activities and, therefore, would be considered a controlling interest that NJR would have to consolidate. Based on those evaluations, NJR has determined that it does not have any investments in variable interest entities as of September 30, 2014, 2013 and 2012. Investments in entities over which the Company does not have a controlling financial interest are either accounted for under the equity method or cost method of accounting. Regulatory Assets & Liabilities Under cost-based regulation, regulated utility enterprises generally are permitted to recover their operating expenses and earn a reasonable rate of return on their utility investment. NJNG maintains its accounts in accordance with the FERC Uniform System of Accounts as prescribed by the BPU and in accordance with the Regulated Operations Topic of the FASB ASC. As a result of the impact of the ratemaking process and regulatory actions of the BPU, NJNG is required to recognize the economic effects of rate regulation. Accordingly, NJNG capitalizes or defers certain costs that are expected to be recovered from its customers as regulatory assets and recognizes certain obligations representing probable future expenditures as regulatory liabilities on the Consolidated Balance Sheets. See Note 3. Regulation, for a more detailed description of NJNG's regulatory assets and liabilities. Page 70 Page 71 Gas in Storage ($ in thousands) NJRES NJNG Total Demand Fees (Millions) NJRES NJNG Total Gas in storage is reflected at average cost on the Consolidated Balance Sheets, and represents natural gas and LNG that will be utilized in the ordinary course of business. The following table summarizes gas in storage by company as of September 30: 2014 2013 Gas in Storage Bcf Gas in Storage Bcf $ 191,250 $ 86,266 $ 277,516 56.5 21.3 77.8 $ 209,498 $ 104,979 $ 314,477 62.3 20.4 82.7 For the purpose of securing adequate storage and pipeline capacity, NJRES and NJNG enter into storage and pipeline capacity contracts, which require the payment of certain demand charges 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 based on established rates as regulated by FERC. These demand charges represent commitments to pay storage providers or pipeline companies for the right to store and transport natural gas utilizing their respective assets. The following table summarizes the demand charges, which are net of capacity releases, and are included as a component of gas purchases on the Consolidated Statements of Operations for the fiscal years ended September 30: 2014 2013 2012 $ $ 122.0 $ 123.0 $ 129.8 92.0 92.1 86.7 214.0 $ 215.1 $ 216.5 NJNG's costs associated with demand charges are included in its weighted average cost of gas. The demand charges are expensed based on NJNG's BGSS sales and recovered as part of its gas commodity component of its BGSS tariff. Derivative Instruments NJR accounts for its financial instruments, such as futures, options, foreign exchange contracts and swaps, as well as its physical commodity contracts related to the purchase and sale of natural gas at NJRES, as derivatives, and therefore recognizes them at fair value on the Consolidated Balance Sheets. NJR's unregulated subsidiaries record changes in the fair value of their financial commodity derivatives and physical forward contracts in gas purchases or operating revenues, as appropriate, on the Consolidated Statements of Operations. NJRES designates its foreign exchange contracts as cash flow hedges of Canadian dollar dominated gas purchases. Changes in the fair value of the effective portion of these hedges are recorded to OCI, a component of stockholders' equity, and reclassified to gas purchases on the Consolidated Statements of Operations when they settle. Ineffective portions of the cash flow hedges are recognized immediately in earnings. NJR did not have derivatives designated as fair value hedges during fiscal 2013 and 2014. The Derivatives and Hedging Topic of the ASC also provides for a normal scope exception for qualifying physical commodity contracts that are intended for purchases and sales during the normal course of business and for which physical delivery is probable. NJR applies this normal scope exception to physical commodity contracts at NJNG and forward contracts at NJRCEV, and therefore does not record changes in the fair value of these contracts until the contract settles and the related underlying natural gas or SREC is delivered. NJNG's derivatives used to economically hedge its natural gas purchasing activities are recoverable through its BGSS, a component of its tariff. Accordingly, the offset to the change in fair value of these derivatives is recorded as a regulatory asset or liability on the Consolidated Balance Sheets. See Note 4. Derivative Instruments for additional details regarding natural gas trading and hedging activities. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) Fair values of exchange-traded instruments, including futures, swaps, foreign exchange contracts and certain options, are based on actively quoted market prices. Fair values are subject to change in the near term and reflect management's best estimate based on various factors. In establishing the fair value of commodity contracts that do not have quoted prices, such as physical contracts, over-the-counter options and swaps and certain embedded derivatives, management uses available market data and pricing models to estimate fair values. Estimating fair values of instruments that do not have quoted market prices requires management's judgment in determining amounts that could reasonably be expected to be received from, or paid to, a third party in settlement of the instruments. These amounts could be materially different from amounts that might be realized in an actual sale transaction. Revenues Revenues from the sale of natural gas to customers of NJNG are recognized in the period that gas is delivered and consumed by customers, including an estimate for unbilled revenue. NJNG records unbilled revenue for natural gas services. Natural gas sales to individual customers are based on meter readings, which are performed on a systematic basis throughout the month. At the end of each month, the amount of natural gas delivered to each customer after the last meter reading through the end of the respective accounting period is estimated, and NJNG recognizes unbilled revenues related to these amounts. The unbilled revenue estimates are based on estimated customer usage by customer type, weather effects, unaccounted-for gas and the most current tariff rates. Revenues for NJRES are recognized when the natural gas is physically delivered to the customer. In addition, changes in the fair value of derivatives that economically hedge the forecasted sales of the natural gas are recognized in operating revenues as they occur, as noted above. Revenues from all other activities are recorded in the period during which products or services are delivered and accepted by customers, or over the related contractual term. Gas Purchases NJNG's tariff includes a component for BGSS, which is designed to allow NJNG to recover the cost of natural gas through rates charged to its customers and is typically revised on an annual basis. As part of computing its BGSS rate, NJNG projects its cost of natural gas, net of supplier refunds, the impact of hedging activities and credits from non-firm sales and transportation activities. NJNG subsequently recovers or credits the difference, if any, of actual costs compared with those included in current rates. Any underrecoveries or overrecoveries are either credited to customers or deferred and, subject to BPU approval, reflected in the BGSS rates in subsequent years. NJRES' gas purchases represent the total commodity contract cost, recognized upon completion of the transaction, as well as realized gains and losses of settled derivative instruments, both for physical purchase contracts and all financial contracts and unrealized gains and losses on the change in fair value of financial derivative instruments that have not yet settled. (1) TEFA was phased out in January 2014. Cash and Cash Equivalents Income Taxes The Company computes income taxes using the asset and liability method, whereby deferred income taxes are generally determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. See Note 12. Income Taxes. In addition, NJR evaluates its tax positions to determine the appropriate accounting and recognition of future obligations associated with unrecognized tax benefits. The Company invests in property that qualifies for federal ITCs and utilizes the ITCs, as allowed, based on the cost and life of the assets. ITCs at NJNG are deferred and amortized as a reduction to the tax provision over the average lives of the related equipment in accordance with regulatory treatment. ITCs at NJR's unregulated subsidiaries are recognized as a reduction to income tax expense when the property is placed in service. Page 72 Page 73 Capitalized and Deferred Interest NJNG's base rates include the ability for NJNG to recover the cost of debt associated with AFUDC and CWIP. For most of NJNG's construction projects, an incremental cost of equity is also recoverable during periods when NJNG's short-term debt balances are lower than its CWIP. For more information on AFUDC treatment with respect to certain accelerated infrastructure projects, see Note 3 Regulation - Infrastructure programs. Capitalized amounts associated with the debt and equity components of NJNG's AFUDC, are recorded in utility plant on the Consolidated Balance Sheets. Corresponding amounts for the debt component is recognized in interest expense and in other income for the equity component on the Consolidated Statements of Operations and include the following for the fiscal years ended 2014 2013 2012 $ $ 1,057 1,562 2,619 $ $ 921 2,037 2,958 $ $ 300 638 938 3.30% 1.05% 1.47% September 30: ($ in thousands) AFUDC: Debt Equity Total Weighted average interest rate Sales Tax Accounting (Millions) Sales tax TEFA (1) Total Pursuant to a BPU order, NJNG is permitted to recover carrying costs on uncollected balances related to SBC program costs, which include NJCEP, RA and USF expenditures. See Note 3. Regulation. The SBC interest rate changes each September based on the August 31 seven-year constant maturity Treasury rate plus 60 basis points. The rate was 2.65 percent, 2.84 percent and 1.61 percent for the fiscal years ended September 30, 2014, 2013 and 2012, respectively. Accordingly, other income included $586,000, $653,000 and $878,000 in the fiscal years ended September 30, 2014, 2013 and 2012, respectively. Sales tax and TEFA are collected from customers and presented in both operating revenues and operating expenses on the Consolidated Statements of Operations for the fiscal years ended September 30, as follows: 2014 2013 2012 $ $ 47.4 $ 44.4 $ 1.4 5.0 48.8 $ 49.4 $ 32.3 6.0 38.3 Cash and cash equivalents consists of cash on deposit and temporary investments with maturities of three months or less, and excludes restricted cash of $1 million and $1.1 million as of September 30, 2014 and 2013, respectively, related to escrow balances for utility plant projects, which is recorded in other current and noncurrent assets on the Consolidated Balance Sheets, respectively. Property Plant and Equipment Regulated property, plant and equipment and solar and wind equipment are stated at original cost. Regulated property, plant and equipment costs include direct labor, materials and third-party construction contractor costs, AFUDC and certain indirect costs related to equipment and employees engaged in construction. Upon retirement, the cost of depreciable regulated property, plus removal costs less salvage, is charged to accumulated depreciation with no gain or loss recorded. Depreciation is computed on a straight-line basis over the useful life of the assets for non-regulated assets for financial statement purposes and using rates based on the estimated average lives of the various classes of depreciable property for NJNG. The composite rate of depreciation used for NJNG was 2.44 percent of average depreciable property in fiscal 2014, 2.43 percent in fiscal 2013 and 2.38 percent in fiscal 2012. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) Property, plant and equipment was comprised of the following as of September 30: (Thousands) Property Classifications Distribution facilities Transmission facilities Storage facilities Solar and wind property All other property Total property, plant and equipment Accumulated depreciation and amortization Property, plant and equipment, net Sale of Asset Estimated Useful Lives 2014 2013 38 to 74 years 35 to 56 years 34 to 47 years 20 to 25 years 5 to 35 years $ 1,567,648 $ 1,421,885 281,488 273,853 41,669 41,687 376,065 232,409 66,673 85,321 2,333,543 2,055,155 (449,433) (412,039) $ 1,884,110 $ 1,643,116 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. Disposal of Equipment In October 2012, certain NJRCEV's solar assets sustained damage as a result of Superstorm Sandy. To the extent that any of the assets were deemed irreparable, the Company disposed of the damaged assets. As a result, the Company recognized a pre- tax loss of $766,000 during fiscal 2013, which is included in other income on the Consolidated Statements of Operations. The Company also received $997,000 from an insurance claim, representing the replacement value of the disposed assets and recorded a gain in the same amount in other income on the Consolidated Statements of Operations. Impairment of Long-Lived Assets The Company reviews the carrying amount of an asset for possible impairment whenever events or changes in circumstances indicate that such amount may not be recoverable. No impairments were identified for the fiscal years ended September 30, 2014, 2013 and 2012. Available for Sale Securities Included in other noncurrent assets on the Consolidated Balance Sheets are certain investments in equity securities of a publicly traded energy company that have a fair value of $10.7 million and $11.7 million as of September 30, 2014 and 2013, 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 $8.1 million, $4.8 million after tax, and $9.1 million, $5.4 million after tax, for the fiscal years ended September 30, 2014 and 2013, respectively. Reclassifications made from unrealized gains to realized gains are determined based on average cost. There were no sales of securities during fiscal 2014. During fiscal 2013, NJR received proceeds of approximately $482,000 from the sale of available-for-sale securities and realized a pre-tax gain of $380,000, which is included in other income in the Consolidated Statements of Operations. Reclassifications of realized gains out of OCI into income are determined based on average cost. The Company accounts for its investment in PennEast using the equity method of accounting. NJR expects the pipeline to cost approximately $1 billion, which will be split among the six investors in accordance with ownership interests. NJR has a 20 percent equity interest and has the ability to exert significant influence, but not control. The Company accounts for its investment in OwnEnergy using the cost method of accounting. NJRCEV is not the primary beneficiary of OwnEnergy, nor does it have significant influence over operating and management decisions. Therefore, NJRCEV records dividends, if and when received, as a component of other income on the Consolidated Statements of Operations. During the fourth quarter of fiscal 2014, NJR determined that it was unlikely that it would be able to recover the value of its cost method investment in OwnEnergy and, therefore, recognized an impairment loss of $6.4 million, which is included in other income, net on the Consolidated Statements of Operations. See Note 6. Investment in Equity Investees for more information. Customer Accounts Receivable and Allowance for Doubtful Accounts Receivables consist of natural gas sales and transportation services billed to residential, commercial, industrial and other customers, as well as equipment sales, installations, solar leases and power purchase agreements to commercial and residential customers. NJR evaluates it accounts receivables and, to the extent customer account balances are outstanding for more than 60 days, establishes an allowance for doubtful accounts. The allowance is based on a combination of factors including historical collection experience and trends, aging of receivables, general economic conditions in the company's distribution or sales territories, and customer specific information. NJR writes-off customers' accounts once it is determined they are uncollectible. The following table summarizes customer accounts receivable by company as of September 30: (Thousands) NJRES NJNG (1) NJRCEV NJRHS and other Total Loan Receivable 2014 2013 $ 142,566 75% $ 194,263 81% 41,281 22 594 — 5,529 3 43,045 293 2,680 18 — 1 $ 189,970 100% $ 240,281 100% (1) Does not include unbilled revenues of $7.2 million and $7.4 million as of September 30, 2014 and 2013, respectively. 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 Consolidated Balance Sheets. Refer to Note 5. Fair Value for a discussion of the Company's fair value measurement policies and level disclosures. The Company has recorded $3.9 million and $1.9 million in other current assets and $27.3 million and $14.3 million in other noncurrent assets as of September 30, 2014 and 2013, respectively, on the 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. There was no allowance for doubtful accounts established during fiscal 2014 and 2013. Asset Retirement Obligations NJR recognizes a liability for its AROs based on the fair value of the liability when incurred, which is generally upon acquisition, construction, development and/or through the normal operation of the asset. Concurrently, NJR also capitalizes an asset retirement cost by increasing the carrying amount of the related asset by the same amount as the liability. In periods subsequent to the initial measurement, NJR is required to recognize changes in the liability resulting from the passage of time (accretion) or due to revisions to either timing or the amount of the originally estimated cash flows to settle the conditional ARO. Investments in Equity Investees Pension and Postemployment Plans The Company accounts for its investments in Steckman Ridge and Iroquois using the equity method of accounting, where its respective ownership interests are 50 percent or less and/or it has significant influence over operating and management decisions, but is not the primary beneficiary, as defined under ASC 810, Consolidation. The Company's share of earnings is recognized as equity in earnings of affiliates on the Consolidated Statements of Operations. NJR has two noncontributory defined pension plans covering eligible employees, including officers. Benefits are based on each employee's years of service and compensation. NJR's funding policy is to contribute annually to these plans at least the minimum amount required under ERISA, as amended, and not more than can be deducted for federal income tax purposes. Plan assets consist of equity securities, fixed-income securities and short-term investments. NJR made no discretionary contributions to the pension plans in fiscal 2014, and contributed $20 million in aggregate to the plans in fiscal 2013 and 2012, respectively. Page 74 Page 75 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) NJR also provides two primarily noncontributory medical and life insurance plans for eligible retirees and dependents. Medical benefits, which make up the largest component of the plans, are based upon an age and years-of-service vesting schedule and other plan provisions. Funding of these benefits is made primarily into Voluntary Employee Beneficiary Association trust funds. NJR contributed $5 million, $6 million and $5.8 million in aggregate to these plans in fiscal 2014, 2013 and 2012, respectively. See Note 10. Employee Benefit Plans, for a more detailed description of the Company's pension and postemployment plans. Foreign Currency Transactions NJRES' market area includes Canadian delivery points and as a result incurs certain natural gas commodity costs and demand fees that are denominated in Canadian dollars. Gains or losses that occur as a result of these foreign currency transactions are reported as a component of gas purchases on the Consolidated Statements of Operations and were not material during the fiscal years ended September 30, 2014, 2013 and 2012. Recent Updates to the Accounting Standards Codification Balance Sheet Offsetting In December 2011, the FASB issued ASU No. 2011-11, an amendment to ASC 210, Balance Sheet, requiring additional disclosures about the nature of an entity's rights of setoff and related master netting arrangements. ASU 2013-01, issued in January 2013, further clarified that the amended guidance was applicable to certain financial and derivative instruments. The Company applied the provisions of the amended guidance retrospectively effective October 1, 2013. The guidance did not impact the Company's financial position, results of operations or cash flows, however, it required additional disclosures that are included in Note 4. Derivative Instruments. 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 will become 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 does not expect any 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 an 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 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 any impact to its financial position, results of operations and cash flows upon adoption. Accumulated Other Comprehensive Income The following table presents the changes in the components of accumulated other comprehensive income, net of related tax effects as of September 30: (Thousands) Balance as of September 30, 2012 Other comprehensive income, net of tax Other comprehensive income (loss), before reclassifications, net of tax of $(485), $16, $(5,124), $(5,593) Amounts reclassified from accumulated other comprehensive income, net of tax of $155, $7, $(810), $(648) Net current-period other comprehensive income (loss), net of tax of $(330), $23, $(5,934), $(6,241) Balance at September 30, 2013 Other comprehensive income, net of tax Other comprehensive (loss), before reclassifications, net of tax of $426 $159, $3,334, $3,919 Amounts reclassified from accumulated other comprehensive income, net of tax of $0, $(98), $(1,172), $(1,270) Net current-period other comprehensive income, net of tax of $426, $61, $2,162, $2,649 Balance at September 30, 2014 $ $ Unrealized gain on available for sale securities Net unrealized Adjustment to gain on derivatives postemployment benefit obligation Total $ 4,921 $ 51 $ (15,743) $ (10,771) 703 (28) 7,526 8,201 (1) (224) (2) (11) (3) 1,184 949 479 5,400 $ (39) 12 8,710 9,150 $ (7,033) $ (1,621) (618) (273) (5,006) (5,897) (1) — (2) 168 (3) 1,756 1,924 (618) 4,782 $ (105) (93) (3,250) (3,973) $ (10,283) $ (5,594) (1) Reclassified to other income in the Consolidated Statements of Operations. (2) Consists of realized losses related to foreign currency derivatives, which are reclassified to gas purchases in the Consolidated Statements of Operations. (3) Included in the computation of net periodic pension cost, a component of O&M expense in the Consolidated Statements of Operations. Use of Estimates The preparation of financial statements in conformity with GAAP requires NJR to make estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingencies during the reporting period. On a monthly basis, NJR evaluates its estimates, including those related to the calculation of the fair value of derivative instruments, debt, unbilled revenues, allowance for doubtful accounts, provisions for depreciation and amortization, regulatory assets and liabilities, income taxes, pensions and other postemployment benefits, contingencies related to environmental matters and litigation. AROs are evaluated as often as needed. NJR's estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. NJR has legal, regulatory and environmental proceedings during the normal course of business that can result in loss contingencies. When evaluating the potential for a loss, NJR will establish a reserve if a loss is probable and can be reasonably estimated, in which case it is NJR's policy to accrue the full amount of such estimates. Where the information is sufficient only to establish a range of probable liability, and no point within the range is more likely than any other, it is NJR's policy to accrue the lower end of the range. In the normal course of business, estimated amounts are subsequently adjusted to actual results that may differ from estimates. Page 76 Page 77 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) 3. REGULATION The EDECA is the legal framework for New Jersey's public utility and wholesale energy landscape. NJNG is required, pursuant to a written order by the BPU under EDECA, to open its residential markets to competition from third-party natural gas suppliers. Customers can choose the supplier of their natural gas commodity in NJNG's service territory. As required by EDECA, NJNG's rates are segregated into two primary components, the commodity portion, which represents the wholesale cost of natural gas, including the cost for interstate pipeline capacity to transport the gas to NJNG's service territory, and the delivery portion, which represents the transportation of the commodity portion through NJNG's gas distribution system to the end-use customer. NJNG does not earn utility gross margin on the commodity portion of its natural gas sales. NJNG earns utility gross margin through the delivery of natural gas to its customers, regardless of whether it or a third-party supplier provides the wholesale natural gas commodity. Under EDECA, the BPU is required to audit the state's energy utilities every two years. The primary purpose of the audit is to ensure that utilities and their affiliates offering unregulated retail services do not have an unfair competitive advantage over nonaffiliated providers of similar retail services. A combined competitive services and management audit of NJNG commenced in August 2013. A draft management audit report was accepted by the BPU on July 23, 2014, for public comment and is waiting for final approval. 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. 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. Regulatory assets and liabilities included on the Consolidated Balance Sheets as of September 30, are comprised of the following: (Thousands) Regulatory assets-current Underrecovered gas costs Conservation Incentive Program New Jersey Clean Energy Program Total current regulatory assets Regulatory assets-noncurrent Environmental remediation costs Expended, net of recoveries Liability for future expenditures Deferred income taxes Derivatives at fair value, net SAVEGREEN Postemployment and other benefit costs Deferred Superstorm Sandy costs Other noncurrent regulatory assets Total noncurrent regulatory assets Regulatory liability-current Conservation Incentive Program Derivatives at fair value, net Total current regulatory liabilities Regulatory liabilities-noncurrent Cost of removal obligation Derivatives at fair value, net Other noncurrent regulatory liabilities Total noncurrent regulatory liabilities 2014 2013 12,577 $ — 14,285 26,862 $ 953 18,887 14,532 34,372 30,916 $ 177,000 9,968 — 29,180 108,507 15,207 6,797 377,575 $ 5,752 $ 320 6,072 $ 61,163 $ 57 106 61,326 $ 46,968 183,600 10,718 19 30,004 101,415 14,822 14,656 402,202 — 1,456 1,456 79,315 — 332 79,647 $ $ $ $ $ $ $ $ NJNG's recovery of costs is facilitated through its base tariff rates, BGSS and other regulatory tariff riders. NJNG is required to make an annual filing to the BPU by June 1 of each year for review of its BGSS, CIP and various other programs and related rates. Annual rate changes are requested to be effective at the beginning of the following fiscal year. In addition, NJNG is also permitted to request approval of certain rate or program changes on an interim basis. All rate and program changes are subject to proper notification and BPU review and approval. Gas Costs NJNG recovers its cost of gas through the BGSS rate component of its customers' bills. NJNG's cost of gas includes the purchased cost of the natural gas commodity, fees paid to pipelines and storage facilities, adjustments as a result of BGSS incentive programs, and hedging transactions. Under-recovered gas costs represent a regulatory asset that generally occurs during periods when NJNG's BGSS rates are lower than actual costs and requests amounts to be recovered from customers in the future. Conversely, over-recovered gas costs represent a regulatory liability that generally occurs when NJNG's BGSS rates are higher than actual costs and requests approval to be returned to customers including interest, when applicable, in accordance with NJNG's approved BGSS tariff. Conservation Incentive Program The CIP permits NJNG to recover utility gross margin variations related to customer usage resulting from customer conservation efforts and allows NJNG to mitigate the impact of weather on its gross margin. Such utility gross margin variations are recovered in the year following the end of the CIP usage year, without interest, and are subject to additional conditions, including an earnings test and an evaluation of BGSS related savings. New Jersey Clean Energy Program The NJCEP is a statewide program that encourages energy efficiency and renewable energy. Funding amounts are determined by the BPU's Office of Clean Energy and all New Jersey utilities are required to share in the annual funding obligation. The current NJCEP program is for the State of New Jersey's fiscal year ending June 2015. NJNG recovers the costs associated with its portion of the NJCEP obligation, including interest, through its SBC rate rider over a one-year period. Environmental Remediation Costs NJNG is responsible for the cleanup of certain former gas manufacturing facilities. Actual expenditures are recovered from customers, with interest, over seven year rolling periods, through a RA rate rider. Recovery for NJNG's estimated future liability will be requested and/or recovered when actual expenditures are incurred. See Note 13. Commitments and Contingencies. In 1993, NJNG adopted the provisions of ASC 740, Income Taxes, which changed the method used to determine deferred tax assets and liabilities. Upon adoption, NJNG recognized a transition adjustment and corresponding regulatory asset representing the difference between NJNG's existing deferred tax amounts compared with the deferred tax amounts calculated in accordance with the change in method prescribed by ASC 740. NJNG recovers the regulatory asset associated with these tax impacts through Derivatives are utilized by NJNG to manage the price risk associated with its natural gas purchasing activities and to participate in certain BGSS incentive programs. The gains and losses associated with NJNG's derivatives are recoverable through its BGSS, as noted above, without interest. See Note 4. Derivatives. NJNG administers certain programs that supplement the state's NJCEP and that allows NJNG to promote clean energy to its residential and commercial customers, as described further below. NJNG will recover related expenditures and a weighted average cost of capital through a tariff rider, as approved by the BPU, over a two to 10-year period depending upon the specific Deferred Income Taxes future base rates, without interest. Derivatives SAVEGREEN program incentive. Page 78 Page 79 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) Postemployment and Other Benefit Costs Postemployment and Other Benefit Costs represents NJNG's underfunded postemployment benefit obligations that the Company began recognizing in fiscal 2006, as a result of changes in the accounting provisions of ASC 715, Compensation and Benefits, as well as a fiscal 2010 tax charge resulting from a change in the deductibility of federal subsidies associated with Medicare D, both of which are deferred as regulatory assets and are recoverable, without interest, in base tariff rates. See Note 10. Employee Benefit Plans. Deferred Superstorm Sandy Costs In October 2012, portions of NJNG's distribution system incurred significant damage as a result of Superstorm Sandy. NJNG filed a petition with the BPU in November 2012 requesting deferral accounting for uninsured incremental O&M costs associated with its restoration efforts, which was approved in May 2013. On October 22, 2014, the BPU approved, as prudent and reasonable, the deferred O&M storm costs to be recovered in NJNG's next base rate case including the appropriate recovery period for such deferred expenses, to be filed no later than November 15, 2015. Other Regulatory Assets Other regulatory assets consists primarily of deferred costs associated with certain components of NJNG's SBC, as discussed further below, and NJNG's compliance with federal and state mandated PIM provisions. NJNG's related costs to maintain the operational integrity of its distribution and transmission main are recoverable, subject to BPU review and approval, in its next base rate case. NJNG is limited to recording a regulatory asset associated with PIM that does not exceed $700,000 per year. In addition, to the extent that project costs are lower than the approved PIM annual expense of $1.4 million, NJNG will record a regulatory liability that will be refundable as a credit to customers' gas costs when the net cumulative liability exceeds $1 million. As of September 30, 2014, NJNG has recorded $3.8 million of PIM in other regulatory assets. Cost of Removal Obligation NJNG accrues and collects for cost of removal in base tariff rates on its utility property, without interest. A regulatory liability represents the current collections in excess of actual expenditures, which the Company will return to customers over approximately 48 years, through a reduction in the depreciation expense component of NJNG's base tariff rates, as approved by the BPU in NJNG's October 2008 base rate case. The following is a description of regulatory proceedings during fiscal 2013 and 2014: receives approval for recovery of all costs through base rates. BGSS and CIP BGSS rates are normally revised on an annual basis. In addition, to manage the fluctuations in wholesale natural gas costs, NJNG has the ability to make two interim filings during each fiscal year to increase residential and small commercial customer BGSS rates on a self-implementing and provisional basis. NJNG is also permitted to refund or credit back a portion of the commodity costs to customers when the natural gas commodity costs decrease in comparison to amounts projected or to amounts previously collected from customers. Commodity prices were relatively stable during fiscal 2014 and 2013, therefore, no refunds or bill credits were issued to BGSS customers. Concurrent with the annual BGSS filing, NJNG files for an annual review of its CIP. In March 2013, NJNG and South Jersey Gas Company filed a joint petition with the BPU requesting the continuation of the CIP with certain modifications. On May 21, 2014, the BPU approved the continuation of the CIP program with no expiration date; however, it will be subject to review in a future rate filing in 2017. NJNG's annual BGSS and CIP filings are summarized as follows: • June 2012 BGSS/CIP filing — NJNG proposed to maintain its BGSS rate. In addition, NJNG requested approval to decrease the CIP rate for residential non-heating customers and increase the CIP rates for residential heating and commercial customers, which increased an average residential heat customer's bill by 2.4 percent, effective October 2012. In May 2013, the BPU approved the changes on a final basis. In May 2013, NJNG notified the BPU that it was going to reduce its BGSS rate resulting in a 5.2 percent decrease to an average residential heat customer's bill, effective June 1, 2013. Page 80 Page 81 • June 2013 BGSS/CIP filing — NJNG proposed to maintain its BGSS rate. In addition, NJNG proposed a 1 percent reduction to an average residential heat customer's bill related to the CIP factor. The CIP rate reduction was provisionally approved by the BPU on October 16, 2013, to be effective November 1, 2013. On November 21, 2013, NJNG notified the BPU of its intent to reduce its BGSS rate, effective December 1, 2013, resulting in a 6 percent decrease to the average residential heat customer's bill. On July 23, 2014, the BPU approved these rates on a final basis. • June 2014 BGSS/CIP filing — NJNG proposed to maintain its BGSS rate. In addition, NJNG proposed a 4.3 percent reduction to an average residential heat customer's bill related to the CIP factor for fiscal 2015. On September 30, 2014, the BPU provisionally approved these rates to be effective October 1, 2014. • 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. Infrastructure Programs NJNG has significant annual capital expenditures associated with the management of its natural gas distribution and transmission system, including new utility plant for customer growth and its associated PIM and infrastructure programs. NJNG has implemented BPU-approved infrastructure projects that are designed to enhance the reliability of NJNG's gas distribution system, including AIP and SAFE. The AIP projects, which totaled approximately $148.7 million, were constructed and gas was introduced to the system from 2009 through October 2012. In May 2013, a base rate change was approved by the BPU that permits NJNG to recover a total of approximately $15.3 million annually. Depending on the infrastructure project, recoveries include a weighted average cost of capital of 7.76 percent or 7.12 percent with a return on equity of 10.3 percent. In October 2012, the BPU approved NJNG's petition to implement the SAFE program, investing up to $130 million, exclusive of AFUDC, over a four-year period to replace portions of NJNG's gas distribution unprotected steel and cast iron infrastructure in order to improve the safety and reliability of the gas distribution system. The approved SAFE Program includes the deferral of infrastructure costs subject to review in NJNG's next base rate case to be filed no later than November 15, 2015, the deferral of depreciation expense on SAFE investments and recognizes an overall rate of return on infrastructure investments of 6.9 percent, including a return on equity of 9.75 percent. The deferred cost recovery will include accruals for both debt and equity components of AFUDC while construction is completed but not yet in service. In accordance with ASC 980, Regulated Operations, when SAFE construction projects are placed in service, NJNG will accrue an AFUDC debt rate. For ratemaking purposes, subsequent to projects being placed into service, NJNG will continue to earn an AFUDC rate of 6.9 percent per year until such time that NJNG In June 2012, the BPU approved a pilot program for NJNG to invest up to $10 million to build NGV refueling stations in Monmouth, Ocean and Morris counties. On April 23, 2014, the BPU approved NJNG's request to include a cost recovery filing to the BPU within the Company's next base rate case to be filed no later than November 15, 2015. In addition, the BPU approved a deferred accounting methodology related to the NGV investment costs consistent with NJNG's SAFE Program. The NGV program was authorized by the BPU to earn an overall weighted average cost of capital of 7.1 percent, including a return on equity of 10.3 percent. A portion of the proceeds from the utilization of the NGV equipment, along with any available federal and state incentives, will be credited back to ratepayers to help offset the cost of this investment. As of September 30, 2014, NJNG has begun development on three NGV stations for a total investment of approximately $5.8 million to date. On September 3, 2013, NJNG filed a petition seeking approval of NJ RISE, which consists of six capital investment projects estimated to cost $102.5 million over a five-year period, excluding AFUDC, for gas distribution storm hardening and mitigation projects, along with incremental O&M expenses. The submission was made in response to a March 2013 BPU order, initiating a proceeding to investigate prudent, cost efficient and effective opportunities to protect New Jersey's utility infrastructure from future major storm events. These system enhancements are intended to minimize service impacts during extreme weather events to customers that live in the most storm prone areas of NJNG's service territory. In the filing, NJNG seeks to recover the capital costs associated with NJ RISE through an annual adjustment to its base rate. On July 23, 2014, the BPU issued an order approving a Stipulation of Settlement related to the NJ RISE capital infrastructure program that requires NJNG to submit a filing in May 2015 to recover costs through July 31, 2015, associated with NJ RISE. Those costs will be recovered through an adjustment to base rates as of November 1, 2015. Additional cost recovery will be included in NJNG's next base rate case scheduled to be filed no later than November 15, 2015. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) BGSS Incentive Programs NJNG is eligible to receive financial incentives for reducing BGSS costs through a series of utility gross margin-sharing programs that include off-system sales, capacity release, storage incentive and FRM programs. In August 2011, the BPU approved an extension of NJNG's BGSS incentive programs for four years through October 31, 2015, maintaining the existing margin- sharing percentages. This agreement also permits the Company to annually propose a process to evaluate and discuss alternative incentive programs, should performance of the existing incentives or market conditions warrant re-evaluation. SAVEGREEN SAVEGREEN conducts home energy audits and provides various grants, incentives and financing alternatives, which are designed to encourage the installation of high efficiency heating and cooling equipment and other energy efficiency upgrades to promote energy efficiency incentives to its residential and commercial customers while stimulating state and local economies through the creation of jobs. Depending on the specific initiative, NJNG recovers costs associated with the programs over a two to 10-year period through a tariff rider mechanism. As of September 30, 2014, the BPU has approved total SAVEGREEN expenditures of $85 million related to grants and rebates, of which, NJNG has spent a total of $52.8 million and approved $93.1 million related to customer financing incentives, of which, NJNG has provided interest-free loans in the amount of $38.8 million. SAVEGREEN investments and costs are filed with the BPU on an annual basis and include the following: NJNG's next base rate case to be filed no later than November 15, 2015. • June 2012 SAVEGREEN filing — In June 2013, the BPU approved NJNG's 2012 request to extend and expand SAVEGREEN through June 2015, with certain modifications, resulting in a planned investment of more than $85 million, which includes $17.3 million of investments in grants and rebates, and includes a weighted average cost of capital of 6.9 percent. In addition, the BPU approved a tariff rider rate increase of approximately 1.7 percent to recover costs and investments related to SAVEGREEN over a two to 10-year period, which represents an an annual recovery of approximately $12.4 million. Additionally, in June 2014, NJNG submitted a rate filing for the recovery of SAVEGREEN costs, which proposes to maintain the existing rate. Societal Benefits Clause The SBC is comprised of three primary riders that allow NJNG to recover costs associated with USF, which is a permanent statewide program for all natural gas and electric utilities for the benefit of income-eligible customers, MGP remediation, and the NJCEP. NJNG has submitted the following filings to the BPU, which includes a report of program expenditures incurred each program year: • • • • • February 2012 SBC filing — NJNG requested, and received, BPU approval of its MGP expenditures incurred through June 2011, which continued its existing overall SBC rate and recovery that was approved by the BPU, effective November 2011. June 2012 USF filing — NJNG filed to reduce the USF recovery rate resulting in a .1 percent decrease for the average residential heat customer's bill. The rate was approved by the BPU, effective October 2012. June 2013 USF filing — NJNG filed to reduce the USF recovery rate resulting in a .5 percent decrease for the average residential heat customer's bill effective October 1, 2013. The rate was approved by the BPU in September 2013. July 2013 SBC filing — NJNG requested approval of its MGP expenditures incurred through June 2013, as well as a .2 percent reduction to the average residential heat customer's bill related to the SBC RA factor to recover $18.7 million annually, and a 1.9 percent increase related to its NJCEP factor. The rates were approved by the BPU on a provisional basis, effective December 1, 2013, and on a final basis in July 2014. June 2014 USF filing — NJNG filed to to increase the statewide USF rate, resulting in a .4 percent increase to the average residential heat customer's bill effective October 1, 2014. The rate was approved by the BPU in September 2014. Page 82 Page 83 • September 2014 SBC filing — NJNG requested approval of its MGP expenditures incurred through June 2014, as well as a 3 percent reduction to the average residential heat customer's bill, to recover $8.5 million annually related to the SBC RA factor and $16.3 million related to the NJCEP factor. • Additionally, in November 2012, the BPU approved NJNG's funding obligations for NJCEP for the period from January 2013 to June 2013, of approximately $9.8 million. In June 2013, the BPU approved NJNG's funding obligations for July 2013 to June 2014, of approximately $15.6 million. In June 2014, the BPU approved NJNG's funding obligations for July 2014 to June 2015, of approximately $15.6 million. Accordingly, NJNG recorded the obligation and corresponding regulatory asset on the Consolidated Balance Sheets. Other Regulatory Initiatives In November 2012, NJNG filed a petition with the BPU requesting deferral accounting for uninsured incremental O&M costs associated with Superstorm Sandy, which was subsequently approved in May 2013. In March 2013, the BPU issued an Order establishing a generic proceeding to review the prudency of costs incurred by New Jersey utility companies in response to major storm events in 2011 and 2012. In July 2013, NJNG filed its detailed report including unreimbursed, uninsured incremental storm restoration costs and capital expenditures. As of September 30, 2014, NJNG has deferred $15.2 million of these costs as a regulatory asset. On October 22, 2014, the BPU approved, as prudent and reasonable, the deferred O&M storm costs to be recovered in In December 2012, NJNG filed a petition with the BPU requesting approval of a municipal consent in the Borough of Sayreville, New Jersey to provide natural gas distribution service to Red Oak Power, LLC, an electric generating facility. The municipal consent was approved by the BPU in September 2013. In December 2013, the BPU approved a gas service agreement between TAQA GEN-X, LLC and NJNG that allows NJNG to provide transportation service to Red Oak Power, LLC, through September 2022. Construction to connect to the plant commenced during the fourth quarter of fiscal 2014, and is anticipated to cost approximately $1 million, which will be reimbursed by Red Oak Power, LLC. Service is expected to begin in the first half of fiscal 2015. On April 23, 2014, the BPU approved a petition filed by NJNG requesting authorization over a three-year period to issue up to $300 million of medium-term notes with a maturity of not more than 30 years, renew its revolving credit facility expiring August 2014 for up to five years, enter into interest rate risk management transactions related to debt securities and redeem, refinance or defease any of NJNG's outstanding long-term debt securities. 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 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 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 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) 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 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 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 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. 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 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 stated counterparty. Fair Value of Derivatives The following table reflects the fair value of NJR's derivative assets and liabilities recognized on the Consolidated Balance Sheets as of September 30: (Thousands) Balance Sheet Location Derivatives designated as hedging instruments: NJRES: Fair Value 2014 2013 Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives Foreign currency contracts Derivatives - current Derivatives - noncurrent Fair value of derivatives designated as hedging instruments $ $ — $ — — $ 155 — 155 $ $ 16 — 16 $ $ 3 2 5 Derivatives not designated as hedging instruments: NJNG: Financial commodity contracts Derivatives - current $ 2,525 $ 2,205 $ 3,502 $ 2,045 Derivatives - noncurrent 82 25 121 140 NJRES: Physical forward commodity contracts Derivatives - current Financial commodity contracts Derivatives - current Derivatives - noncurrent Derivatives - noncurrent 15,391 35 46,307 5,537 30,778 132 46,725 6,533 11,282 541 38,527 2,099 14,573 22 23,769 2,294 Fair value of derivatives not designated as hedging instruments Total fair value of derivatives $ 69,877 $ 86,398 $ 69,877 $ 86,553 $ 56,072 $ 56,088 $ 42,843 $ 42,848 Page 84 As of September 30, 2014, the gross notional amount of the foreign currency transactions was approximately $2.9 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. The tables below summarize 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. Amounts Presented in Offsetting Derivative Balance Sheets (1) Instruments (2) Financial Collateral Received/Pledged (3) Net Amounts (4) (Thousands) As of September 30, 2014: Derivative assets: NJRES Physical forward commodity contracts Financial commodity contracts Total NJRES NJNG Financial commodity contracts Derivative liabilities: NJRES Physical forward commodity contracts Financial commodity contracts Foreign currency contracts Total NJRES NJNG As of September 30, 2013: Derivative assets: NJRES Physical forward commodity contracts Financial commodity contracts Foreign currency contracts Total NJRES NJNG Financial commodity contracts Derivative liabilities: NJRES Physical forward commodity contracts Financial commodity contracts Foreign currency contracts Total NJRES NJNG ISDA netting. 2,607 (2,230) (377) $ $ $ $ $ $ $ $ $ $ $ $ — — — (1,200) (1,414) — (2,614) — (100) 6,870 — 6,770 214 — — — $ $ $ $ $ $ $ $ $ $ $ $ 3,895 — 3,895 — 17,652 — 155 17,807 — 8,174 21,433 11 29,618 1,652 — — — (500) 10,546 (500) 10,546 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 15,426 51,844 67,270 (11,531) (51,844) (63,375) 30,910 53,258 155 84,323 (12,058) (51,844) — (63,902) 3,623 (2,185) (3,549) (26,063) (5) (29,617) (3,549) (26,063) (5) (29,617) 11,823 40,626 16 52,465 14,595 26,063 5 40,663 Page 85 Financial commodity contracts 2,185 (2,185) (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 (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. Financial commodity contracts 2,230 (2,230) New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) 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. The following table reflects the effect of derivative instruments on the Consolidated Statements of Operations as of September 30: (Thousands) Location of gain (loss) recognized in income on derivatives Amount of gain (loss) recognized in income on derivatives Wholesale Credit Risk Derivatives not designated as hedging instruments: NJRES: Physical commodity contracts Physical commodity contracts Financial commodity contracts Operating revenues Gas purchases Gas purchases Total unrealized and realized (losses) gains 2014 2013 2012 $ (48,977) (83,847) (118,872) $ (251,696) $ 1,117 (17,194) 41,183 $ (7,187) 12,967 81,872 $ 25,106 $ 87,652 The table above does not include gains (losses) associated with NJNG's financial derivatives that totaled $10.1 million, $1.8 million and $(25.3) million for the fiscal years ended September 30, 2014, 2013 and 2012, 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 Consolidated Statements of Operations. The following table reflects the effect of derivative instruments designated as cash flow hedges on OCI as of September 30: (Thousands) Derivatives in cash flow hedging relationships: Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) (1) 2014 2013 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) 2014 2013 2014 2013 Foreign currency contracts $ (432) $ (44) $ 266 $ (18) $ — $ — (1) The settlement of foreign currency transactions over the next 12 months is expected to result in the reclassification of $(155,000) from OCI into earnings. The maximum tenor is April 2015. NJNG and NJRES had the following outstanding long (short) derivatives as of September 30: NJNG NJRES Futures Futures Financial Options Physical Volume (Bcf) 2014 2013 17.3 (62.1) 1.2 28.6 22.6 (64.2) 1.5 7.3 Page 86 Page 87 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 as of September 30, by company, are as follows: (Thousands) NJNG NJRES Balance Sheet Location Broker margin - Current assets Broker margin - Current assets 2014 2013 $ $ 1,057 $ 26,282 $ 213 6,368 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 September 30, 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) Investment grade Noninvestment grade Internally-rated investment grade Internally-rated noninvestment grade Total Gross Credit Exposure $ 143,070 6,462 9,334 9,366 $ 168,232 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. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) 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 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. NJNG's and NJRES' financial derivatives portfolios consist mainly of futures, options and swaps. NJR primarily uses the market approach and its policy is to use actively quoted market prices when available. The principal market for its derivative transactions is the natural gas wholesale market, therefore, the primary source for its price inputs is CME/NYMEX. NJRES also uses ICE, Platts, and Natural Gas Exchange for Canadian delivery points. However, NJRES also engages in transactions that result in transporting natural gas to delivery points for which there is no actively quoted market price. In most instances, the transportation cost to the final delivery location is not significant to the overall valuation. If required, NJRES' policy is to use the best information available to determine fair value based on internal pricing models, which would include estimates extrapolated from broker quotes NJR also has available for sale securities and other financial assets that include listed equities, mutual funds and money market funds for which there are active exchange quotes available. When NJR determines fair values, measurements are adjusted, as needed, for credit risk associated with its counterparties, as well as its own credit risk. NJR determines these adjustments by using historical default probabilities that correspond to the applicable S&P issuer ratings, while also taking into consideration collateral and netting arrangements that serve to mitigate risk. 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 September 30, 2014 and 2013, is $39,000 and $2 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 September 30, 2014 and 2013, the Company would have been required to post an additional $7,000 and $1.1 million, respectively, to its counterparties. These amounts differ from the respective net derivative liabilities reflected on the 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. Liquidation of Clearing Broker In October 2011, MF Global disclosed to the CME that it had a “significant shortfall” in its segregated customer accounts. As of the close of business on November 3, 2011, the market value of NJRES' MF Global account was $27.8 million. NJRES received distributions from the Securities Investor Protection Act Trustee totaling $9.3 million related to its CME positions. During the fourth quarter of fiscal 2012, the Company established an allowance for bad debt of $1.4 million. On October 24, 2012, NJR sold its remaining claim of $18.5 million for $17.1 million. The loss on the sale was equal to the allowance established during fiscal 2012. 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. As of September 30, the estimated fair value of long-term debt at NJNG and NJR, including current maturities and excluding capital leases, as applicable, is as follows: or other pricing services. (Thousands) NJNG Carrying value Fair market value NJR Carrying value Fair market value 2014 2013 $ $ $ $ 432,845 $ 453,773 $ 379,845 397,175 125,000 $ 133,136 $ 150,000 159,343 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 September 30, 2014 and 2013, 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. Page 88 Page 89 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) Assets and liabilities measured at fair value on a recurring basis are summarized as follows: (Thousands) As of September 30, 2014: Assets Physical forward commodity contracts Financial derivative contracts - natural gas Available for sale equity securities - energy industry (1) Other (2) Total assets at fair value Liabilities Physical forward commodity contracts Financial commodity contracts - natural gas Financial commodity contracts - foreign exchange Total liabilities at fair value As of September 30, 2013: Assets Physical forward commodity contracts Financial derivative contracts - natural gas Financial commodity contracts - foreign exchange Available for sale equity securities - energy industry (1) Other (2) Total assets at fair value Liabilities Physical forward commodity contracts Financial derivative contracts - natural gas Financial commodity contracts - foreign exchange Total liabilities at fair value (1) (2) Included in other noncurrent assets on the Consolidated Balance Sheets. Includes various money market funds in Level 1. 6. INVESTMENTS IN EQUITY INVESTEES Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ — 54,451 10,672 1,299 $ 66,422 $ — 55,488 — $ 55,488 $ — 44,249 — 11,716 1,129 $ 57,094 $ — 28,248 — $ 28,248 $ 15,426 — — — $ 15,426 $ 30,910 — 155 $ 31,065 $ 11,823 — 16 — — $ 11,839 $ 14,595 — 5 $ 14,600 $ — — — — $ — $ — — — $ — $ — — — — — $ — $ — — — $ — Total $ 15,426 54,451 10,672 1,299 $ 81,848 $ 30,910 55,488 155 $ 86,553 $ 11,823 44,249 16 11,716 1,129 $ 68,933 $ 14,595 28,248 5 $ 42,848 Investments in equity investees includes NJR's equity method and cost method investments. Weighted average shares of common stock outstanding-basic Equity Method Investments During the fourth quarter of fiscal 2014, NJR, through a subsidiary, NJR Pipeline Company, formed PennEast with four other investors, with another investor joining in October 2014, plans to construct and operate a 108-mile pipeline that will extend from northeast Pennsylvania to western New Jersey. As of September 30, NJR's equity method investments include the following: 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 15. Related Party Transactions for more information on these intercompany transactions. Cost Method Investments In fiscal 2012, NJR invested $8.8 million in OwnEnergy, a developer of onshore wind projects, for an 18.7 percent ownership interest and the option, but not the obligation, to purchase certain qualified projects. During fiscal 2014, NJRCEV agreed to acquire the development rights to the following onshore wind farms from OwnEnergy: a $21.2 million 9.7 MW project in Two Dot, Montana that was completed in June 2014; and a $42 million, 20 MW project in Carroll County, Iowa that is currently under construction and expected to be operational in the second quarter of fiscal 2015. Accordingly, NJRCEV reclassified $2.4 million associated with the wind purchase option from its investment to property, plant and equipment on the Consolidated Balance Sheets, which represents the costs associated with the rights to develop the • • projects above. During the fourth quarter of fiscal 2014, due to its concerns surrounding the ability of OwnEnergy to fulfill its future obligation to present qualified projects to NJRCEV for investment, the Company reassessed the value of its cost method investment, as well as remaining value of its wind purchase option and determined that it was other-than-temporarily impaired. As a result, NJRCEV recognized an impairment loss of $6.4 million, $3.8 million after tax, which is included in other income, net on the Consolidated Statements of Operations. On October 9, 2014, NJRCEV also acquired the development rights to an $85 million, 48 MW wind project in Rush County, Kansas that is currently under construction and is expected to commence commercial operation in the first quarter of fiscal 2016. The following table presents the calculation of the Company's basic and diluted earnings per share for the fiscal years ended 7. EARNINGS PER SHARE September 30: (Thousands, except per share amounts) Net income, as reported Basic earnings per share Basic earnings per common share Diluted earnings per share Weighted average shares of common stock outstanding-basic Incremental shares (1) Weighted average shares of common stock outstanding-diluted Diluted earnings per common share (2) (1) (2) Incremental shares consist of stock options, stock awards and performance units. There were no anti-dilutive shares excluded from the calculation of diluted earnings per share for fiscal 2014, 2013 and 2012. 2014 2013 2012 $ 141,970 $ 114,809 $ 92,879 42,099 $3.37 41,658 $2.76 41,527 $2.24 42,099 41,658 41,527 362 42,461 $3.34 156 41,814 $2.75 105 41,632 $2.23 (Thousands) Steckman Ridge (1) Iroquois PennEast Total (1) quarterly and are due October 1, 2023. 2014 128,413 $ 24,042 555 153,010 $ $ $ 2013 129,707 23,084 — 152,791 Includes loans with a total outstanding principal balance of $70.4 million for both fiscal 2014 and 2013, which accrue interest at a variable rate that resets Page 90 Page 91 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) 8. DEBT NJNG First Mortgage Bonds NJNG and NJR finance working capital requirements and capital expenditures through the issuance of various long-term debt and other financing arrangements, including unsecured credit and private placement debt shelf facilities. Amounts available under credit facilities are reduced by bank or commercial paper borrowings, as applicable, and any outstanding letters of credit. The following table presents the long-term debt of the Company as of September 30: Maturity date: December 1, 2038 August 1, 2023 August 1, 2024 October 1, 2040 May 15, 2018 September 1, 2027 August 1, 2035 August 1, 2041 April 15, 2028 March 13, 2024 March 13, 2044 June 1, 2021 Various dates (Thousands) NJNG First mortgage bonds: 5.00% 4.50% 4.60% 4.90% 5.60% Variable Variable Variable 3.15% 4.77% 3.58% 4.61% Series HH Series II Series JJ Series KK Series LL Series MM Series NN Series OO Series PP Series QQ Series RR Unsecured senior notes March 15, 2014 Capital lease obligation-buildings Capital lease obligation-meters Capital lease obligation-equipment December 1, 2013 Less: Current maturities of long-term debt Total NJNG long-term debt NJR 6.05% 1.94% 2.51% 3.25% Unsecured senior notes September 24, 2017 Unsecured senior notes September 17, 2015 Unsecured senior notes September 17, 2018 Unsecured senior notes September 17, 2022 Less: Current maturities of long-term debt Total NJR long-term debt Total long-term debt 2014 2013 $ — $ 12,000 10,300 10,500 15,000 10,300 10,500 15,000 125,000 125,000 9,545 41,000 46,500 50,000 — 70,000 55,000 18,726 31,143 — (9,505) 473,209 50,000 25,000 25,000 50,000 (25,000) 125,000 9,545 41,000 46,500 50,000 60,000 — — 20,381 31,261 42 (68,643) 362,886 50,000 25,000 25,000 50,000 — 150,000 $ 598,209 $ 512,886 NJNG and Trustee, entered into the New Mortgage Indenture, dated September 1, 2014, which secures all of the outstanding First Mortgage Bonds issued under the Old Mortgage Indenture. The New Mortgage Indenture provides a direct first mortgage lien upon substantially all of the operating properties and franchises of NJNG (other than excepted property, such as cash on hand, choses-in-action, securities, rent, natural gas meters and certain materials, supplies, appliances and vehicles), subject only to certain permitted encumbrances. The New Mortgage Indenture contains provisions subjecting after-acquired property (other than excepted property and subject to pre-existing liens, if any, at the time of acquisition) to the lien thereof. NJNG's New Mortgage Indenture no longer contains a restriction on the ability of NJNG to pay dividends. New Jersey Administrative Code 14:4-4.7 states that a public utility cannot issue dividends if it's equity to total capitalization ratio falls below 30 percent without regulatory approval. As of September 30, 2014, NJNG equity to total capitalization ratio is 50.9 percent and has the ability to issue up to $841.2 million of FMBs under the terms of the New Mortgage Indenture. In August 2011, NJNG completed a refunding of its outstanding Auction-Rate Securities whereby the EDA issued three series of Variable Rate Demand Notes with a total principal amount of $97 million with maturity dates ranging from September 2027 to August 2041. NJNG and the EDA entered into a Loan Agreement securing the payment of principal and interest on the notes by NJNG with a pledge of $97 million principal amount of First Mortgage Bonds issued by NJNG. This agreement was amended and restated effective September 1, 2014, to accommodate a new variable interest rate mode. In connection with the change in interest rate mode, NJNG entered into a Continuing Covenant Agreement dated as of September 24, 2014, with Wells Fargo Municipal Capital Strategies, LLC, pursuant to which Wells Fargo agreed to buy the EDA Bonds. Each series of EDA Bonds is expected to accrue interest for five years at a variable rate determined monthly, which rate is initially calculated as .55 percent plus 70 percent of one month LIBOR, subject to earlier redemption or conversion to another interest rate mode. The EDA Bonds are not subject to optional tender while they bear interest at a LIBOR index rate. Any remaining unamortized extinguished debt costs, will be amortized over the life of the new EDA Bonds in accordance with ASC 980, Regulated Operations, therefore, there was no impact to income upon extinguishment. The rates on these types of investments are generally correlated with the Securities Industry and Financial Markets Association Municipal Swap Index and will initially accrue interest at a daily rate, with a maximum rate of 12 percent per annum. As of September 30, 2014, the interest rate on the EDA Bonds was .66 percent. On April 15, 2013, NJNG issued $50 million of 3.15 percent senior secured notes due April 15, 2028, in the private placement market pursuant to a note purchase agreement entered into on February 8, 2013. Interest is payable semi-annually. The proceeds were used to refinance short-term debt and will fund capital expenditure requirements. 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 First Mortgage Bonds in the private placement market pursuant to a note purchase agreement entered into on February 7, 2014. The proceeds were used to pay down short-term debt and redeem NJNG's $60 million, 4.77 percent private placement bonds on March 15, 2014. On May 27, 2014, NJNG redeemed the $12 million, 5 percent Series HH bonds, which were callable as of December 1, 2013. NJNG Sale-Leasebacks Annual long-term debt redemption requirements, excluding capital leases, as of September 30, are as follows: (Millions) 2015 2016 2017 2018 2019 Thereafter NJNG NJR $ $ $ $ $ $ — $ — $ — $ 125.0 $ — $ 307.8 $ 25.0 — 50.0 25.0 — 50.0 NJNG has entered into a sale-leaseback for its headquarters building, which has a 25.5-year term that expires in June 2021, subject to an option by NJNG to renew the lease for additional five-year terms a maximum of four times. The present value of the agreement's minimum lease payments is reflected as both a capital lease asset and a capital lease obligation, which are included in utility plant and long-term debt, respectively, on the Consolidated Balance Sheets. NJNG received $7.6 million, $7.1 million and $6.5 million for fiscal 2014, 2013 and 2012, 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. During fiscal 2014, 2013 and 2012, NJNG exercised early purchase options with respect to meter leases by making final principal payments of $956,000, $752,000 and $1 million, respectively. This sale-leaseback program is expected to continue on an annual basis. Page 92 Page 93 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) Contractual commitments for capital lease payments, as of the fiscal years ended September 30, are as follows: A summary of NJR's and NJNG's short-term bank facilities as of September 30, are as follows: (Millions) 2015 2016 2017 2018 2019 Thereafter Subtotal Less: interest component Total NJR Long-term Debt Lease Payments $ 11.9 12.1 11.0 9.1 6.3 7.6 58.0 (8.1) $ 49.9 NJR has two unsecured, uncommitted private placement debt shelf note agreements. These debt shelf note agreements are to be used for general corporate purposes, including working capital and capital expenditures. The first agreement was entered into with Prudential on June 30, 2011, in the amount of $75 million, which expired on June 30, 2014, and was amended effective July 25, 2014, by the First Amendment to the Prudential Facility, which allowed for another $100 million under the Prudential Facility. As of September 30, 2014, NJR had $50 million at 3.25 percent outstanding under this agreement, which will mature on September 17, 2022, and $100 million in notes at 3.48 percent due November 7, 2024. On September 26, 2013, NJR entered into an unsecured, uncommitted $100 million private placement shelf note agreement with MetLife. The MetLife Facility, subject to the terms and conditions set forth therein, allows NJR to issue senior notes to MetLife or certain of MetLife's affiliates from time to time during a three-year issuance period ending September 26, 2016, on terms and conditions, including interest rates and maturity dates, to be agreed upon in connection with each note issuance. The notes issued under the MetLife Facility will be guaranteed by certain unregulated subsidiaries of NJR. As of September 30, 2014, $100 million remains available for borrowing under the MetLife Facility. Additionally, NJR entered into another debt shelf note agreement on May 12, 2011, in the amount of $100 million, which expired on May 10, 2013. As of September 30, 2014, NJR had two series of notes outstanding under this agreement, $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. Notes issued under these agreements are guaranteed by certain unregulated subsidiaries of the Company. NJR had no long-term, variable-rate debt outstanding as of September 30, 2014 and 2013. 2014 2013 $ 425,000 $ 148,000 $ 325,000 $ 97,000 1.08% 1.00% $ 256,484 $ $ $ $ $ —% — — — — — $ 210,110 $ 100,000 $ 100,000 0.74% — 10,000 $ $ $ 100,000 $ 250,000 $ 168,600 $ 250,000 $ 153,000 .12% .13% $ 96,269 $ 81,400 (Thousands) NJR Bank revolving credit facilities (1) Notes outstanding at end of period Weighted average interest rate at end of period Amount available at end of period (2) Bank term loan Loan outstanding at end of period Weighted average interest rate at end of period Amount available at end of period Bank letter of credit facility (3) (4) NJNG Bank credit facility dedicated to EDA Bonds (1) (4) Bank revolving credit facilities (1) Commercial paper outstanding at end of period Weighted average interest rate at end of period Amount available at end of period (5) (1) (2) (4) (5) the same amount. (3) Uncommitted, expired on June 5, 2014. amount. NJR Short-term Debt Committed credit facilities, which require commitment fees on the unused amounts. Letters of credit outstanding total $20.5 million and $17.9 million as of September 30, 2014 and 2013, respectively, which reduces amount available by There were no borrowings outstanding as of September 30, 2014 and 2013, respectively. Letters of credit outstanding total $731,000 and $266,000 as of September 30, 2014 and 2013, respectively, which reduces amount available by the same NJR had a $325 million unsecured committed credit facility expiring August 22, 2017. On January 24, 2014, NJR entered into an agreement for a $50 million unsecured, committed credit line. The credit line was put in place primarily to provide additional working capital to NJRES to meet any potential margin calls that may arise in NJRES' normal course of business. Effective January 31, 2014, NJR utilized the accordion option available under the NJR Credit Facility to increase the amount of credit available from $325 million to $425 million. The additional credit line was thereby terminated on the same date. The credit facility is used primarily to finance its share repurchases, to satisfy NJRES' short-term liquidity needs and to finance, on an initial basis, unregulated investments. As of September 30, 2014, NJR has six letters of credit outstanding totaling $20.5 million. One letter of credit for $15 million is issued on behalf of NJRES and five letters of credit, which total $5.5 million, are issued on behalf of NJRCEV. These letters of credit reduce the amount available under NJR's committed credit facility by the same amount. NJR does not anticipate that these letters of credit will be drawn upon by the counterparties, and they will be renewed as necessary. NJRES' letter of credit is used for margin requirements for natural gas transactions and expires on December 31, 2014. NJRCEV's letters of credit are used to secure construction of ground-mounted solar projects and to secure obligations pursuant to an Interconnection Services Agreement. They expire on dates ranging from November 27, 2014 to August 21, 2015. On September 13, 2013, NJR, as borrower, and certain of its unregulated subsidiaries, as guarantors, entered into an unsecured one-year $100 million Term Loan Credit Agreement with JPMorgan that expired on September 15, 2014, and was not replaced. On June 5, 2013, NJR entered into a new agreement permitting the issuance of stand-alone letters of credit for up to $10 million, which expired on June 5, 2014. Page 94 Page 95 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) On October 24, 2014, NJR entered into a $100 million uncommitted line of credit agreement, with Santander Bank, N.A., Stock Options expiring on October 23, 2015. The following table summarizes the stock option activity for the past three fiscal years: Neither NJNG nor the results of its operations are obligated or pledged to support the NJR credit or debt shelf facilities. NJNG Short-term Debt NJNG had a $250 million unsecured committed credit facility, which was due to expire in August 2014. On May 15, 2014, NJNG replaced the facility with a new $250 million, five-year, revolving, unsecured credit facility expiring in May 2019. The new NJNG Credit Facility permits the borrowing of revolving loans and swing loans, as well as the issuance of letters of credit. It also permits an increase to the facility, from time to time, with the existing or new lenders, in a minimum of $15 million increments up to a maximum of $50 million at the lending banks' discretion. As of September 30, 2014, the unused amount available under the NJNG Credit Facility, including amounts allocated to the backstop under the commercial paper program and the issuance of letters of credit, was $153 million. As of September 30, 2014, NJNG has two letters of credit outstanding for $731,000. NJNG's letters of credit are used for collateral for remediation projects and expire on August 11, 2015. These letters of credit reduce the amount available under NJNG's committed credit facility by the same amount. NJNG does not anticipate that these letters of credit will be drawn upon by the counterparty, and will be renewed as necessary. NJNG entered into the JPMC Facility, which was a $100 million four-year credit facility that was due to expire in August 2015, to provide liquidity support in the event of a failed remarketing of the EDA Bonds and to ensure payment of principal and interest. The JPMC Facility was terminated on September 26, 2014 as a result of the change in the interest rate mode on the EDA bonds. 9. STOCK-BASED COMPENSATION In January 2007, the NJR 2007 Stock Award and Incentive Plan replaced the 2002 Employee and Outside Director Long- Term Incentive Plan. Shares have been issued in the form of options, performance shares, restricted stock and deferred retention stock. The Outside Director Stock Compensation Plan allows for the issuance of non-restricted shares to non-employee directors. As of September 30, 2014, 1,596,316 and 28,897 shares remain available for future issuance to employees and directors, respectively. The following table summarizes all stock-based compensation expense recognized during the following fiscal years: (Thousands) Stock-based compensation expense: Performance share awards Restricted and non-restricted stock Deferred retention stock Compensation expense included in operation and maintenance expense Income tax benefit Total, net of tax 2014 2013 2012 $ 2,509 $ 1,664 13,643 1,049 $ 1,276 1,081 1,326 1,362 2,733 17,816 (7,278) $ 10,538 $ 3,456 (1,412) 2,044 $ 5,371 (2,194) 3,177 Outstanding at September 30, 2011 Outstanding at September 30, 2012 Outstanding at September 30, 2013 Granted Exercised Forfeited Granted Exercised Forfeited Granted Exercised Forfeited Outstanding at September 30, 2014 Exercisable at September 30, 2014 Exercisable at September 30, 2013 Exercisable at September 30, 2012 Exercise Price Range $28.65 - $30.37 Performance Shares Shares 109,763 Weighted Average Exercise Price $27.84 (28,138) $25.30 81,625 $28.71 (15,000) $25.08 66,625 $29.53 (42,500) $26.26 — — — — — — — — — — — — 24,125 24,125 66,625 81,625 $30.00 $30.00 $29.53 $28.71 There are no costs related to outstanding options for the stock options listed above. During fiscal 2014 and fiscal 2013, NJR received proceeds of $1.2 million and $376,000, respectively, from the exercise of stock options. The following table summarizes stock options outstanding and exercisable as of September 30, 2014: Outstanding and Exercisable Weighted Average Remaining Contractual Term (in years) Number Of Stock Options 24,125 0.6 Weighted Average Exercise Price $30.00 Aggregate Intrinsic Value (in thousands) $ 495 In fiscal 2014, the Company granted to various officers 34,577 performance shares, which are market condition awards that vest on September 30, 2016, subject to the Company meeting certain performance conditions. In fiscal 2014, the Company also granted to various officers 39,287 performance shares, of which 25,240 vest in September 2016 and 14,047 vest annually over a three year period beginning in September 2014, both of which are subject to the Company meeting certain performance conditions. In fiscal 2013, the Company granted to various officers 49,904 performance shares, which are market condition awards that vest on September 30, 2015, subject to the Company meeting certain performance conditions. In fiscal 2012, the Company granted to various officers 28,418 performance shares, which vested on September 30, 2014. There is $2.2 million of deferred compensation related to unvested performance shares that is expected to be recognized over the next two years. Page 96 Page 97 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) The following table summarizes the performance share activity under the NJR 2007 Stock Award and Incentive Plan for the The following table summarizes the restricted stock activity under the NJR 2007 Stock Award and Incentive Plan for the past three fiscal years: past three fiscal years: Non-vested and outstanding at September 30, 2011 Granted Vested (2) Cancelled/forfeited Non-vested and outstanding at September 30, 2012 Granted Vested Cancelled/forfeited (3) Non-vested and outstanding at September 30, 2013 Granted Vested (4) Cancelled/forfeited Non-vested and outstanding at September 30, 2014 (1) Weighted Average Grant Date Fair Value $28.04 $47.17 30.08 — $33.26 $30.74 — 26.24 $36.70 $40.55 47.17 — $36.59 Shares (1) 106,027 28,418 (49,702) — 84,743 49,904 — (56,325) 78,322 73,864 (28,418) — 123,768 (2) (3) (4) The number of common shares issued related to performance shares may range from zero to 150 percent of the number of shares shown in the table above based on the Company's achievement of performance goals. As certified by the Company's Leadership and Compensation Committee on November 13, 2012, the number of common shares related to performance shares and market condition shares earned was 68.8 percent , or 15,427 shares and 70 percent, or 19,095 shares, respectively. The number represented on this line is the target number of 100 percent. See footnote (1) above. As certified by the Company's Leadership and Compensation Committee on November 12, 2013, the number of common shares granted in fiscal 2011 related to performance shares and market condition shares earned was zero. The number represented on this line is the target number of 100 percent. See footnote (1) above. As certified by the Company's Leadership and Compensation Committee on November 11, 2014, the number of common shares related to performance shares earned was 150 percent, or 42,627 shares, excluding accumulated dividends. The number represented on this line is the target number of 100 percent. See footnote (1) above. The Company measures compensation expense related to performance shares based on the fair value of these awards at their date of grant. In accordance with ASC 718, Compensation - Stock Compensation, compensation expense for market condition grants are recognized for awards granted, and are not adjusted based on actual achievement of the performance goals. The Company estimated the fair value of these grants on the date of grant using a lattice model. Performance condition grants are initially fair valued at the company's stock price on grant date, and are subsequently adjusted for actual achievement of the performance goals. Restricted Stock In fiscal 2014, the company granted 16,678 shares of restricted stock that will vest annually over a three year period beginning in October 2014. In fiscal 2013, the company granted 2,139 shares of restricted stock that will vest in October 2015. In fiscal 2012, the company granted 1,929 shares of restricted stock that vested in October 2014. There is $576,000 of deferred compensation related to unvested restricted stock shares that is expected to be recognized over the next two years. Page 98 Page 99 Non-vested and outstanding at September 30, 2011 Cancelled/forfeited Non-vested and outstanding at September 30, 2012 Cancelled/forfeited Non-vested and outstanding at September 30, 2013 Granted Vested Granted Vested (1) Granted Vested (1) Cancelled/forfeited Non-vested and outstanding at September 30, 2014 Deferred Retention Stock end. the past three fiscal years: Outstanding at September 30, 2011 Outstanding at September 30, 2012 Granted/Vested Delivered Forfeited Granted/Vested Delivered Forfeited Granted/Vested Delivered Forfeited Outstanding at September 30, 2013 Outstanding at September 30, 2014 Weighted Average Grant Date Fair Value Total Fair Value of Vested Shares (in Thousands) Shares 77,097 1,929 (19,680) — 59,346 2,139 (19,680) (2,550) 39,255 16,678 (34,230) (958) 20,745 Shares 106,730 49,171 (103,903) (2,827) 49,171 67,295 — (4,673) 111,793 28,985 — (2,387) 138,391 $39.90 $47.17 $39.10 — $40.40 $40.62 $39.10 $40.74 $41.05 $45.56 $40.74 $40.74 $45.20 $35.37 $47.17 $35.37 35.37 $47.17 $40.62 — $43.44 $43.38 $45.75 — $42.94 $43.89 $ 879 $ 888 $ 1,534 — — — — — — — — — — $ 4,787 — — — — — — — — — — — — Deferred retention stock awards vest immediately when granted, with shares delivered at a future date in accordance with the terms of the underlying agreements. The expense for these awards is recognized in the fiscal year in which services are rendered and the related shares are granted upon approval by the Board of Directors, which generally occurs subsequent to the fiscal year The following table summarizes the deferred retention stock award under the NJR 2007 Stock Award and Incentive Plan for Weighted Average Grant Date Fair Value Total Fair Value of Vested Shares (in Thousands) New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) Non-Employee Director Stock Non-employee director compensation includes an annual retainer that is awarded in stock. In January 2014, the company issued 15,848 shares for the annual retainer with a weighted average fair value of $44.80 per share. The shares vested immediately and are amortized to expense over a 12 month period. As of September 30, 2014, there is $177,000 of expense remaining to be recognized through December 31, 2014. In January 2013 and January 2012, the company issued 16,262 and 10,800 shares for the annual retainer with weighted average fair values of $39.97 and $48.18, respectively. 10. EMPLOYEE BENEFIT PLANS Pension and Other Postemployment Benefit Plans The Company has two trusteed, noncontributory defined benefit retirement plans covering eligible regular represented and nonrepresented employees with more than one year of service. Defined benefit plan benefits are based on years of service and average compensation during the highest sixty consecutive months of employment. The Company also provides postemployment medical and life insurance benefits to employees who meet certain eligibility requirements. All represented employees of NJRHS hired on or after October 1, 2000, non-represented employees hired on or after October 1, 2009, and NJNG represented employees hired on or after January 1, 2012, are covered by an enhanced defined contribution plan instead of the defined benefit plan. Participation in the postemployment medical and life insurance plan was also frozen to new employees as of the same dates, with the exception of new NJRHS represented employees, for which benefits were frozen beginning April 3, 2012. The Company also maintains an unfunded nonqualified PEP that was established to provide employees with the full level of benefits as stated in the qualified plan without reductions due to various limitations imposed by the provisions of federal income tax laws and regulations. There were no plan assets in the nonqualified plan due to the nature of the plan. During the fourth quarter of fiscal 2014, the Company implemented a voluntary early retirement program to certain employees and recognized an expense of approximately $5 million, including pension and postemployment benefit costs of $3.5 million related to special termination benefits, and $1.5 million related to other severance benefits. The Company's funding policy for its pension plans is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. In fiscal 2014 and 2013, the Company had no minimum funding requirements. The Company made no discretionary contributions to the pension plans in fiscal 2014, and contributed $20 million in fiscal 2013. The Company elected to make this discretionary tax-deductible contribution to improve the funded status of the pension plans. 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 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 are no Federal requirements to pre-fund OPEB benefits. However, the Company is required to fund certain amounts due to regulatory agreements with the BPU. The Company contributed $5 million and $6 million, respectively, in fiscal 2014 and 2013 and estimates that it will contribute between $4 million to $6 million over the next five years. Additional contributions may be required based on market conditions and changes to assumptions. Page 100 Page 101 (1) Balance represents amounts recognized in accordance with ASC 715 and excludes $308,000 associated with a regulatory asset approved by the BPU for The following summarizes the changes in the funded status of the plans and the related liabilities recognized on the Consolidated Balance Sheets as of September 30: (Thousands) Change in Benefit Obligation Benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Special termination benefits Actuarial loss (gain) Benefits paid, net of retiree subsidies received Benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid, net of plan participants' contributions Fair value of plan assets at end of year Amounts recognized on Consolidated Balance Sheets Postemployment employee benefit (liability) asset Funded status Current Noncurrent Total (1) Includes the Company's PEP. Balance at September 30, 2012 Amounts arising during the period: Net actuarial (gain) Amounts amortized to net periodic costs: Net actuarial (loss) Prior service (cost) credit Net transition obligation Balance at September 30, 2013 Amounts arising during the period: Net actuarial loss Amounts amortized to net periodic costs: Net actuarial (loss) gain Prior service (cost) credit Net transition obligation Balance at September 30, 2014 fiscal 2012. Pension (1) OPEB 2014 2013 2014 2013 $ 198,826 $ 211,136 $ 112,771 $ 121,027 6,143 10,066 47 2,814 21,440 (11,637) 6,871 8,942 49 — (22,288) (5,884) 3,923 5,734 38 648 6,792 (2,133) 4,686 5,148 32 — (15,645) (2,477) 227,699 $ 198,826 $ 127,773 $ 112,771 200,236 $ 166,664 $ 49,555 $ 41,090 22,923 85 (11,591) 211,653 $ (16,046) $ 19,323 20,083 (5,834) 4,590 4,970 (2,206) 200,236 $ 1,410 $ 56,909 $ (70,864) $ 5,120 5,977 (2,632) 49,555 (63,216) (100) $ (15,946) (16,046) $ (96) $ (136) $ 1,506 (70,728) 1,410 $ (70,864) $ (100) (63,116) (63,216) $ $ $ $ $ $ Regulatory Assets Pension OPEB $ 80,449 $ 58,799 $ 25,183 $ 1,511 (1) Accumulated Other Comprehensive Income (Loss) Pension OPEB (17,961) (13,523) (8,826) (3,589) (5,719) (105) — (3,743) 301 (22) (1,927) (3) — (114) 54 (4) $ 56,664 $ 41,812 $ 14,427 $ (2,142) 10,563 4,277 6,243 2,098 (5,326) (107) — (2,607) 303 (11) (3,085) (4) — $ 61,794 $ 43,774 $ 17,581 $ 107 54 — 117 The Company recognizes a liability for its underfunded benefit plans as required by the Compensation - Retirement Benefits Topic of the ASC. The Company records the offset to regulatory assets for the portion of liability relating to its regulated utility and to accumulated other comprehensive income for the portion of the liability related to its non-regulated operations. The following table summarizes the amounts recognized in regulatory assets and accumulated other comprehensive income as of September 30: — 61,794 $ — 56,664 $ $ (Thousands) Net actuarial loss (gain) $ 2014 60,797 $ 997 2013 55,559 $ 1,105 Prior service cost (credit) Net transition obligation Total 2014 45,809 $ (2,035) — 43,774 $ 2013 44,140 $ (2,339) 11 41,812 $ 2014 17,570 $ 11 2013 14,412 $ 15 — 17,581 $ — 14,427 $ 2014 2013 425 $ (308) — 117 $ (1,782) (360) — (2,142) New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) The amounts in regulatory assets and accumulated other comprehensive income not yet recognized as components of net The weighted average assumptions used to determine benefit costs during the fiscal year and obligations as of September 30, periodic benefit cost as of September 30 are: are as follows: Regulatory Assets Accumulated Other Comprehensive Income (Loss) Pension OPEB Pension OPEB 2014 2012 2014 2012 OPEB 2013 Amounts included in regulatory assets and accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost in fiscal 2015 are as follows: Compensation increase 3.25/3.50% (1) (1) Percentages for represented and nonrepresented plans, respectively. (Thousands) Net actuarial loss Prior service cost (credit) Total Regulatory Assets OPEB Pension Accumulated Other Comprehensive Income (Loss) Pension OPEB $ $ 5,305 $ 108 5,413 $ 2,911 (311) 2,600 $ $ 1,680 $ 3 1,683 $ 32 (54) (22) The accumulated benefit obligation for the pension plans, including the PEP, exceeded the fair value of plan assets. The projected benefit and accumulated benefit obligations and the fair value of plan assets as of September 30, are as follows: (Thousands) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Pension 2014 2013 $ 227,699 $ 198,826 $ 198,058 $ 176,172 $ 211,653 $ 200,236 The components of the net periodic cost for pension benefits, including the Company's PEP, and OPEB costs (principally health care and life insurance) for employees and covered dependents for fiscal years ended September 30, are as follows: (Thousands) Service cost Interest cost Expected return on plan assets Recognized actuarial loss Prior service cost (credit) amortization Recognized net initial obligation Net periodic benefit cost $ $ Special termination benefit Net periodic benefit cost recognized as expense $ 2014 6,143 $ 10,066 (15,475) 5,596 111 — 6,441 $ 2,814 9,255 $ Pension 2013 2012 2014 6,871 $ 8,942 (14,825) 7,646 5,375 $ 8,825 (12,685) 5,015 108 — 8,742 $ — 8,742 $ 46 — 6,576 $ — 6,576 $ 3,923 $ 5,734 (4,174) 2,500 (357) 11 7,637 $ 648 8,285 $ OPEB 2013 2012 4,686 $ 3,584 5,148 (3,653) 3,857 (355) 26 5,133 (2,746) 2,894 25 356 9,709 $ 9,246 — — 9,709 $ 9,246 Page 102 Page 103 Benefit costs: Discount rate Expected asset return Compensation increase Obligations: Discount rate Pension 2013 4.30% 8.50% 3.25% 5.15% 3.25% 5.15% 8.25% 3.25% 4.55% 5.25% 8.25% 3.25% 5.15% 8.25% 3.50% 4.30% 8.50% 3.25% 4.30% 3.25% 4.55% 3.50% 5.15% 3.25% 5.25% 8.25% 3.25% 4.30% 3.25% In selecting an assumed discount rate, the Company uses a modeling process that involves selecting a portfolio of high- quality corporate debt issuances (AA- or better) whose cash flows (via coupons or maturities) match the timing and amount of the Company's expected future benefit payments. The Company considers the results of this modeling process, as well as overall rates of return on high-quality corporate bonds and changes in such rates over time, to determine its assumed discount rate. Information relating to the assumed HCCTR used to determine expected OPEB benefits as of September 30, and the effect of a one percent change in the rate, are as follows: ($ in thousands) HCCTR Ultimate HCCTR Year ultimate HCCTR reached Year-end benefit obligation Total service and interest cost Year-end benefit obligation Total service and interest costs Effect of a 1 percentage point increase in the HCCTR on: Effect of a 1 percentage point decrease in the HCCTR on: 2014 7.1% 4.8% 2022 2013 2012 7.3% 4.8% 2022 7.5% 4.8% 2022 $ 20,965 $ 1,885 $ 18,008 $ 2,156 $ 21,278 $ 1,868 $ (16,932) $ (1,493) $ (14,629) $ (1,675) $ (17,034) $ (1,457) The Company's investment objective is a long-term real rate of return on assets before permissible expenses that is approximately 6 percent greater than the assumed rate of inflation as measured by the consumer price index. The expected long- term rate of return is based on the asset categories in which the Company invests and the current expectations and historical performance for these categories. The mix and targeted allocation of the pension and OPEB plans' assets are as follows: Asset Allocation U.S. equity securities International equity securities Fixed income Total 2015 Target Allocation 40% 20 40 100% Assets at September 30, 2014 39% 20 41 2013 42% 22 36 100% 100% New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the The Plan had no Level 2 or Level 3 fair value measurements during the two fiscal years and there have been no changes in following years: (Thousands) 2015 2016 2017 2018 2019 2020 - 2024 Pension OPEB $ $ $ $ $ $ 7,176 $ 8,102 $ 8,513 $ 9,309 $ 10,017 $ 3,509 4,292 4,735 5,197 5,705 62,977 $ 37,063 The Company 's OPEB plans provide prescription drug benefits that are actuarially equivalent to those provided by Medicare Part D. Therefore, under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Company qualifies for federal subsidies. Defined Contribution Plan The estimated subsidy payments are: Fiscal Year 2015 2016 2017 2018 2019 2020 - 2024 Estimated Subsidy Payment (Thousands) $201 $225 $249 $274 $300 $2,030 valuation methodologies as of September 30, 2014. The following is a description of the valuation methodologies used for assets Money Market funds — Represents bank balances and money market funds that are valued based on the net asset value of measured at fair value: shares held at year end. Registered Investment Companies — Equity and fixed income funds valued at the net asset value of shares held by the plan at year end as reported on the active market on which the individual securities are traded. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The Company offers a Savings Plan to eligible employees. As of January 1, 2014, the Company matches 60 percent of participants' contributions up to 6 percent of base compensation. Represented NJRHS employees, non-represented employees hired on or after October 1, 2009, and NJNG represented employees hired on or after January 1, 2012, are eligible for an employer special contribution of between 3 and 4 percent of base compensation, depending on years of service, into the Savings Plan on their behalf. The amount expensed and contributed for the matching provision of the Savings Plan was $2.2 million in fiscal 2014, $1.9 million in fiscal 2013 and $1.7 million in fiscal 2012. The amount contributed for the employer special contribution of the Savings Plan was $374,000 in fiscal 2014, $193,000 in fiscal 2013 and $143,000 in fiscal 2012. 11. ASSET RETIREMENT OBLIGATIONS NJR recognizes AROs related to the costs associated with cutting and capping its main and service gas distribution pipelines of NJNG, which is required by New Jersey law when taking such gas distribution pipeline out of service. Pension and OPEB assets held in the master trust, measured at fair value, as of September 30, are summarized as follows: The following is an analysis of the change in the ARO liability for the fiscal year ended September 30: (Thousands) Assets Money market funds Registered Investment Companies- Equity Funds Large Cap Index Extended Market Index International Stock Fixed Income Funds Emerging Markets Core Fixed Income Opportunistic Income Ultra Short Duration High Yield Bond Fund Long Duration Fund Quoted Prices in Active Markets for Identical Assets (Level 1) Pension OPEB 2014 2013 2014 2013 $ 50 $ 3 $ 1,154 $ 1,150 70,358 12,475 41,833 69,707 14,736 42,792 10,029 8,754 — — — 21,054 55,854 — — — 19,850 44,394 19,092 3,733 10,309 2,798 6,522 3,960 3,761 5,580 — 16,419 3,444 10,033 2,163 11,684 — — 4,662 — Total assets at fair value $ 211,653 $ 200,236 $ 56,909 $ 49,555 (Thousands) Balance at October 1 Accretion Additions Retirements Balance at period end Sheets. 2015 2016 2017 2018 2019 Total Accretion amounts are not reflected as an expense on NJR's Consolidated Statements of Operations, but rather are deferred as a regulatory asset and netted against NJNG's regulatory liabilities, for presentation purposes, on the Consolidated Balance Accretion for the next five years is estimated to be as follows: (Thousands) Fiscal Year Ended September 30, 2014 2013 $ $ 28,711 2,012 925 (1,153) $ 30,495 $ 27,983 1,892 533 (1,697) 28,711 Estimated Accretion $ 2,075 2,139 2,194 2,248 2,303 $ 10,959 Page 104 Page 105 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) 12. INCOME TAXES A reconciliation of the U.S. federal statutory rate of 35 percent to the effective rate from operations for the fiscal years ended September 30, 2014, 2013 and 2012 is as follows: (Thousands) Statutory income tax expense Change resulting from State income taxes Depreciation and cost of removal Investment tax credits Basis adjustment of solar assets due to ITC Other Income tax provision Effective income tax rate The income tax provision (benefit) from operations consists of the following: 2014 $ 67,834 2013 $ 52,661 2012 $ 35,213 7,785 (4,437) (23,083) 3,959 (218) $ 51,840 5,168 (5,769) (18,749) 3,225 (961) $ 35,575 5,434 (3,999) (34,397) 5,974 (496) $ 7,729 26.8% 23.6% 7.7% (Thousands) Current Federal State Deferred Federal State Investment tax credits Income tax provision 2014 2013 2012 there was no need to recognize any liabilities associated with uncertain tax positions. $ 37,904 $ 12,248 $ 14,983 4,025 11,096 1,763 24,963 960 (23,083) 34,127 6,186 (18,749) $ 51,840 $ 35,575 $ 18,757 4,361 (34,397) 7,729 The temporary differences, which give rise to deferred tax assets and (liabilities), consist of the following: The Company and one or more of its subsidiaries files or expects to file income and/or franchise tax returns in the U.S. Federal jurisdiction and in the states of New Jersey, New York, Connecticut, Texas, Delaware, Pennsylvania, Oklahoma, North Carolina and Louisiana and the City of New York. The Company neither files in, nor believes it has a filing requirement in, any The Company's federal income tax returns through fiscal 2010 have either been reviewed by the IRS, or the related statute of limitations has expired and all matters have been settled. The IRS is currently examining tax returns for fiscal 2011 through foreign jurisdictions. fiscal 2013. The State of New Jersey has completed its sales and use tax examinations through March 31, 2010, and its corporate business tax examinations through September 30, 2008. All periods subsequent to those ended September 30, 2009, are statutorily open to examination in all applicable states with the exception of New York. In New York, all periods subsequent to September 30, 2011, are statutorily open to examination. In May 2013, the State of New Jersey completed their audit of NJRES for the periods ended September 30, 2008, 2009 and 2010. The audit resulted in a refund of $1.1 million that was related primarily to state apportionment differences. NJR evaluates its tax positions to determine the appropriate accounting and recognition of potential future obligations associated with unrecognized tax benefits. As of September 30, 2014 and 2013, based on its analysis, the Company determined As of September 30, 2014, the Company has state income tax net operating losses of approximately $153.2 million, which generally have a life of 20 years. The company has recorded a deferred state tax asset of approximately $9 million on the Consolidated Balance Sheets, reflecting the tax benefit associated with the loss carryforwards. In addition, as of September 30, 2014 and 2013, the Company has recorded a valuation allowance of $212,000 and $262,000, respectively, because it believes that it is more likely than not that the deferred tax assets related to CR&R and NJR will expire unused. The deferred tax assets will expire as follows: (Thousands) Fiscal years 2015 - 2018 Fiscal years 2019 - 2023 Fiscal Years 2024 - 2028 Fiscal Years 2029 - 2034 Total $ 78 — — 8,946 $ 9,024 In addition, as of September 30, 2014, the Company has an ITC carryforward of approximately $7.5 million, which has a life of 20 years. This carryforward will begin to expire in fiscal 2034. In September 2013, the U.S. Department of the Treasury and the IRS released final regulations that provide guidance on applying Section 263(a) of the Internal Revenue Code to amounts paid to acquire, produce, or improve tangible property, as well as rules for materials and supplies. Implementation of these final regulations in September 2013 had no material impact on NJR's and its subsidiaries' results of operations, financial condition or cash flow. 13. 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 $78.3 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. (Thousands) Deferred tax assets Investment tax credits Deferred service contract revenue Incentive compensation Fair value of derivatives State net operating losses Conservation incentive plan Other Total deferred tax assets Deferred tax liabilities Property related items Remediation costs Equity investments Post employment benefits Fair value of derivatives Conservation incentive plan Under-recovered gas costs Other Total deferred tax liabilities 2014 2013 $ $ $ $ $ 10,341 3,299 14,632 14,350 8,962 2,312 10,078 63,974 (371,017) (12,429) (35,474) (10,268) — — (5,056) (11,751) (445,995) (382,021) (1) $ $ $ $ $ 43,033 3,231 6,798 — 6,118 — 5,718 64,898 (329,921) (18,881) (33,368) (17,455) (6,258) (7,611) (383) (13,699) (427,576) (362,678) Includes $2.8 million for NJNG, which is being amortized over the life of the related assets and $7.5 million for NJRCEV, which is ITC carryforward. Total net deferred tax liabilities (1) Page 106 Page 107 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. General operations or cash flows. 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 14. 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: (Thousands) Fiscal Years Ended September 30, Operating revenues New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) Commitments as of September 30, 2014, for natural gas purchases and future demand fees for the next five fiscal year periods Consolidated Balance Sheets, based on the most likely amount. The actual costs to be incurred by NJNG are dependent upon several are as follows: (Thousands) NJRES: Natural gas purchases Storage demand fees Pipeline demand fees Sub-total NJRES NJNG: Natural gas purchases Storage demand fees Pipeline demand fees Sub-total NJNG 2015 2016 2017 2018 2019 Thereafter $ 298,563 $ 27,883 76,524 $ 402,970 $ 18,402 $ 10,471 41,759 70,632 $ — $ 5,612 21,828 27,440 $ — $ 3,500 14,499 17,999 $ — $ 1,782 6,638 8,420 $ 5,328 $ $ 100,218 $ 17,865 24,045 44,372 54,293 $ 178,556 $ 67,565 $ $ 581,526 $ 138,197 $ 34 $ — $ — $ 9,299 9,299 10,883 87,367 85,558 41,001 51,918 $ 96,666 $ 94,857 $ 79,358 $ 112,856 $ 105,086 $ — 2,598 6,861 9,459 — 4,649 860,211 864,860 874,319 Total (1) (1) Does not include amounts related to intercompany asset management agreements between NJRES and NJNG. As of September 30, 2014, the Company's future minimum lease payments under various operating leases will not be more than $2 million annually for the next five years and $22.8 million in the aggregate for all years thereafter. Guarantees As of September 30, 2014, there were NJR guarantees covering approximately $323.6 million of natural gas purchases and NJRES demand fee commitments not yet reflected in accounts payable on the Consolidated Balance Sheets. The Company previously entered into agreements to lease vehicles, generally over a five-year term, that qualified as operating leases. These agreements contain provisions that could require the Company to make additional cash payments at the end of the term for a portion of the residual value of the vehicles. As of September 30, 2014, the present value of the liability recognized on the Consolidated Balance Sheets is $700,000. In the event performance under the guarantee is required, the Company's maximum future payment would be $922,000. 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 February 2012, NJNG filed its 2011 SBC filing, requesting approval of its MGP expenditures incurred through June 30, 2011, which would continue its existing overall SBC rate and recovery at approximately $20 million. 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 September 30, 2014, $30.9 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in regulatory assets on the Consolidated Balance Sheets. NJNG periodically, and at least annually, performs an environmental review of 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 September 30, 2014, NJNG recorded an MGP remediation liability and a corresponding regulatory asset of $177 million on the Natural Gas Distribution External customers Energy Services External customers (1) Intercompany Clean Energy Ventures External customers Subtotal Home Services and Other External customers Intercompany Eliminations Total Depreciation and amortization Natural Gas Distribution Energy Services Clean Energy Ventures Home Services and Other Midstream Subtotal Eliminations Total Interest income (2) Energy Services Midstream Subtotal Natural Gas Distribution Home Services and Other Eliminations Total (1) (2) Page 108 Page 109 2014 2013 2012 $ 819,415 $ 787,987 $ 627,713 2,351,084 1,577,851 2,858,703 72,114 14,575 3,764,807 5,494 11,988 45,452 1,235 (73,349) 47,009 945 (6,439) 3,156,553 2,210,581 $ 3,738,145 $ 3,198,068 $ 2,248,923 $ 40,540 $ 37,999 $ 11,295 59 6 51,900 846 (4) 222 950 2,171 1 (950) 1,222 $ $ $ $ 44 8,477 6 46,526 786 (2) 1,065 1,719 1 2 52,742 $ 47,310 $ 41,643 999 $ 653 $ (884) 837 $ (1,001) 1,026 2,760 2,257 41,102 1,093 (3,853) 35,247 59 5,680 6 40,992 661 (10) 889 37 1,098 2,024 3 Includes sales to Canada, which accounted for 3.3, 5.9 and 6.6 percent of total operating revenues during fiscal 2014, 2013 and 2012, respectively. Included in other income on the Consolidated Statement of Operations. New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) (Thousands) Fiscal Years Ended September 30, Interest expense, net of capitalized interest Natural Gas Distribution Energy Services Clean Energy Ventures Midstream Subtotal Home Services and Other Total Income tax provision (benefit) Natural Gas Distribution Energy Services Clean Energy Ventures Midstream Subtotal Home Services and Other Eliminations Total Equity in earnings of affiliates Midstream Eliminations Total Net financial earnings Natural Gas Distribution Energy Services Clean Energy Ventures Midstream Subtotal Home Services and Other Eliminations Total Capital expenditures Natural Gas Distribution Clean Energy Ventures Subtotal Home Services and Other Total Investments in equity investees Clean Energy Ventures Midstream Total The Chief Executive Officer, who uses NFE as a measure of profit or loss in measuring the results of the Company's segments and operations, is the chief operating decision maker of the Company. A reconciliation of consolidated NFE to consolidated net income is as follows: (Thousands) Consolidated net financial earnings Less: Tax adjustments Consolidated net income Unrealized loss (gain) on derivative instruments and related transactions Effects of economic hedging related to natural gas inventory 2014 2013 2012 $ 176,857 $ 113,681 $ 112,417 28,534 26,639 (20,286) (9,418) 7,635 655 35,790 (4,891) (11,361) $ 141,970 $ 114,809 $ 92,879 The Company uses derivative instruments as economic hedges of purchases and sales of physical gas inventory. For GAAP purposes, these derivatives are recorded at fair value and related changes in fair value are included in reported earnings. Revenues and cost of gas related to physical gas flow is recognized when the gas is delivered to customers. Consequently, there is a mismatch in the timing of earnings recognition between the economic hedges and physical gas flows. Timing differences occur in two ways: • Unrealized gains and losses on derivatives are recognized in reported earnings in periods prior to physical gas inventory flows; and • Unrealized gains and losses of prior periods are reclassified as realized gains and losses when derivatives are settled in the same period as physical gas inventory movements occur. NFE is a measure of the earnings based on eliminating these timing differences, to effectively match the earnings effects of the economic hedges with the physical sale of gas. Consequently, to reconcile between GAAP and NFE, current period unrealized gains and losses on the derivatives are excluded from NFE as a reconciling item. Additionally, realized derivative gains and losses are also included in current period net income. However, NFE includes only realized gains and losses related to natural gas sold out of inventory, effectively matching the full earnings effects of the derivatives with realized margins on physical gas flows. The Company's assets for the various business segments and business operations are detailed below: (Thousands) Assets at end of period Natural Gas Distribution Energy Services Clean Energy Ventures Midstream Subtotal Home Services and Other Intercompany assets (1) Total (1) Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation. 2014 2013 2012 $ 2,143,684 $ 2,094,940 $ 2,005,520 457,080 380,707 153,891 468,096 253,663 153,536 347,406 223,247 157,779 3,135,362 2,970,235 2,733,952 82,413 85,293 73,298 (58,971) (50,745) (37,245) $ 3,158,804 $ 3,004,783 $ 2,770,005 2014 2013 2012 16,683 $ 1,725 5,300 1,396 25,104 359 25,463 $ 39,374 $ 26,458 (21,937) 5,227 49,122 2,460 258 51,840 $ 14,995 $ 14,890 2,534 3,387 1,962 22,878 1,101 1,096 854 2,665 19,505 1,339 23,979 $ 20,844 35,399 $ 10,516 (17,711) 4,993 33,197 2,550 (172) 35,575 $ 38,135 (4,950) (32,507) 4,978 5,656 2,178 (105) 7,729 14,078 $ (3,546) 10,532 $ 13,868 $ (3,519) 10,349 $ 14,308 (3,674) 10,634 74,204 $ 79,735 12,654 7,498 73,846 $ 19,311 10,060 7,199 174,091 110,416 2,798 (32) 3,292 (27) 176,857 $ 113,681 $ 73,238 10,791 19,452 6,749 110,230 2,366 (179) 112,417 152,566 $ 135,543 288,109 1,179 289,288 $ 137,083 $ 116,455 59,125 196,208 1,042 89,726 206,181 1,334 197,250 $ 207,515 — $ 555 555 $ — $ 8,800 — — — $ 8,800 $ $ $ $ $ $ $ $ $ $ $ $ Page 110 Page 111 New Jersey Resources Corporation Part II New Jersey Resources Corporation Part II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued) 15. RELATED PARTY TRANSACTIONS NJRES may periodically enter into storage or park and loan agreements with its affiliated FERC-regulated natural gas storage facility, Steckman Ridge, or transportation agreements with its affiliated FERC-regulated interstate pipeline, Iroquois. As of September 30, 2014, NJRES has entered into storage and park and loan transactions with Steckman Ridge for varying terms, all of which expire by October 31, 2020. Additionally, NJRES has transportation capacity with Iroquois that expires by March 31, 2019. Demand fees, net of eliminations, associated with both Steckman Ridge and Iroquois were $6.2 million, $6.1 million and $6.6 million during the fiscal years ended September 30, 2014, 2013 and 2012, respectively. As of September 30, 2014, NJRES had demand fees payable of $187,000 and $389,000 to Steckman Ridge and Iroquois, respectively, which are included in gas purchases payable. As of September 30, 2013, fees payable to Steckman Ridge and Iroquois were $159,000 and $390,000 respectively. In January 2010, NJNG entered into a 10-year agreement effective April 1, 2010, for 3 Bcf of firm storage capacity with Steckman Ridge. Under the terms of the agreement, NJNG incurs demand fees, at market rates, of approximately $9.3 million annually, a portion of which is eliminated in consolidation. These fees are recoverable through NJNG's BGSS mechanism and are included in regulatory assets. Additionally, NJNG has transportation capacity with Iroquois that expires by January 31, 2019. Demand fees, net of eliminations, associated with both Steckman Ridge and Iroquois were $6.4 million, $5.9 million and $5.6 million during the fiscal years ended September 30, 2014, 2013and 2012, respectively. NJNG had demand fees payable to Steckman Ridge in the amount of $775,000 as of September 30, 2014 and $775,000 as of September 30, 2013. NJNG had fees payable to Iroquois of $48,000 and $61,000 as of September 30, 2014 and September 30, 2013, respectively. NJNG and NJRES have entered into various asset management agreements. Under the terms of these agreements, NJNG releases certain transportation and storage contracts to NJRES for the entire term of the agreements. NJNG also sold natural gas in storage at cost to NJRES. In return, NJNG has the option to purchase index priced gas and storage inventory gas from NJRES at NJNG's citygate and other delivery locations to maintain operational reliability. As of September 30, 2014, NJNG and NJRES had four asset management agreements with expiration dates ranging from October 2014 through March 2016. In the fourth quarter of fiscal 2014, NJNG entered into a precedent agreement for transportation capacity of 180,000 dths per day with PennEast with an estimated service date of November 1, 2017. 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of financial data for each quarter of fiscal 2014 and 2013 follows. Due to the seasonal nature of the Company's businesses, quarterly amounts vary significantly during the fiscal year. In the opinion of management, the information furnished reflects all adjustments necessary for a fair presentation of the results of the interim periods. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None Disclosure Controls and Procedures ITEM 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Company's management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of end of the period covered by this report, the Company's disclosure controls and procedures are effective, to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management's Annual Report on Internal Control over Financial Reporting The report of management required under this ITEM 9A is contained in ITEM 8 of this Form 10-K under the caption Management's Report on Internal Control over Financial Reporting. The attestation report required under this ITEM 9A is contained in ITEM 8 of this 10-K under the caption Report of Attestation Report of Registered Public Accounting Firm Independent Registered Public Accounting Firm. Changes in Internal Control over Financial Reporting There has been no change in internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15 (f)) that occurred during the quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. (Thousands, except per share data) 2014 Operating revenues Gross margin (1) Operating income (loss) Net income (loss) Earnings (loss) per share Basic Diluted 2013 Operating revenues Gross margin (1) Operating income (loss) Net income (loss) Earnings (loss) per share Basic Diluted First Quarter Second Quarter Third Quarter Fourth Quarter None ITEM 9B. OTHER INFORMATION $ 878,405 $ 1,579,569 $ 688,257 $ 591,914 $ 47,375 (28,838) $ (24,420) $ 64,432 $ 315,849 $ 12,224 $ 247,012 $ 7,693 $ 172,971 $ 28,474 $ (29,208) $ (14,274) $ $0.18 $0.18 $4.11 $4.07 $(0.34) $(0.34) $(0.58) $(0.58) $ 736,019 $ 960,885 $ 767,469 $ 733,695 $ 135,189 $ 108,137 $ 100,641 $ 23,088 (31,929) 47,000 $ $ (20,021) 29,155 $ $ 87,191 $ 60,206 $ 56,969 $ 45,469 $ $1.44 $1.44 $1.09 $1.08 $0.70 $0.70 $(0.48) $(0.48) (1) Gross margin consists of operating revenue less cost of goods sold and other direct expenses at NJR's unregulated subsidiaries and utility gross margin at NJNG, which includes natural gas revenues less natural gas purchases, sales tax, a TEFA and regulatory rider expenses. The sum of quarterly amounts may not equal the annual amounts due to rounding. Page 112 Page 113 New Jersey Resources Corporation Part III New Jersey Resources Corporation Part IV ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements. All Financial Statements of the Registrant are filed as part of this report and included in Item 8 of Part II of this Form 10-K. (a) 2. Financial Statement Schedules-See Index to Financial Statement Schedules in Item 8. (a) 3. Exhibits-See Exhibit Index on page 119 Information required by this item, including information concerning the Board of Directors of the Company, the members of the Company's Audit Committee, the Company's Audit Committee Financial Expert, compliance with Section 16(a) of the Exchange Act and shareholder proposals, is incorporated by reference to the Company's Proxy Statement for the 2015 Annual Meeting of Shareholders, which will be filed with SEC pursuant to Regulation 14A within 120 days after September 30, 2014. The information regarding executive officers is included in this report following Item 4, as Item 4A, under the caption Executive Officers of the Company and incorporated herein by reference. The Board of Directors has adopted the Code of Conduct, a code for all directors, officers and employees, as required by the New York Stock Exchange (NYSE) rules, and governing the chief executive officer and senior financial officers, in compliance with Sarbanes-Oxley and SEC regulations. Copies of the Code of Conduct are available free of charge on the Company's website at http://investor.njresources.com under the caption Corporate Governance. A printed copy of the Code of Conduct is available free of charge to any shareholder who requests it by contacting the Corporate Secretary at 1415 Wyckoff Road, Wall, New Jersey 07719. The Company will disclose any amendments to, or waivers from, a provision of the Code of Conduct that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions that relate to any element of the Codes as defined in Item 406 of Regulation S-K by posting such information on the Company's website. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is incorporated by reference from the Registrant's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required by this Item is incorporated by reference from the Registrant's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE Information required by this Item is incorporated by reference from the Registrant's Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by this Item is incorporated by reference from the Registrant's Proxy Statement. Page 114 Page 115 New Jersey Resources Corporation Part IV INDEX TO FINANCIAL STATEMENT SCHEDULES New Jersey Resources Corporation Part IV SCHEDULE II Schedule II - Valuation and qualifying accounts and reserves for each of the three years in the period ended September 30, 2014 Page 117 VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 30, 2014, 2013 and 2012 Schedules other than those listed above are omitted because they are either not required or are not applicable, or the required information is shown in the financial statements or notes thereto. Allowance for doubtful accounts 5,330 2,504 (2,477) $ 5,357 (Thousands) CLASSIFICATION 2014 2013 2012 Regulatory asset Allowance for doubtful accounts Regulatory asset Allowance for doubtful accounts (1) Uncollectible accounts written off, less recoveries and adjustments. ADDITIONS CHARGED TO BEGINNING BALANCE EXPENSE OTHER (1) ENDING BALANCE $ $ $ $ $ 71 4,797 141 4,612 (71) 2,627 (70) 3,932 (2,094) $ 5,330 — $ — $ — 71 (3,747) $ 4,797 Page 116 Page 117 New Jersey Resources Corporation Part IV SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. New Jersey Resources Corporation Part IV EXHIBIT INDEX Exhibit Number Exhibit Description Date: November 25, 2014 NEW JERSEY RESOURCES CORPORATION (Registrant) By:/s/ Glenn C. Lockwood Glenn C. Lockwood Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: 4.2(a) 36th Supplemental Indenture dated as of September 1, 2014, between NJNG and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K, as filed on September 30, November 25, 2014 November 25, 2014 /s/ Laurence M. Downes Laurence M. Downes Chairman, President and Chief Executive Officer Director /s/ Laurence R. Codey Lawrence R. Codey Director November 25, 2014 /s/ Alfred C. Koeppe Alfred C. Koeppe Director November 25, 2014 /s/ Glenn C. Lockwood Glenn C. Lockwood Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) November 25, 2014 November 25, 2014 /s/ Donald L. Correll Donald L. Correll Director /s/ Robert B. Evans Robert B. Evans Director November 25, 2014 /s/ M. William Howard, Jr. M. William Howard, Jr. Director November 25, 2014 November 25, 2014 November 25, 2014 /s/ J. Terry Strange J. Terry Strange Director /s/ Sharon C. Taylor Sharon C. Taylor Director /s/ David A. Trice David A. Trice Director November 25, 2014 /s/ Jane M. Kenny Jane M. Kenny Director November 25, 2014 /s/ George R. Zoffinger George R. Zoffinger Director 4.7(a) First Amendment to the 2008 NPA, dated as of September 1, 2014, by and among New Jersey Natural Gas Company and the Purchasers party thereto (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K, as filed on September 30, 2014) Page 118 Page 119 3.1 Restated Articles of Incorporation of New Jersey Resources Corporation, as amended through January 22, 2014 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, as filed on January 23, 2014) 3.2 Bylaws of New Jersey Resources Corporation, as amended through July 16, 2014 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, as filed on July 21, 2014) 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10- K for the year ended September 30, 2013, as filed on November 25, 2013) 4.2 Indenture of Mortgage and Deed of Trust dated as of September 1, 2014, between NJNG and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K, as filed on September 30, 2014) 2014) $250,000,000 Credit Agreement dated as of May 15, 2014, by and among New Jersey Natural Gas Company, the Lenders party thereto, PNC Bank, National Association, as Administrative Agent, Wells Fargo Bank, National Association, as Syndication Agent, U.S. Bank National Association, TD Bank, N.A., and Santander Bank, N.A., as Documentation Agents, and PNC Capital Markets LLC and Wells Fargo Securities, LLC, as Joint Lead Arrangers (incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, as filed on August 4, 2014) $325,000,000 Amended and Restated Credit Agreement dated as of August 22, 2012 by and among the Company, the guarantors thereto, the lenders party thereto, PNC Bank, National Association, as Administrative Agent, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as Syndication Agents, Bank of America, N.A., TD Bank, N.A. and U.S. Bank National Association, as Documentation Agents (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed on August 28, 2012) $75,000,000 Shelf Note Purchase Agreement dated as of June 30, 2011, between New Jersey Resources Corporation and Prudential Investment Management, Inc. (“Prudential Facility”)(incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed on July 6, 2011) 4.5(a) First Amendment to the Prudential Facility dated as of July 25, 2014, between the Company and Prudential Investment Management, Inc. (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed on November 12, 2014) $50,000,000 Note Purchase Agreement dated as of September 24, 2007, by and among the Company, New York Life Insurance Company and New York Life Insurance and Annuity Company (incorporated by reference to Exhibit 4.7 to the Annual Report on Form 10-K as filed on December 10, 2007) $125,000,000 Note Purchase Agreement dated as of May 15, 2008 (“2008 NPA”), by and among New Jersey Natural Gas Company and the Purchasers party thereto (incorporated by reference to Exhibit 4.8 to the Current Report on Form 8-K, as filed on May 20, 2008) $100,000,000 Shelf Note Purchase Agreement dated as of May 12, 2011, between New Jersey Resources Corporation and Metropolitan Life Insurance Company (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed on May 17, 2011) $125,000,000 Note Purchase Agreement dated as of February 7, 2014, by and among New Jersey Natural Gas Company and the Purchasers party thereto (incorporated by reference to Exhibit 4.5 to the Quarterly Report on Form 10-Q, as filed on May 7, 2014) 4.3 4.4 4.5 4.6 4.7 4.8 4.9 New Jersey Resources Corporation Part IV New Jersey Resources Corporation Part IV Exhibit Number Exhibit Description Exhibit Number Exhibit Description 4.10 4.11 4.12 4.13 4.14 Loan Agreement between New Jersey Economic Development Authority and New Jersey Natural Gas Company dated as of August 1, 2011 (incorporated by reference to Exhibit 4.10 to the Annual Report on Form 10-K for the year ended September 30, 2011, as filed on November 23, 2011) Continuing Covenant Agreement between NJNG and Wells Fargo Municipal Strategies, LLC, dated September 24, 2014 (incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K, as filed on September 30, 2014) $50,000,000 Note Purchase Agreement dated as of February 8, 2013, by and among New Jersey Natural Gas Company and the Purchasers party thereto (incorporated by reference to Exhibit 4.12 to the Quarterly Report on Form 10-Q, as filed on May 3, 2013) Shelf Note Purchase Agreement dated as of September 26, 2013, between New Jersey Resources Corporation and Metropolitan Life Insurance Company (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8- K, as filed on October 1, 2013) $100,000,000 Uncommitted Line of Credit Agreement, dated as of October 24, 2014, with Santander Bank, N.A., as the Lender (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on October 30, 2014) 10.1* Amended and Restated Supplemental Executive Retirement Plan Agreement between the Company and Laurence M. Downes dated December 31, 2008 (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 10.2(a)* Schedule of Supplemental Executive Retirement Plan Agreements for named executive officers (incorporated by reference to Exhibit 10.2(a) to the Annual Report on Form 10-K for the year ended September 30, 2010, as filed on November 24, 2010) 10.2(b)* Form of Amendment of Supplemental Executive Retirement Plan Agreement between the Company and Named Executive Officer (for future use) (incorporated by reference to Exhibit 10.4(b) to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 10.3 10.4 10.5* 10.6* Service Agreement for Rate Schedule SS-1 by and between NJNG and Texas Eastern Transmission Company, dated as of June 21, 1995 (incorporated by reference to Exhibit 10-5B to the Annual Report on Form 10-K for the year ended September 30, 1996, as filed on December 30, 1996) Lease Agreement between NJNG, as Lessee, and State Street Bank and Trust Company of Connecticut, National Association, as Lessor, for NJNG's Headquarters Building dated December 21, 1995 (incorporated by reference to Exhibit 10-7 to the Annual Report on Form 10-K for the year ended September 30, 1996, as filed on December 30, 1996) The Company's Long-Term Incentive Compensation Plan, as amended, effective as of October 1, 1995 (incorporated by reference to Appendix A to the Proxy Statement for the 1996 Annual Meeting as filed on January 4, 1996) 21.1+ Subsidiaries of the Registrant Employment Continuation Agreement between the Company and Laurence M. Downes dated December 31, 2008 (incorporated by reference to Exhibit 10.12 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 10.6(a)* Schedule of Employee Continuation Agreements (incorporated by reference to Exhibit 10.6(a) to the Annual Report on Form 10-K for the year ended September 30, 2010, as filed on November 24, 2010) 10.7* 10.8* 10.9* Summary of Company's Non-Employee Director Compensation (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed on November 12, 2014) The Company's 2007 Stock Award and Incentive Plan (as amended and restated January 1, 2009) (incorporated by reference to Exhibit 10.17 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 2007 Stock Award and Incentive Plan Form of Stock Option Agreement (incorporated by reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 10.10* 2007 Stock Award and Incentive Plan Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, as filed on December 24, 2013) Page 120 Page 121 10.10(a)* 2007 Stock Award and Incentive Plan Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 10.11* 2007 Stock Award and Incentive Plan Form of NFE Annual Average Growth Rate Performance Share Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on December 24, 2013) 10.12* 2007 Stock Award and Incentive Plan Form of Performance Shares Agreement-TSR (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on January 4, 2010) 10.13* 2007 Stock Award and Incentive Plan Form of Performance-Based Restricted Stock Agreement (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, as filed on December 24, 2013) 10.14* 2007 Stock Award and Incentive Plan Form of Performance Shares Agreement-NFE (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on December 28, 2011) 10.15* 2007 Stock Award and Incentive Plan Form of Deferred Stock Retention Award Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, as filed on December 24, 2013) 10.15(a)* 2007 Stock Award and Incentive Plan Form of Deferred Stock Retention Award Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, as filed on December 28, 2011) 10.16* 2007 Stock Award and Incentive Plan Form of Deferred Stock Retention Award Agreement (FY 2013) (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, as filed on February 2, 2013) 10.17 Limited Liability Company Agreement of Steckman Ridge GP, LLC dated as of March 2, 2007 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, as filed on May 3, 2007) 10.18 Limited Partnership Agreement of Steckman Ridge, LP dated as of March 2, 2007 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q, as filed on May 3, 2007) 10.20* New Jersey Resources Corporation Savings Equalization Plan (incorporated by reference to Exhibit 10.27 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 10.21* New Jersey Resources Corporation Pension Equalization Plan (incorporated by reference to Exhibit 10.28 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 10.22* New Jersey Resources Corporation Directors' Deferred Compensation Plan (incorporated by reference to Exhibit 10.25 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 10.23* New Jersey Resources Corporation Officers' Deferred Compensation Plan (incorporated by reference to Exhibit 10.26 to the Quarterly Report on Form 10-Q, as filed on February 6, 2009) 23.1+ Consent of Independent Registered Public Accounting Firm 31.1+ Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act 31.2+ Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act 32.1+ † Certification of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act 32.2+ † Certification of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act 101+ Interactive Data File (Annual Report on Form 10-K, for the fiscal year ended September 30, 2014, furnished in XBRL (eXtensible Business Reporting Language)). _______________________________ + Filed herewith. * Denotes compensatory plans or arrangements or management contracts. † This certificate accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of Section 18 or any other provision of the Securities Exchange Act of 1934, as amended. Shareowner Information annual meeting The Annual Shareowners Meeting will be held at 9:30 a.m. on January 21, • Increase your holdings in NJR by reinvesting all or some of your cash 2015 at the Eagle Oaks Golf and Country Club, 20 Shore Oaks Drive, dividends in our common stock. Farmingdale, NJ 07727. Please refer to your proxy statement for directions. • Invest automatically with optional withdrawals from your bank account. stock listing The Company’s common stock is traded on the New York Stock Exchange under the ticker symbol NJR. The stock may also appear as NewJerRes or NJRsc in stock tables in many daily newspapers, business publications, financial Web sites and search engines. • Benefit from maintenance of shares of common stock in book-entry form and detailed record keeping and reporting, provided at no charge. • Deposit common stock certificates registered in your name with the Plan Administrator into your Plan account for safekeeping, at no cost. • Receive statements of your account following each reinvestment of dividends and each investment of an optional cash payment or payroll investoR anD meDia infoRmation deduction amount, if any. Members of the financial community are invited to contact Joanne • Execute plan transactions online. Fairechio, Director  —   Investor Relations, at 732-378-4967 or Dennis Puma, Director   —   Investor Relations, at 732-938-1229. Members of the media are invited to contact Michael Kinney, Senior Executive Communications Specialist   , at 732-938-1031. Correspondence can be sent to New Jersey For additional information, visit njresources.com, then “Shareholder Account Info” under “Investor Relations.” Full details are contained in the NJR Direct prospectus, which may be obtained from WFSS or the Company. Resources, 1415 Wyckoff Road, P.O. Box 1468, Wall, NJ 07719. DiviDenDs stock tRansfeR agent anD RegistRaR The Transfer Agent and Registrar for the Company’s common stock is Wells Fargo Shareowner Services (WFSS). Shareowners with questions about account activity should contact WFSS investor relations representatives between 8 a.m. and 8 p.m. ET, Monday through Friday, by calling toll-free Dividends on common stock are declared quarterly by the Board of Directors. Shareowners of record receive their dividend checks from WFSS, unless they have elected to reinvest their dividends through the Plan. The Company offers direct deposit of dividends into shareowners’ bank accounts so the funds are available the same day they are paid. Please 800-817-3955. contact WFSS for details. General written inquiries and address changes may be sent to: Wells Fargo Shareowner Services P.O. Box 64874, St. Paul, MN 55164-0874 or Wells Fargo Shareowner Services 1110 Centre Point Curve, Suite 101, Mendota Heights, MN 55120 Shareowners can view their account information online at shareowneronline.com. new JeRsey ResouRces DiRect stock PuRchase anD DiviDenD Reinvestment Plan Request foR foRm 10-k anD otheR Documents The following documents may be obtained when available, without charge, upon written request to:  Investor Relations, New Jersey Resources, 1415 Wyckoff Road, P.O. Box 1468, Wall, NJ 07719: • Annual Report and Form 10-K • Form 10-Q • Form 8-K • Quarterly Earnings News Release • Audit Committee Charter • Corporate Governance Guidelines • Leadership Development and Compensation Committee Charter The New Jersey Resources Direct Stock Purchase and Dividend Reinvestment • Nominating/Corporate Governance Committee Charter Plan, NJR Direct, provides a convenient and economical method for new • NJR Code of Conduct eligible investors to make an initial investment in shares of common stock and for existing shareowners to invest in additional shares of common stock These documents, as well as other filings made with the Securities and or reinvest all or some of their common stock cash dividends. This is neither Exchange Commission, also are available through njresources.com. an offer to sell nor a solicitation of an offer to buy securities. The Plan is administered by WFSS. As a participant in NJR Direct, you can: • Conveniently purchase our common stock without incurring brokerage commissions or transaction/processing fees. • Build your investment over time, starting with as little as $100, up to a Information in this Annual Report should not be considered a solicitation of the sale or purchase of securities. maximum of $100,000 per calendar year. Design: Decker Design, Inc., New York 1415 Wyckoff Road Post Office Box 1468 Wall, NJ 07719 732-938-1480 www.njresources.com 

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