10-K 1 njr10ksep2013.htm 10-K NJR 10K Sep2013


 

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

FORM 10‑K

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM             TO             
Commission file number 1‑8359
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey
 
22‑2376465
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1415 Wyckoff Road, Wall, New Jersey 07719
 
732‑938‑1480
(Address of principal
executive offices)
 
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock ‑ $2.50 Par Value
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)
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.
Yes: x            No: o

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

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

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

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

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

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

The aggregate market value of the Registrant's Common Stock held by nonaffiliates was $1,848,838,319 based on the closing price of $44.85 per share on March 28, 2013, as reported on the New York Stock Exchange.

The number of shares outstanding of $2.50 par value Common Stock as of November 21, 2013 was 42,025,580.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareowners (Proxy Statement) to be held January 22, 2014, to be filed on or about December 12, 2013, are incorporated by reference into Part I and Part III of this report.
 


New Jersey Resources Corporation

TABLE OF CONTENTS

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


New Jersey Resources Corporation



GLOSSARY OF KEY TERMS                                                                                                                                                        
AFUDC
Allowance for Funds Used During Construction
AIP
Accelerated Infrastructure Program
ARO
Asset Retirement Obligations
ARS
Auction-Rate Securities
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bcf
Billion Cubic Feet
BGSS
Basic Gas Supply Service
BPU
New Jersey Board of Public Utilities
CFTC
Commodity Futures Trading Commission
CIP
Conservation Incentive Program
CME
Chicago Mercantile Exchange
CR&R
Commercial Realty & Resources Corp.
CWIP
Construction Work In Progress
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
DRP
NJR Direct Stock Purchase and Dividend Reinvestment Plan
dths
Dekatherms
EDA
New Jersey Economic Development Authority
EDA Bonds
Collectively, Series 2011A, Series 2011B and Series 2011C Bonds
EDECA
Electric Discount and Energy Competition Act
FASB
Financial Accounting Standards Board
FCM
Futures Commission Merchant
FERC
Federal Energy Regulatory Commission
FRM
Financial Risk Management
GAAP
Generally Accepted Accounting Principles of the United States
HCCTR
Health Care Cost Trend Rate
ICE
Intercontinental Exchange
IFRS
International Financial Reporting Standards
Iroquois
Iroquois Gas Transmission L.P.
ITC
Investment Tax Credit
JPMC Facility
NJNG's $100 million, four-year credit facility with JPMorgan Chase Bank, N.A.
JPMC Term Loan
NJR's $100 million, one-year term loan credit agreement with JPMorgan Chase Bank, N.A.
LIBOR
London Inter-Bank Offered Rate
LNG
Liquefied Natural Gas
Loan Agreement
Loan Agreement between the EDA and the Company
MetLife
Metropolitan Life Insurance Company
MetLife Facility
NJR's unsecured, uncommitted $100 million private placement shelf note agreement with MetLife, Inc.
MF Global
MF Global Holdings Ltd. (collectively with its affiliates MF Global Inc. and MF Global UK Limited)
MGP
Manufactured Gas Plant
MMBtu
Million Metric British Thermal Unit
Moody's
Moody's Investors Service, Inc.
MW
Megawatts
MWh
Megawatt Hour
NJR Credit Facility
NJR's $325 million unsecured committed credit facility expiring in August 2017 that NJR entered into in August 2012
NFE
Net Financial Earnings
NGV
Natural Gas Vehicles
NGX
Natural Gas Exchange
NJ RISE
New Jersey Reinvestment in System Enhancement
NJCEP
New Jersey's Clean Energy Program

Page 1

New Jersey Resources Corporation



NJDEP
New Jersey Department of Environmental Protection
NJNG
New Jersey Natural Gas Company
NJNG Credit Facility
The $200 million unsecured committed credit facility expiring in August 2014 that NJNG entered into in August 2011
NPNS
Normal Purchase/Normal Sale
NJR or The Company
New Jersey Resources Corporation
NJR Energy
NJR Energy Corporation
NJR Midstream
NJR Midstream Holdings Corporation
NJR Service
NJR Service Corporation
NJRCEV
NJR Clean Energy Ventures Corporation
NJREI
NJR Energy Investments Corporation
NJRES
NJR Energy Services Company
NJRHS
NJR Home Services Company
NJRPS
NJR Plumbing Services, Inc.
Non-GAAP
Not in accordance with Generally Accepted Accounting Principles of the United States
NYMEX
New York Mercantile Exchange
O&M
Operating and Maintenance
OCI
Other Comprehensive Income
OPEB
Other Postemployment Benefit Plans
PBO
Projected Benefit Obligations
PEP
Pension Equalization Plan
PIM
Pipeline Integrity Management
Pipeline
NJNR Pipeline Company
Prudential
Prudential Investment Management, Inc.
Prudential Facility
NJR's unsecured, uncommitted $75 million private placement shelf note agreement with Prudential
PTC
Production Tax Credit
RA
Remediation Adjustment
Rate Counsel
New Jersey Division of Rate Counsel
Retail and Other
Retail and Other Operations
Retail Holdings
NJR Retail Holdings Corporation
S&P
Standard & Poor's Financial Services LLC
SAFE
Safety Acceleration and Facility Enhancement
Sarbanes-Oxley
Sarbanes-Oxley Act of 2002
SAVEGREEN
The SAVEGREEN Project®
Savings Plan
Employees' Retirement Savings Plan
SBC
Societal Benefits Clause
SEC
Securities and Exchange Commission
SREC
Solar Renewable Energy Certificate
Steckman Ridge
Collectively, Steckman Ridge GP, LLC and Steckman Ridge, LP
Superstorm Sandy
Post-Tropical Cyclone Sandy
TEFA
Transitional Energy Facilities Assessment
The Exchange Act
The Securities Exchange Act of 1934, as amended
U.S.
The United States of America
Union
International Brotherhood of Electrical Workers Local 1820
USF
Universal Service Fund
VRDN
Variable Rate Demand Notes


Page 2

New Jersey Resources Corporation

TABLE OF CONTENTS

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS                                                                           

Certain statements contained in this report, including, without limitation, statements as to management expectations 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;" "-Retail 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 "may," "intends," "estimates," "expects," "projects," "plans," "believes," "should," "will" or "continues" or comparable terminology and are made based upon management's current expectations and beliefs as of this date concerning future developments and their potential effect upon 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 and SRECs, extension of the PTC, financial condition, results of operations, cash flows, capital requirements, market risk and other matters for fiscal 2014 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;
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, a lower discount rate 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, liquidity in the wholesale energy trading market;
the ability to obtain governmental approvals and/or financing for the construction, development and operation of certain non-regulated energy investments;
risks associated with the management of the Company's joint ventures and partnerships;
risks associated with our investments in clean energy projects and our investment in an onshore wind developer, 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, NJR's eligibility for ITCs or PTCs, 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 (including those related to restoration efforts resulting from Superstorm Sandy) 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, including a work stoppage;
the regulatory and pricing policies of federal and state regulatory agencies;
the possible expiration of the NJNG CIP;
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 on our operations and customers, including any impacts to utility gross margin and restoration costs resulting from Superstorm Sandy.

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 3

New Jersey Resources Corporation
Part I


ITEM 1. BUSINESS                                                                                                                                                                         

ORGANIZATIONAL STRUCTURE

New Jersey Resources Corporation is a New Jersey corporation formed in 1981 pursuant to a corporate reorganization. The Company is an energy services holding company that provides retail and wholesale 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. 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 497,400 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 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 clean energy projects, including commercial and residential solar projects, an onshore wind project, and the Company's 18.7 percent ownership interest in OwnEnergy.

NJR Energy Services Company maintains and transacts around a portfolio of physical assets consisting of natural gas storage and transportation contracts. NJRES also provides wholesale energy management services to other energy companies and natural gas producers. NJRES comprises the Company's Energy Services segment.

NJR Energy Investments Corporation, an unregulated affiliate that consolidates the Company's unregulated energy-related investments. NJREI includes the following wholly owned subsidiaries:

NJR Midstream Holdings Corporation (formerly NJR Energy Holdings Corporation) primarily 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 and NJNR Pipeline Company, which holds the Company's 5.53 percent ownership interest in Iroquois. Steckman Ridge and Iroquois comprise the Company's Midstream segment (formerly Energy Holdings 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, primarily 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 wholly owned subsidiaries:

NJR Home Services Company, a company that provides heating, ventilation and cooling service repair and contract services to approximately 121,000 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.


Page 4

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

BUSINESS SEGMENTS

The Company operates within four reportable business segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services and Midstream (formerly Energy Holdings).

The Natural Gas Distribution segment consists of regulated energy and off-system, capacity and storage management operations. The Clean Energy Ventures segment consists of capital investments in clean energy projects. The Energy Services segment consists of unregulated wholesale energy operations. 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)
2013
2012
2011
 
Net Income
Assets
Net Income
Assets
Net Income
Assets
Natural Gas Distribution
$
73,846

$
2,094,940

$
73,238

$
2,005,520

$
71,322

$
1,942,691

Clean Energy Ventures
$
10,060

$
253,663

$
19,452

$
223,247

$
6,761

$
80,234

Energy Services
$
20,725

$
468,096

$
(8,605
)
$
347,406

$
13,479

$
400,882

Midstream
$
7,199

$
153,536

$
6,749

$
157,779

$
6,780

$
159,940


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 497,400 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 1.4 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 7,456 and 6,704 new customers and added natural gas heat and other services to another 619 and 539 existing customers in fiscal 2013 and 2012, 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 14,000 to 16,000 new customers over the next two years. This anticipated customer growth represents approximately $3.9 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 2014, 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 5

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

Operating Revenues/Throughput

For the fiscal year ended September 30, operating revenues and throughput by customer class were as follows:
 
2013
 
2012
 
2011
($ in thousands)
Operating Revenue
Bcf
 
Operating Revenue
Bcf
 
Operating Revenue
Bcf
Residential
$
467,269

38.3

 
$
363,780

32.9

 
$
579,038

42.3

Commercial and other
102,350

7.5

 
88,484

6.5

 
116,043

8.3

Firm transportation
73,745

15.2

 
60,599

11.2

 
57,126

12.2

Total residential and commercial
643,364

61.0

 
512,863

50.6

 
752,207

62.8

Interruptible
6,452

10.9

 
6,510

10.3

 
7,029

8.3

Total system
649,816

71.9

 
519,373

60.9

 
759,236

71.1

BGSS incentive programs (1)
138,171

36.0

 
108,340

36.1

 
212,488

43.4

Total
$
787,987

107.9

 
$
627,713

97.0

 
$
971,724

114.5

(1)
Does not include 105.5, 63.5 and 63.6 Bcf for the capacity release program and related amounts of $3.7 million, $3.4 million and $2.2 million, which are recorded as a reduction of gas purchases on the Consolidated Statements of Operations for the fiscal years ended September 30, 2013, 2012 and 2011, respectively.

In fiscal 2013, 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 fluctuations in 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. The CIP was initially authorized in October 2006 as a three-year pilot program and continues in effect due to the continuing nature of energy efficiency programs at the state and federal levels in concert with the issuance of the economic stimulus programs. During fiscal 2010, the BPU approved an extension of the program through September 30, 2013. 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. The discovery phase has commenced and since no BPU Order on that petition was issued as of September 30, 2013, the CIP program will continue for up to one additional year or until such an Order is issued, whichever is earlier.

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 2013, NJNG purchased gas from approximately 104 suppliers under contracts ranging from one day to one year and purchased over 10 percent of its natural gas from one supplier. NJNG believes the loss of this supplier would not have a material adverse impact on its results of operations, financial position or cash flows as an adequate number of alternative suppliers exist. NJNG believes that its supply strategy should adequately meet its expected firm load over the next several years.

Page 6

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

Firm Transportation and Storage Capacity

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 nine 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 in dths and the contract expiration dates are as follows:
Pipeline
Maximum daily
 
deliverability (dths) (1)
Expiration
Texas Eastern Transmission, L.P.
270,948

 
Various dates between 2015 and 2023
Tennessee Gas Pipeline Co.
25,166

 
Various dates between 2014 and 2015
Columbia Gulf Transmission Corp.
20,000

 
Various dates between 2015 and 2024
Algonquin Gas Transmission
12,000

 
2015
Transcontinental Gas Pipe Line Corp.
3,931

 
2014
Total
332,045

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

The pipeline companies that provide firm contract transportation service for NJNG and supply the above pipelines are Iroquois, Dominion Transmission Corporation and Columbia Gulf Transmission Company.

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:
Pipeline
Maximum daily
 
deliverability (dths)
Expiration
Texas Eastern Transmission, L.P.
94,557

 
2015
Transcontinental Gas Pipe Line Corp.
8,384

 
2015
Total
102,941

 
 

NJNG also has upstream storage contracts, maximum daily deliverability and contract expiration dates as follows:
Company
Maximum daily
 
deliverability (dths)
Expiration
Dominion Transmission Corporation
128,714

 
Various dates between 2016 and 2017
Steckman Ridge, L.P.
38,000

 
2020
Central New York Oil & Gas
25,337

 
2015
Total
192,051

 
 

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, 2014. NJRES will manage the storage and provide delivery to NJNG at NJNG's request as needed. NJNG and NJRES also have an agreement where NJNG released 159,790 dths/day of its Texas Eastern Transmission capacity to NJRES for the period from November 1, 2010 to October 31, 2014. NJNG can call upon a supply of up to 159,790 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.

Page 7

New Jersey Resources Corporation
Part I
 
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 20 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 upon five days notice to the BPU.

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.

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, it is expected that NJNG would 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.

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New Jersey Resources Corporation
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ITEM 1. BUSINESS (Continued)                                                                                                                                                     

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, 2013, NJNG had 54,253 residential and 10,399 commercial and industrial customers utilizing the transportation service.

Clean Energy Ventures

NJRCEV is an unregulated company that invests in, owns and operates clean energy projects located primarily in New Jersey and owns a minority equity interest in an onshore wind project developer.

NJRCEV invests in, owns and operates residential and commercial solar installations in New Jersey. As of September 30, 2013, NJRCEV has placed solar assets with a capacity of 56 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 the opportunity to have a solar system installed on 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. 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 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.

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 second 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 attributes associated with one MWh of solar energy generated. NJRCEV sells the SRECs, at market-based rates, 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 has the option to acquire small to mid-size wind farms that fit its investment profile through its 18.7 percent ownership interest in OwnEnergy, a developer of onshore wind projects. On October 11, 2013, NJRCEV acquired the development rights of the Two Dot wind project in Montana, which is its first onshore wind project. NJRCEV expects to invest approximately $22 million to construct the 9.7 MW wind project. The energy produced at Two Dot, as well as the renewable attributes, will be sold through a 25-year power purchase agreement with an electric utility. Additionally, NJRCEV expects the wind farm will qualify for federal PTCs, which will be utilized by NJR.

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.

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 can 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.


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New Jersey Resources Corporation
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ITEM 1. BUSINESS (Continued)                                                                                                                                                     

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

Providing natural gas portfolio management services to nonaffiliated utilities, electric generation facilities and natural gas producers;

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.

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 2013 and 2012, NJRES managed and sold 630.7 and 558.2 Bcf of natural gas, respectively. In addition, as of September 30, 2013 and 2012, NJRES had 62.3 Bcf or $209.5 million of gas in storage and 45.5 Bcf or $119.8 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.


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

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 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.

Midstream

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

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 approximately 17.7 Bcf of operating capacity in Bedford County, Pennsylvania. The facility has direct access to Texas Eastern and Dominion and has access to the Northeast markets; and

NJNR Pipeline, which consists of its 5.53 percent equity investment in Iroquois Gas Transmission System, which is a 412-mile FERC-regulated interstate natural gas pipeline system that runs from the New York-Canadian border to Long Island, New York.

OTHER BUSINESS OPERATIONS

Retail and Other

Retail and Other operations consist primarily of the following unregulated affiliates:

NJRHS, which provides heating, ventilation and cooling service, sales and installation of appliances to approximately 121,000 service contract customers, as well as installation of solar equipment;

CR&R, which holds and develops commercial real estate. As of September 30, 2013, CR&R's real estate portfolio consisted of 25.4 acres of undeveloped land in Monmouth County with a net book value of $5.4 million, which was sold in October 2013, 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;

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

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.

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 $159.8 million to $261 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 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 best estimate 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, 2013, NJNG recorded an MGP remediation liability and a corresponding Regulatory asset of $183.6 million on the Consolidated Balance Sheets, which represents its best estimate of possible liability; however, actual costs may differ from these estimates. NJNG is currently recovering approximately $20 million annually and will continue to seek recovery of these costs through its remediation rider.

EMPLOYEE RELATIONS

As of September 30, 2013, the Company and its subsidiaries employed 936 employees compared with 927 employees as of September 30, 2012. Of the total number of employees, NJNG had 405 and 411 and NJRHS had 111 and 106 Union or "Represented" employees as of September 30, 2013 and 2012, 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 2016 and April 2017, respectively. The labor agreements cover wage increases and other benefits, including the defined benefit pension and postemployment benefit plan, which was closed to all employees hired on or after January 1, 2012, and an 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.

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:

Annual reports on Form 10-K;
Quarterly reports on Form 10-Q; and
Current reports on Form 8-K.

In addition, on our website at http://njr360.client.shareholder.com/governance.cfm, the following documents are also available free of charge:

Corporate Governance Guidelines;
Principal Executive Officer and Senior Financial Officers Code of Ethics;
Wholesale Trading Code of Conduct;
NJR Code of Conduct; and
Charters of the following Board of Directors Committees: Audit, Leadership Development and Compensation and Nominating/Corporate Governance.

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

In Part III of this Form 10-K, we incorporate certain information by reference from our Proxy Statement for our 2014 annual meeting of shareholders. We expect to file that Proxy Statement with the SEC on or about December 12, 2013, 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, NJ 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 orders of presentation. Unless indicated otherwise or the content requires otherwise, references below to “we,” “us,” and “our” should be read to refer to New Jersey Resources Corporation 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 the recent shutdown of the U.S. federal government;

financial difficulties of unrelated energy companies;

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

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

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.

NJNG's debt is currently rated by the rating agencies Moody's and S&P 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.

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

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 ourstock 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 or being delayed in qualifying for ITCs due to delays or failures to complete planned solar energy projects 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.

NJNG's operations are subject to certain operating risks incidental to handling, storing, transporting and providing customers 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.

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

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

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.

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 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.

Changes in customer growth may affect earnings and cash flows.

NJNG's ability to increase its utility firm gross margin is dependent upon the new construction housing market, as well as the conversion of customers to natural gas from other fuel sources. During periods of extended economic downturns, prolonged weakness in housing markets or slowdowns in the conversion market, there could be an adverse impact on NJNG's utility firm gross margin, earnings and cash flows. Furthermore, 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 customers, the cash flows and earnings at NJRES, and ultimately NJR, could be adversely impacted.

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

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

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 non-regulated midstream investments, including Steckman Ridge and Iroquois, and 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.

Our investments in clean energy 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 relatively new and have been developed through advancement in technologies whose commercial application is limited, and which are unrelated to our core businesses. These projects 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 and in the case of our investment in OwnEnergy, onshore wind projects, the renewal of the PTC and several states' renewable portfolio standards. 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.

In addition, because these projects depend on technology outside of our expertise, 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 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, uninsured incremental O&M costs associated with Superstorm Sandy, CIP, NJCEP, economic stimulus plans, certain deferred income tax and pension and other postemployment 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.


Page 17

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

Termination of NJNG’s CIP may lead to a decrease in earnings and cash flows.

Customer conservation efforts have been increasing and as a result NJNG has seen a decrease in volumes of natural gas delivered to its customers. NJNG’s CIP has a usage component that is intended to mitigate the impact to earnings as a result of reductions in customer usage. 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. The discovery phase remains in process and since no BPU Order on that petition has been issued as of September 30, 2013, the CIP program will continue for up to one additional year or until such an Order is issued, whichever is earlier. If the CIP is not renewed or replaced with a similar mechanism to decouple the link between customer usage and NJNG’s utility gross margin, our financial position, results of operations and cash flows, could be adversely affected.

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

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.

Page 18

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

A work stoppage could adversely affect our natural gas distribution operations and results.

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 2016. Disputes with the Union over terms and conditions of the agreement could result in instability in our labor relationship and work stoppages that could impact the timely delivery of gas and other services from our utility, which could strain relationships with customers and state regulators and cause a loss of revenues that could adversely affect our results of operations. Our collective bargaining agreement may also increase the cost of employing our natural gas distribution segment workforce, affect our ability to continue offering market-based salaries and employee benefits, limit our flexibility in dealing with our workforce, and limit our ability to change work rules and practices and implement other efficiency-related improvements to successfully compete in today's challenging marketplace.

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 would 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 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 may be unable to obtain governmental approvals, property rights and/or financing for the construction, development and operation of our non-regulated energy investments.

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 and 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 non-regulated 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 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.


Page 19

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

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

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.

Changes in accounting standards may adversely impact our financial condition and results of operations.

The SEC is currently considering whether publicly registered companies in the U.S. should be required to prepare financial statements in accordance with IFRS instead of the current GAAP in the United States. IFRS is a comprehensive set of accounting standards promulgated by the International Accounting Standards Board, which are currently in effect for most other countries in the world. Unlike U.S. GAAP, IFRS does not currently provide an industry accounting standard for rate-regulated activities. As such, if IFRS were adopted in its current state, we could be precluded from applying certain regulatory accounting principles, including the recognition of certain regulatory assets and regulatory liabilities. The potential issues associated with rate-regulated accounting, along with other potential changes associated with the adoption of IFRS, may adversely impact our financial condition and results of operations, should adoption of IFRS be required. Also, the U.S. FASB is considering various changes to U.S. GAAP, some of which may be significant, as part of a joint effort with the International Accounting Standards Board to converge accounting standards over the next several years. If approved, adoption of these changes could adversely impact our financial condition and results of operations.

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


ITEM 2. PROPERTIES                                                                                                                                                                  

NJNG (All properties are located in New Jersey)

NJNG owns approximately 6,990 miles of distribution main, 7,000 miles of service main, 226 miles of transmission main and approximately 518,000 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.


Page 20

New Jersey Resources Corporation
Part I

ITEM 2. PROPERTIES (Continued)                                                                                                                                            

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 an Indenture of Mortgage and Deed of Trust to BNY Midwest Trust Company, Chicago, Illinois, dated April 1, 1952, as amended by thirty-four supplemental indentures, as security for NJNG's mortgage bonds, which totaled $319.8 million at September 30, 2013. In addition, under the terms of the Indenture, NJNG could have issued up to $650.7 million of additional first mortgage bonds as of September 30, 2013.

All Other Business Operations

As of September 30, 2013, CR&R's real estate portfolio consisted of 25.4 acres of undeveloped land in Monmouth County with a net book value of $5.4 million, 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. On October 22, 2013, CR&R sold the 25.4 acres of undeveloped land located in Monmouth County for $6 million, and recognized a pre-tax gain of $313,000 after closing costs.

As of September 30, 2013, NJRES leased office space in Wall Township, New Jersey, as well as Houston, Texas and Charlotte, North Carolina for its business activities.

As of September 30, 2013, the Steckman Ridge partnership owned and/or leased mineral rights on approximately 8,300 acres of land in Bedford County, Pennsylvania, where it has developed a 17.7 Bcf natural gas storage facility with up to 12 Bcf of working gas capacity. As of September 30, 2013, NJR had invested $126.8 million in Steckman Ridge, excluding capitalized interest and other direct costs of $6.3 million and received cash distributions from Steckman Ridge of $42 million. Equipment on the property includes a compressor station, gathering pipelines and pipeline interconnections.

NJRHS leases service centers in Dover, Morris County and Wall, Monmouth County, New Jersey.

NJRCEV has various contracts, including lease agreements, that allow access rights for the installation and maintenance of solar equipment on property, including commercial and residential rooftops.

Capital Expenditure Program

See Item 7. Management Discussion and Analysis for a discussion of anticipated fiscal 2014 and 2015 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, subject to BPU approval, recover its remediation expenditures, including carrying costs, over rolling seven-year periods pursuant to a RA. In March 2013, the BPU approved a February 2012 filing that requested approval of NJNG's MGP expenditures incurred through June 30, 2011, maintaining the existing overall SBC rate and RA recovery at approximately $20 million. In July 2013, NJNG filed an SBC petition with the BPU requesting approval of its MGP expenditures for the period through June 2013, as well as a reduction in the RA factor to $18.7 million annually. The petition was provisionally approved by

Page 21

New Jersey Resources Corporation
Part I

ITEM 3. LEGAL PROCEEDINGS (Continued)                                                                                                                          

the BPU on November 22, 2013. As of September 30, 2013, $47 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 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 $159.8 million to $261 million. NJNG's estimate of these liabilities is based upon known facts, existing technology and enacted laws and regulations in place when the review was completed. However, NJNG expects actual costs to differ from these estimates. Where it is probable that costs will be incurred, and the information is sufficient to establish a range of possible liability, NJNG accrues the best estimated amount in the range. If no point within the range is more likely than the other, it is NJNG's policy to accrue the lower end of the range. Accordingly, as of September 30, 2013, NJNG recorded an MGP remediation liability and a corresponding regulatory asset of $183.6 million on the Consolidated Balance Sheets, based on our best estimate 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 below.
Name
Age
Officer
since
Office held during last five years
Laurence M. Downes
56
1986
Chairman of the Board (September 1996 - present);
President and Chief Executive Officer (July 1995 - present)
Kathleen T. Ellis
60
2004
Executive Vice President and Chief Operating Officer, NJNG (February 2008 - present);
Senior Vice President, Corporate Affairs (December 2004 - present)
Glenn C. Lockwood
52
1990
Executive Vice President (January 2011 - present);
Chief Financial Officer (September 1995 - present);
Senior Vice President (January 1996 - December 2010)
Mariellen Dugan
47
2005
Senior Vice President and General Counsel (February 2008 - present)
Stephen Westhoven
45
2004
Senior Vice President, NJRES (May 2010 - present);
Vice President of Energy Trading, NJRES (January 2004 - May 2010)
Stanley M. Kosierowski
61
2008
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
60
1996
Vice President, Corporate Services, NJR Service (June 2005 - present)


Page 22

New Jersey Resources Corporation
Part II


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

NJR's Common Stock is traded on the New York Stock Exchange under the ticker symbol NJR. As of September 30, 2013, NJR had 38,850 holders of record of its common stock.

NJR's common stock high and low sales prices and dividends paid per share were as follows:
 
2013
2012
Dividends Paid
 
High
Low
High
Low
2013
2012
Fiscal Quarter
 
 
 
 
 
 
First
$46.28
$38.51
$50.48
$40.10
$0.40
$0.36
Second
$45.63
$39.06
$50.28
$43.86
$0.40
$0.38
Third
$47.60
$40.97
$45.50
$41.11
$0.40
$0.38
Fourth
$46.00
$40.60
$47.53
$43.40
$0.40
$0.38

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, 2013:
Period
Total Number of Shares
(or Units) Purchased
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
07/01/13 - 07/31/13
68,642
$
42.49

68,642

 
1,649,727
08/01/13 - 08/31/13
$


 
1,649,727
09/01/13 - 09/30/13
$


 
1,649,727
Total
68,642
$
42.49

68,642

 
1,649,727


Page 23

New Jersey Resources Corporation
Part II

ITEM 6. SELECTED FINANCIAL DATA                                                                                                                                   

CONSOLIDATED FINANCIAL STATISTICS
(Thousands, except per share data)
 
 
 
 
 
Fiscal Years Ended September 30,
2013
2012
2011
2010
2009
SELECTED FINANCIAL DATA
 
 
 
 
 
Operating revenues
$
3,198,068

$
2,248,923

$
3,009,209

$
2,639,304

$
2,592,460

Operating expenses
 
 
 
 
 
Gas purchases
2,712,223

1,841,408

2,550,571

2,167,558

2,245,169

Operation and maintenance
173,473

171,045

163,111

148,565

149,151

Regulatory rider expenses
48,417

40,350

51,246

45,966

44,992

Depreciation and amortization
47,310

41,643

34,370

32,267

30,328

Energy and other taxes
57,414

45,787

66,910

56,823

74,750

Total operating expenses
3,038,837

2,140,233

2,866,208

2,451,179

2,544,390

Operating income
159,231

108,690

143,001

188,125

48,070

Other income
4,783

2,128

3,747

5,258

4,409

Interest expense, net of capitalized interest
23,979

20,844

19,623

21,251

21,014

Income before income taxes
140,035

89,974

127,125

172,132

31,465

Income tax provision
35,575

7,729

37,665

64,692

11,376

Equity in earnings of affiliates
10,349

10,634

11,839

10,017

7,153

Net income
$
114,809

$
92,879

$
101,299

$
117,457

$
27,242

Total assets
$
3,004,783

$
2,770,005

$
2,649,444

$
2,563,133

$
2,321,030

 
 
 
 
 
 
CAPITALIZATION
 
 
 
 
 
Common stock equity
$
887,384

$
813,865

$
776,257

$
725,483

$
689,726

Long-term debt
512,886

525,169

426,797

428,925

455,492

Total capitalization
$
1,400,270

$
1,339,034

$
1,203,054

$
1,154,408

$
1,145,218

 
 
 
 
 
 
COMMON STOCK DATA
 
 
 
 
 
Earnings per share-Basic
$2.76
$2.24
$2.45
$2.84
$0.65
Earnings per share-Diluted
$2.75
$2.23
$2.44
$2.82
$0.64
Dividends declared per share
$1.62
$1.54
$1.44
$1.36
$1.24
 
 
 
 
 
 
NON-GAAP RECONCILIATION
 
 
 
 
 
Net income
$
114,809

$
92,879

$
101,299

$
117,457

$
27,242

Add:
 
 
 
 
 
Unrealized loss (gain) on derivative instruments and related transactions, net of taxes
(5,956
)
22,631

23,320

(16,825
)
39,254

Effects of economic hedging related to natural gas inventory, net of taxes
4,828

(3,093
)
(18,086
)
1,132

34,474

Net financial earnings (1)
$
113,681

$
112,417

$
106,533

$
101,764

$
100,970

 
 
 
 
 
 
Net financial earnings per share-Basic
$2.73
$2.71
$2.58
$2.46
$2.40
Net financial earnings per share-Diluted
$2.72
$2.70
$2.56
$2.44
$2.38
(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

New Jersey Resources Corporation
Part II

ITEM 6. SELECTED FINANCIAL DATA (Continued)                                                                                                              

NJNG OPERATING STATISTICS
Fiscal Years Ended September 30,
2013
2012
2011
2010
2009
Operating revenues ($ in thousands)
 
 
 
 
 
Residential
$
467,269

$
363,780

$
579,038

$
471,056

$
686,798

Commercial, industrial and other
102,350

88,484

116,043

112,582

144,565

Firm transportation
73,745

60,599

57,126

45,616

40,356

Total residential and commercial
643,364

512,863

752,207

629,254

871,719

Interruptible
6,452

6,510

7,029

8,454

5,711

Total system
649,816

519,373

759,236

637,708

877,430

BGSS incentive programs
138,171

108,340

212,488

307,772

204,571

Total operating revenues
$
787,987

$
627,713

$
971,724

$
945,480

$
1,082,001

Throughput (Bcf)
 
 
 
 
 
Residential
38.3

32.9

42.3

40.3

43.6

Commercial, industrial and other
7.5

6.5

8.3

8.2

9.8

Firm transportation
15.2

11.2

12.2

10.1

9.4

Total residential and commercial
61.0

50.6

62.8

58.6

62.8

Interruptible
10.9

10.3

8.3

7.7

4.1

Total system
71.9

60.9

71.1

66.3

66.9

BGSS incentive programs
141.5

99.6

107

83.9

66.1

Total throughput
213.4

160.5

178.1

150.2

133

Customers at year-end
 
 
 
 
 
Residential
408,399

423,871

428,694

438,274

437,793

Commercial, industrial and other
24,302

24,985

25,666

26,312

27,771

Firm transportation
64,652

51,214

40,523

25,724

20,965

Total residential and commercial
497,353

500,070

494,883

490,310

486,529

Interruptible
40

41

41

43

45

BGSS incentive programs
38

32

40

40

36

Total customers at year-end
497,431

500,143

494,964

490,393

486,610

Interest coverage ratio (1)
10.82

10.85

10.73

9.43

8.19

Average therm use per customer
 
 
 
 
 
Residential
937

775

986

919

995

Commercial, industrial and other
3,773

3,675

4,350

4,986

4,777

Degree days (2)
4,664

3,698

4,686

4,341

4,791

Weather as a percent of normal (3)
99.9
%
77.9
%
99.3
%
91.4
%
100.9
%
Number of employees
611

611

590

582

613

(1)
NJNG's income from operations divided by interest expense.
(2)
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.
(3)
Normal heating degree-days are based on a twenty-year average, calculated based upon three reference areas representative of NJNG's service territory.



Page 25

New Jersey Resources Corporation
Part II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                                                                                                                                                                                   

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 beginning on page 13 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, 2013, fair value of its derivative assets and liabilities reported on the Consolidated Balance Sheets that is based on such pricing is immaterial.

Page 26

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


Should there be a significant change in the underlying market prices or pricing assumptions, 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 2013, 2012 and 2011. 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.

We have not designated any derivatives as fair value hedges as of September 30, 2013 and 2012.

Income Taxes and Credits

We use the 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. As of September 30, 2013, NJR had net deferred tax liabilities of $362.7 million and a valuation allowance of $262,000 related to certain deferred state tax assets. As of September 30, 2012, NJR had net deferred tax liabilities of $321.3 million, with no valuation allowance recorded.

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, 2013, we have not recorded any liabilities related to uncertain tax positions.

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.

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, 2013, NJNG estimated theses expenditures will range from approximately $159.8 million to $261 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 the loss can be reasonably estimated. NJNG will determine a range of liabilities and will record the best estimated 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 $183.6 million on the Consolidated Balance Sheets, which is based on the best estimate.

Page 27

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


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, 2013 and 2012, $47 million and $59.7 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
Increase/
(Decrease)
Estimated
Increase/(Decrease)
on PBO
(Thousands)
Estimated
Increase/(Decrease)
to Expense
(Thousands)
Discount rate
1.00

%
 
$
(24,994
)
 
 
$
(2,947
)
 
Discount rate
(1.00
)
%
 
$
31,162

 
 
$
3,603

 
Rate of return on plan assets
1.00

%
 
n/a
 
 
$
(1,744
)
 
Rate of return on plan assets
(1.00
)
%
 
n/a
 
 
$
1,744

 


Page 28

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


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

%
 
$
(15,513
)
 
 
$
(1,959
)
 
Discount rate
(1.00
)
%
 
$
19,528

 
 
$
2,436

 
Rate of return on plan assets
1.00

%
 
n/a
 
 
$
(413
)
 
Rate of return on plan assets
(1.00
)
%
 
n/a
 
 
$
417

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

%
 
$
18,008

 
 
$
3,613

 
Health care cost trend rate
(1.00
)
%
 
$
(14,629
)
 
 
$
(2,843
)
 

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 two of its subsidiaries, NJNG and NJRES. In addition, NJR invests in clean energy 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.

Superstorm Sandy

In October 2012, high winds, heavy rainfall and the related flooding associated with Superstorm Sandy caused significant damage to portions of NJNG's distribution system. As a result, NJNG curtailed the natural gas infrastructure in certain areas of its service territory that were most heavily damaged, affecting approximately 30,100 of NJNG's customers. Total capital expenditures associated with the restoration of the affected portions of distribution main were $26.1 million during fiscal 2013. In addition, NJNG expects to spend approximately $5.3 million and $5.2 million during fiscal 2014 and 2015, respectively. NJNG filed a petition with the BPU in November 2012 requesting deferral accounting for uninsured incremental O&M costs associated with Superstorm Sandy restoration efforts, which was approved in May 2013. NJNG requested that the review of and the appropriate recovery period for such deferred expenses be addressed in NJNG's next base rate case to be filed no later than November 15, 2015. As of September 30, 2013, NJNG had $14.8 million of deferred costs in regulatory assets on the Consolidated Balance Sheets related to the restoration of its infrastructure. In addition, as a result of the disruption of service to these customers, NJNG lost approximately $9 million and $3.4 million in operating revenue and utility gross margin, respectively, during fiscal 2013.

Certain of NJRCEV's solar assets also sustained damage as a result of Superstorm Sandy, including a minor portion of a 1.5 MW rooftop commercial solar array. NJRCEV disposed of a portion of the asset that was deemed irreparable and recognized a pre-tax loss of $766,000, which was offset by a gain of $997,000 that was recovered through its property insurance, both of which are included in other income on the Consolidated Statements of Operations.


Page 29

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


Business Segments

NJR has four primary business segments as presented in the chart below:


In addition to the business segments above, 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 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 for the fiscal years ended September 30, is as follows:
(Thousands)
2013
2012
2011
Operating revenues
$
3,198,068

$
2,248,923

$3,009,209
Gas purchases
$
2,712,223

$
1,841,408

$2,550,571

The primary drivers of the changes noted above, which are described in more detail in the individual segment discussions, are as follows:

Operating revenues and gas purchases increased during fiscal 2013, compared with fiscal 2012, due primarily to:

higher average commodity prices at NJRES, which correlate to a 27.2 percent increase in average NYMEX prices and

increases at NJNG due primarily to bill credits issued to NJNG customers during fiscal 2012, which did not recur during fiscal 2013, along with higher sales due primarily to weather being colder and increased off-system sales, partially offset by decreases in firm sales to customers impacted by Superstorm Sandy.

Operating revenues and gas purchases decreased during fiscal 2012, compared with fiscal 2011, due primarily to:

decreases in off-system sales, decreases in firm sales due to lower therm usage and bill credits issued to NJNG customers during fiscal 2012, that did not occur during fiscal 2011 and

lower average commodity prices at NJRES, which correlate to 31 percent lower price levels on the NYMEX.

Page 30

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


Net income and assets by business segment and operations at September 30, are as follows:
($ in thousands)
2013
2012
2011
 
Net Income
Assets
Net Income
Assets
Net Income
Assets
Natural Gas Distribution
$
73,846

$
2,094,940

73,238

$
2,005,520

$
71,322

$
1,942,691

Clean Energy Ventures
10,060

253,663

19,452

223,247

6,761

80,234

Energy Services
20,725

468,096

(8,605
)
347,406

13,479

400,882

Midstream
7,199

153,536

6,749

157,779

6,780

159,940

Retail and Other
3,292

85,293

2,366

73,298

3,087

87,066

Intercompany assets (1)
(313
)
(50,745
)
(321
)
(37,245
)
(130
)
(21,369
)
Total
$
114,809

$
3,004,783

92,879

$
2,770,005

$
101,299

$
2,649,444

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

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 solar projects at NJRCEV.

The decrease in net income during fiscal 2012, compared with fiscal 2011, was primarily driven by:

decreases at NJRES due primarily to changes in the fair value of financial instruments, partially offset by

increases in ITCs associated with solar projects at NJRCEV and

improved earnings at NJNG due primarily to customer growth and additional revenue related to infrastructure projects.

The increase in assets during fiscal 2013 and 2012, included additional utility plant expenditures at our Natural Gas Distribution segment and solar expenditures at Clean Energy Ventures. In addition, higher commodity prices contributed to the increase in gas in storage and accounts receivables at Energy Services during fiscal 2013, while a decrease in commodity prices factored into lower inventory and receivable balances during fiscal 2012.

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)
2013
2012
2011
Net income
$
114,809

$
92,879

$
101,299

Add:
 
 
 
Unrealized (gain) loss on derivative instruments and related transactions, net of taxes
(5,956
)
22,631

23,320

Effects of economic hedging related to natural gas inventory, net of taxes
4,828

(3,093
)
(18,086
)
NFE
$
113,681

$
112,417

$
106,533

 
 
 
 
Basic earnings per share
$
2.76

$
2.24

$
2.45

Basic NFE per share
$
2.73

$
2.71

$
2.58



Page 31

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


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)
2013
 
2012
 
2011
Natural Gas Distribution
$
73,846

65
%
 
$
73,238

65
%
 
$
71,322

67
%
Clean Energy Ventures
10,060

9

 
19,452

17

 
6,761

6

Energy Services
19,311

17

 
10,791

10

 
18,583

18

Midstream
7,199

6

 
6,749

6

 
6,780

6

Retail and Other
3,292

3

 
2,366

2

 
3,087

3

Eliminations (1)
(27
)

 
(179
)

 


Total
$
113,681

100
%
 
$
112,417

100
%
 
$
106,533

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

Natural Gas Distribution Segment

Overview

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, comprises our natural gas distribution segment. 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 497,400 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 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 new customer growth rate, which is expected to be approximately 1.5 percent annually over the next two years;

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 the continuation of CIP;

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

-    administering and promoting of NJNG's approved SAVEGREEN project;

Page 32

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


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

Working to manage expectations related to its financial obligations 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

In fiscal 2009, NJNG implemented its BPU-approved AIP to enhance the reliability of NJNG's gas distribution system and to support economic development and job growth in New Jersey. Since inception of the program, the BPU has approved total infrastructure investments of $131 million, exclusive of AFUDC. The AIP projects were completed in October 2012. NJNG deferred the costs associated with the AIP projects, including a weighted cost of capital, and upon regulatory approval recovers these investments through its base tariff rates. In August 2012 NJNG received approval from the BPU to recover approximately $8.9 million annually. Effective June 2013, a base rate change was approved by the BPU that permits NJNG to recover an additional $6.5 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 a stipulation allowing NJNG to implement the SAFE program whereby NJNG will replace portions of its gas distribution unprotected steel and cast iron infrastructure over a four year period. NJNG will seek to recover $130 million, exclusive of AFUDC accruals, including 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

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. As of September 30, 2013, NJNG has begun development on three NGV stations for a total investment of approximately $7.5 million. NJNG intends to begin construction of the stations by December 2013, and include a cost recovery filing to the BPU in its next base rate case to be filed no later than November 15, 2015. 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 projects totaling $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 seeks to recover the capital costs associated with NJ RISE through an annual adjustment to its base rate.

Other projects

NJNG is exploring other system enhancements that are designed to support improved reliability in the southern portion of its service territory, referred to as the Southern Reliability Link, as well as to reduce costs associated with the filling of LNG tanks, referred to as Liquefaction.


Page 33

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


Below is a summary of NJNG's capital expenditures, including estimates for expected investments over the next two fiscal years:
(Millions)
2012
2013
2014
2015
Customer growth
$
22.6

$
24.5

$
24.7

$
25.6

System maintenance and other
50.8

42.5

63.3

55.9

AIP/SAFE
46.7

45.3

31.6

33.7

Superstorm Sandy

26.1

5.3

5.2

NGV Advantage

1.0

6.5


NJ RISE


4.6

13.0

Liquefaction/LNG


16.0

16.3

Southern Reliability


2.3

12.3

Total
$
120.1

$
139.4

$
154.3

$
162.0


Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory constraints, environmental regulations, unforeseen events and the ability to access capital.

Customer growth

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

During fiscal 2013, NJNG added 7,456 new customers, which represents a customer growth rate of approximately 1.5 percent. During that same time period, NJNG converted 619 existing customers to natural gas heat and other services. This customer growth represents an estimated increase of approximately $3.7 million annually to utility gross margin assuming normal weather and usage. In addition, NJNG currently expects to add approximately 14,000 to 16,000 new customers during the two-year period of fiscal 2014 and 2015. 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 growth would increase utility gross margin under NJNG's base rates by approximately $3.9 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

NJNG implemented SAVEGREEN, a BPU-approved program, in fiscal 2009. SAVEGREEN facilitates 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. The program has been extended and expanded since its inception and currently includes incentives in the form of rebates, grants and loans. Depending on the specific incentive or approval, NJNG recovers costs associated with the programs over a two to ten-year period through a 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.

In June 2013, the BPU approved NJNG's 2012 request to extend and expand the current SAVEGREEN program through June 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. In addition, the BPU approved an overall rider rate increase of approximately 1.7 percent that provides a recovery of approximately $12 million annually related to NJNG's SAVEGREEN costs and investments on a prospective basis, inclusive of the expanded program features approved by the BPU in June 2013. As of September 30, 2013, the BPU has approved total SAVEGREEN investments of approximately $149.5 million, of which, $60.5 million in grants, rebates and loans has been provided to customers.


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


Conservation Incentive Program

The CIP eliminates the disincentive to promote conservation and energy efficiency and facilitates normalizing NJNG's utility gross margin for variances not only due to weather but also for other factors affecting usage. 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. 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. The discovery phase remains in process and since no BPU Order on that petition has been issued as of September 30, 2013, the CIP program will continue for up to one additional year or until such an Order is issued, whichever is earlier.

NJNG's total utility firm gross margin includes the following adjustments related to the CIP mechanism:
(Thousands)
2013
2012
2011
Weather (1)
$
4,463

$
30,243

$
571

Usage
11,284

14,745

7,733

Total
$
15,747

$
44,988

$
8,304

(1)
Compared with the CIP 20-year average, weather was .1 percent, 22.1 percent and .7 percent warmer-than-normal during fiscal 2013, 2012 and 2011, respectively.

As of September 30, 2013, NJNG has $18.9 million in regulatory assets on the Consolidated Balance Sheets related to CIP to be recovered in future periods from customers.

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, gas costs recovered from customers, NJNG's 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 indicated by NYMEX settlement prices, which serve as a market indicator, as shown in the graph below:
As of September 30, 2013, forward natural gas prices for the next 12 months on the NYMEX, which serve as a forward-looking market indicator, averaged $3.80 per MMBtu, 5.6 percent higher than the average settlement price of $3.60 per MMBtu during fiscal 2013.


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


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 rates or can issue credits or refunds, as appropriate, for its residential and small commercial customers when the commodity cost is trending lower than the existing BGSS rate. BGSS 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. In addition, NJNG reduced its BGSS rate resulting in a 3.6 percent decrease during fiscal 2012 and 5.2 percent decrease during fiscal 2013 to the average residential heating customer bill.

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 heating customer 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. NJNG is also permitted to propose a process to re-evaluate and discuss alternative incentive programs annually, should performance of the existing incentives or market conditions warrant.

Utility gross margin from BGSS incentive programs was $8.8 million, $9.4 million and $9.3 million during the fiscal years ended September 30, 2013, 2012 and 2011, respectively. A more detailed discussion of the impacts to margin can be found in the Natural Gas Distribution Operating Results section that follows.

Hedging

In order to provide 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 financial derivatives, including those that are used in the BGSS incentive programs described below.

Environmental remediation

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. 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 $183.6 million as of September 30, 2013, an increase of $1.6 million, compared with the prior fiscal year.

NJNG is currently authorized to recover remediation costs of approximately $20 million annually, based on expenditures incurred through June 2011. 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.

Interest Rate Risk

Due to the capital-intensive nature of NJNG's operations and the seasonal nature of its working capital requirements,

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


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.

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


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 (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, a TEFA 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, TEFA 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.

NJNG's operating results for the fiscal years ended September 30, are as follows:
(Thousands)
2013
2012
2011
Utility gross margin
 
 

Operating revenues
$
787,987

$
627,713

$
971,724

Less:
 
 
 
Gas purchases (1)
414,594

274,370

592,909

Energy and other taxes (2)
48,037

37,241

58,520

Regulatory rider expense (3)
48,417

40,350

51,246

Total utility gross margin
276,939

275,752

269,049

Operation and maintenance expense
113,174

111,998

108,800

Depreciation and amortization
37,999

35,247

33,140

Other taxes not reflected in utility gross margin
4,373

3,899

3,944

Operating income
121,393

124,608

123,165

Other income
2,847

1,655

3,354

Interest expense, net of capitalized interest
14,995

14,890

14,875

Income tax provision
35,399

38,135

40,322

Net income
$
73,846

$
73,238

$
71,322

(1)
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.
(2)
Consists primarily of sales taxes and TEFA, both of which are passed through to customers and offset by corresponding revenues. TEFA will be phased out by January 2014.
(3)
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.


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


Operating revenues increased 25.5 percent during fiscal 2013 and decreased 35.4 percent during fiscal 2012. Gas purchases increased 51.1 percent during fiscal 2013 and decreased 53.7 percent during fiscal 2012. A description of the factors contributing to the increases (decreases) in operating revenues and gas purchases during fiscal 2013 and 2012, are as follows:
 
2013 v. 2012
 
2012 v. 2011
(Millions)
Operating
revenue
Gas
purchases
 
Operating
revenue
Gas
purchases
Firm sales
$
91.9

$
44.3

 
$
(140.0
)
$
(85.6
)
CIP adjustments
(29.2
)

 
36.7


Fiscal 2012 BGSS bill credits
85.9

80.2

 
(85.9
)
(80.2
)
Off-system sales
28.8

29.9

 
(107.2
)
(104.8
)
Average BGSS rates (1)
(10.9
)
(10.2
)
 
(51.5
)
(48.1
)
Superstorm Sandy
(9.0
)
(4.4
)
 


Other
2.8

0.7

 
4.4

2.1

Total increase (decrease)
$
160.3

$
140.5

 
$
(343.5
)
$
(316.6
)
(1)
Operating revenue includes changes in sales tax of $700,000 and $3.4 million during fiscal 2013 and 2012, respectively.

Fiscal 2013 compared with fiscal 2012

An increase in usage related primarily to weather being 26.1 percent colder during fiscal 2013 than fiscal 2012 contributed to increases in operating revenues and gas purchases associated with firm sales, partially offset by a 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.

Fiscal 2012 compared with fiscal 2011

Weather was 21.1 percent warmer during fiscal 2012 than fiscal 2011 and was the primary driver of the decrease in firm sales, partially offset by an increase in CIP adjustments of $29.7 million related to weather and $7 million