REGULATION

The EDECA is the legal framework for New Jersey’s public utility and wholesale energy landscape. NJNG is required, pursuant to a written order by the BPU under EDECA, to open its residential markets to competition from third-party natural gas suppliers. Customers can choose the supplier of their natural gas commodity in NJNG’s service territory.

As required by EDECA, NJNG’s rates are segregated into two primary components, the commodity portion, which represents the wholesale cost of natural gas, including the cost for interstate pipeline capacity to transport the gas to NJNG’s service territory, and the delivery portion, which represents the transportation of the commodity portion through NJNG’s gas distribution system to the end-use customer. NJNG does not earn utility gross margin on the commodity portion of its natural gas sales. NJNG earns utility gross margin through the delivery of natural gas to its customers, regardless of whether it or a third-party supplier provides the wholesale natural gas commodity.

Under EDECA, the BPU is required to audit the state’s energy utilities every two years. The primary purpose of the audit is to ensure that utilities and their affiliates offering unregulated retail services do not have an unfair competitive advantage over nonaffiliated providers of similar retail services. A combined competitive services and management audit of NJNG commenced in August 2013. A draft management audit report was accepted by the BPU on July 23, 2014, for public comment. To date, NJNG has been implementing all audit recommendations with the approval of BPU Staff and is waiting for final BPU approval.

NJNG is subject to cost-based regulation, therefore, it is permitted to recover authorized operating expenses and earn a reasonable return on its utility capital investments based on the BPU’s approval. The impact of the ratemaking process and decisions authorized by the BPU allows NJNG to capitalize or defer certain costs that are expected to be recovered from its customers as regulatory assets and to recognize certain obligations representing amounts that are probable future expenditures as regulatory liabilities in accordance with accounting guidance applicable to regulated operations.

NJNG’s recovery of costs is facilitated through its base rates, BGSS and other regulatory tariff riders. NJNG is required to make an annual filing to the BPU by June 1 of each year for review of its BGSS, CIP and various other programs and related rates. Annual rate changes are requested to be effective at the beginning of the following fiscal year. In addition, NJNG is also permitted to request approval of certain rate or program changes on an interim basis. All rate and program changes are subject to proper notification and BPU review and approval.

Base Rate Case

On November 13, 2015, NJNG filed a base rate case petition with the BPU, requesting an increase in base rates in the amount of $147.6 million, which was revised on July 20, 2016, to $112.9 million. On September 23, 2016, the BPU’s decision and order approved the following, effective October 1, 2016:


•	an increase in base rates in the amount of $45 million. The base rate increase includes a return on common equity of 9.75 percent, a common equity ratio of 52.5 percent and an increase in the overall depreciation rate from 2.34 percent to 2.4 percent;

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the rate mechanism for recovery of SAFE I capital investments and a five-year extension of SAFE II, effective October 1, 2016. The estimated cost for SAFE II, excluding AFUDC, is approximately $200 million and related costs to be recovered on an accelerated basis are approximately $157.5 million. As a condition of the extension approval, NJNG is required to file a base rate case no later than November 2019;


•	rate recovery of NJ RISE capital investment costs through June 30, 2016, and the filing for recovery of future NJ RISE capital investment costs to be recovered, will occur in conjunction with SAFE II, commencing with the rate recovery filing to be submitted in March 2017;


•	recovery of NJNG’s NGV and LNG plant investments; and


•	recovery of other costs previously deferred in regulatory assets over seven years, as described further below.

Regulatory assets and liabilities included on the Consolidated Balance Sheets as of September 30, are comprised of the following:



(Thousands)	2016		2015
Regulatory assets-current
Conservation Incentive Program	$	36,957	$	—
New Jersey Clean Energy Program	14,232		14,293
Derivatives at fair value, net	3,097		9,965
Total current regulatory assets	$	54,286	$	24,258
Regulatory assets-noncurrent
Environmental remediation costs:
Expended, net of recoveries	$	19,595	$	18,886
Liability for future expenditures	172,000		180,400
Deferred income taxes	20,273		17,460
Derivatives at fair value, net	23,384		5,153
SAVEGREEN	25,208		26,882
Postemployment and other benefit costs	157,027		140,636
Deferred Superstorm Sandy costs	15,201		15,201
Other noncurrent regulatory assets	8,606		5,537
Total noncurrent regulatory assets	$	441,294	$	410,155
Regulatory liability-current
Conservation Incentive Program	$	—	$	5,167
Overrecovered gas costs	9,469		6,987
Total current regulatory liabilities	$	9,469	$	12,154
Regulatory liabilities-noncurrent
Cost of removal obligation	$	30,549	$	54,880
New Jersey Clean Energy Program	10,657		11,956
Other noncurrent regulatory liabilities	205		697
Total noncurrent regulatory liabilities	$	41,411	$	67,533

Recovery of regulatory assets is subject to BPU approval, and therefore, if there are any changes in regulatory positions that indicate recovery is not probable, the related cost would be charged to income in the period of such determination. The BPU’s decision and order approving NJNG’s new base rates resulted in no changes to the recovery of NJNG’s regulatory assets.

Conservation Incentive Program

The CIP permits NJNG to recover utility gross margin variations related to customer usage resulting from customer conservation efforts and mitigates the impact of weather on its gross margin. Such utility gross margin variations are recovered in the year following the end of the CIP usage year, without interest, and are subject to additional conditions, including an earnings test, a revenue test and an evaluation of BGSS related savings.

New Jersey Clean Energy Program

The NJCEP is a statewide program that encourages energy efficiency and renewable energy. Funding amounts are determined by the BPU’s Office of Clean Energy and all New Jersey utilities are required to share in the annual funding obligation. The current NJCEP program is for the State of New Jersey’s fiscal year ending June 2017. NJNG recovers the costs associated with its portion of the NJCEP obligation, through its NJCEP rider.

Derivatives

Derivatives are utilized by NJNG to manage the price risk associated with its natural gas purchasing activities and to participate in certain BGSS incentive programs. The gains and losses associated with NJNG’s derivatives are recoverable through its BGSS, as noted above, without interest. See Note 4. Derivatives.

Environmental Remediation Costs

NJNG is responsible for the cleanup of certain former gas manufacturing facilities. Actual expenditures are recovered from customers, with interest, over seven year rolling periods, through a RA rate rider. Recovery for NJNG’s estimated future liability will be requested and/or recovered when actual expenditures are incurred. See Note 13. Commitments and Contingencies.

Deferred Income Taxes

In 1993, NJNG adopted the provisions of ASC 740, Income Taxes, which changed the method used to determine deferred tax assets and liabilities. Upon adoption, NJNG recognized a transition adjustment and corresponding regulatory asset representing the difference between NJNG’s existing deferred tax amounts compared with the deferred tax amounts calculated in accordance with the change in method prescribed by ASC 740. NJNG recovers the regulatory asset associated with these tax impacts through future base rates, without interest.

SAVEGREEN

NJNG administers certain programs that supplement the state’s NJCEP and that allow NJNG to promote clean energy to its residential and commercial customers, as described further below. NJNG will recover related expenditures and a weighted average cost of capital through a tariff rider, as approved by the BPU, over a two to 10-year period depending upon the specific program incentive.

Postemployment and Other Benefit Costs

Postemployment and Other Benefit Costs represents NJNG’s underfunded postemployment benefit obligations that the Company began recognizing in fiscal 2006, as a result of changes in the accounting provisions of ASC 715, Compensation and Benefits, as well as a $2.9 million fiscal 2010 tax charge resulting from a change in the deductibility of federal subsidies associated with Medicare Part D, both of which are deferred as regulatory assets and are recoverable, without interest, in base rates. In the September 23, 2016 base rate case decision and order, the BPU approved the recovery of the tax charge over a seven-year amortization period. See Note 10. Employee Benefit Plans.

Deferred Superstorm Sandy Costs

In October 2012, portions of NJNG’s distribution system incurred significant damage as a result of Superstorm Sandy. NJNG filed a petition with the BPU in November 2012 requesting deferred accounting for uninsured incremental O&M costs associated with its restoration efforts, which was approved in May 2013. On October 22, 2014, the BPU approved, as prudent and reasonable, the deferred O&M storm costs. The deferred Superstorm Sandy costs were approved for recovery through NJNG’s new base rates effective October 1, 2016, over a seven-year amortization period.

Other Regulatory Assets

Other regulatory assets consists primarily of deferred costs associated with certain components of NJNG’s SBC, as discussed further below, and NJNG’s compliance with federal and state mandated PIM provisions. NJNG’s related costs to maintain the operational integrity of its distribution and transmission main are recoverable, subject to BPU review and approval. Through September 30, 2016, NJNG was limited to recording a regulatory asset associated with PIM that did not exceed $700,000 per year. In addition, to the extent that project costs were lower than the approved PIM annual expense of $1.4 million, NJNG recorded a regulatory liability to be refunded as a credit to customers’ gas costs when the net cumulative liability exceeded $1 million. As of September 30, 2016, NJNG recorded $4.4 million of PIM in other regulatory assets. The deferred PIM costs were approved for recovery through NJNG’s new base rates effective October 1, 2016, over a seven-year amortization period. As of October 1, 2016, NJNG will no longer defer any costs associated with PIM.

Overrecovered Gas Costs

NJNG recovers its cost of gas through the BGSS rate component of its customers’ bills. NJNG’s cost of gas includes the purchased cost of the natural gas commodity, fees paid to pipelines and storage facilities, adjustments as a result of BGSS incentive programs, and hedging transactions. Overrecovered gas costs represent a regulatory liability that generally occurs when NJNG’s BGSS rates are higher than actual costs and requests approval to be returned to customers including interest, when applicable, in accordance with NJNG’s approved BGSS tariff. Conversely, underrecovered gas costs generally occurs during periods when NJNG’s BGSS rates are lower than actual costs, in which case NJNG records a regulatory asset and requests amounts to be recovered from customers in the future.

Cost of Removal Obligation

NJNG accrues and collects for cost of removal in base rates on its utility property, without interest. NJNG’s regulatory liability represents customer collections in excess of actual expenditures, which the Company will return to customers as a reduction to depreciation expense until it is depleted by November 2019 when NJNG will file the next required base rate case.

The following is a description of certain regulatory proceedings during fiscal 2015 and 2016:

BGSS and CIP

BGSS rates are normally revised on an annual basis. In addition, to manage the fluctuations in wholesale natural gas costs, NJNG has the ability to make two interim filings during each fiscal year to increase residential and small commercial customer BGSS rates on a self-implementing and provisional basis. NJNG is also permitted to refund or credit back a portion of the commodity costs to customers when the natural gas commodity costs decrease in comparison to amounts projected or to amounts previously collected from customers. Concurrent with the annual BGSS filing, NJNG files for an annual review of its CIP. In May 2014, the BPU approved the continuation of the CIP program with no expiration date; however, it will be subject to review in a future rate filing in 2017. NJNG’s annual BGSS and CIP filings are summarized as follows:


•	June 2014 BGSS/CIP filing — In April 2015, the BPU approved the existing BGSS rate and the reduction in CIP rates, effective October 2014, which resulted in a 4.3 percent decrease to an average residential heat customer’s bill. Additionally, in October 2014, NJNG implemented a decrease to its BGSS price, which resulted in a 5 percent decrease to the average residential heat customer’s bill.

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June 2015 BGSS/CIP filing — On February 24, 2016, the BPU approved NJNG’s proposal to continue its existing BGSS rate and to increase its CIP rates resulting in a .08 percent increase to the average residential heat customer’s bill effective October 2015. NJNG also provided bill credits to residential and small commercial customers from November 2015 through February 2016, as a result of the decline in the wholesale price of natural gas, which totaled $61.6 million.

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June 2016 BGSS/CIP filing — NJNG filed a petition with the BPU to increase its CIP rates resulting in an 8.2 percent increase to the average residential heat customer’s bill and to decrease its BGSS rate for residential and small commercial customers resulting in a 5.5 percent decrease to the average residential heat customer’s bill, effective October 1, 2016, which was approved by the BPU on a provisional basis on September 23, 2016. This petition also included proposed bill credits to residential and small commercial customers during the months of November 2016 through February 2017, as a result of a decline in the wholesale price of natural gas. On September 16, 2016, NJNG notified the BPU that the estimated bill credits will be approximately $48 million and will result in a 10.6 percent decrease to the average residential heat customer’s bill.

BGSS Incentive Programs

NJNG is eligible to receive financial incentives for reducing BGSS costs through a series of utility gross margin-sharing programs that include off-system sales, capacity release, storage incentive programs and the FRM program (through October 31, 2015). The Company is permitted to annually propose a process to evaluate and discuss alternative incentive programs, should performance of the existing incentives or market conditions warrant re-evaluation. In March 2015, NJNG filed a petition with the BPU to continue its existing BGSS Incentive Programs. On October 15, 2015, the BPU issued an order approving the continuation of the BGSS Incentive Programs with modification to the storage incentive program, beginning with the 2015 storage injection period, and termination of the FRM Program, effective November 1, 2015.

SAVEGREEN

SAVEGREEN conducts home energy audits and provides various grants, incentives and financing alternatives, which are designed to encourage the installation of high efficiency heating and cooling equipment and other energy efficiency upgrades to promote energy efficiency incentives to its residential and commercial customers while stimulating state and local economies through the creation of jobs. Depending on the specific initiative or approval, NJNG recovers costs associated with the programs over a two to 10-year period through a tariff rider mechanism. As of September 30, 2016, the BPU has approved total SAVEGREEN investments of approximately $219.3 million, of which, $136.6 million in grants, rebates and loans has been provided to customers, with a total annual recovery of approximately $20 million. The recovery includes a weighted average cost of capital that ranges from 6.69 percent, with a return on equity of 9.75 percent, to 7.76 percent, with a return on equity of 10.3 percent. SAVEGREEN investments and costs are filed with the BPU on an annual basis and include the following:


•	2014 SAVEGREEN filings — In March 2015, the BPU approved the June 2014 filing to maintain the existing rate. In July 2015, the BPU approved NJNG’s petition allowing the extension of SAVEGREEN through July 31, 2017, with an additional $75.2 million in investments.


•	2015 SAVEGREEN filing — On January 27, 2016, the BPU approved the July 2015 filing to maintain its existing rate.


•	2016 SAVEGREEN filings — On May 26, 2016, NJNG submitted its filing to maintain its existing recovery rate, which was approved by the BPU on October 31, 2016. On April 15, 2016, NJNG filed a petition with the BPU to extend its current program, which was set to expire on July 31, 2017, to December 31, 2018, which was approved by the BPU on June 29, 2016.

Societal Benefits Clause

The SBC is comprised of three primary riders that allow NJNG to recover costs associated with USF, which is a permanent statewide program for all natural gas and electric utilities for the benefit of income-eligible customers, MGP remediation, and the NJCEP. NJNG has submitted the following filings to the BPU, which includes a report of program expenditures incurred each program year:


•	2014 SBC filing — In May 2015, the BPU approved a decrease to NJNG’s SBC rate, resulting in a 3.3 percent decrease to the average residential heat customer’s bill, effective June 2015, and approved the recovery of NJNG’s MGP expenditures incurred through June 2014. The rate includes a reduction in the SBC RA factor to $8.5 million annually and the NJCEP factor to $16.3 million annually.

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2015 SBC filings — In September 2015, the BPU approved the June 2015 annual USF compliance filing decreasing the statewide USF rate, resulting in a .6 percent decrease to the average residential heat customer’s total bill, effective October 2015. On December 24, 2015, NJNG filed an SBC petition with the BPU to increase the RA factor, to decrease the NJCEP factor and to request approval of its remediation expenses incurred through June 30, 2015, resulting in an overall decrease of .8 percent to the average residential heat customer’s bill. On June 29, 2016, the BPU approved the Company’s request to modify its rates as proposed, effective July 9, 2016, with recovery of $9.4 million annually related to the SBC RA factor.


•	2016 SBC filing — On June 23, 2016, NJNG submitted its annual USF compliance filing proposing to increase the statewide USF rate, resulting in a .2 percent increase to the average residential heat customer’s bill, effective October 1, 2016, which was approved by the BPU on September 23, 2016.

Infrastructure Programs

NJNG has significant annual capital expenditures associated with the management of its natural gas distribution and transmission system, including new utility plant for customer growth and its associated PIM and infrastructure programs. NJNG continues to implement BPU-approved infrastructure projects that are designed to enhance the reliability of NJNG’s gas distribution system, including SAFE and NJ RISE.

SAFE

In October 2012, the BPU approved NJNG’s petition to implement SAFE I, investing up to $130 million, exclusive of AFUDC, over a four-year period to replace portions of NJNG’s gas distribution unprotected steel, cast iron infrastructure and associated services in order to improve the safety and reliability of the gas distribution system. The rate mechanism for recovery of SAFE I capital investments and a five-year extension of SAFE II were approved through NJNG’s base rate case, effective October 1, 2016. The estimated cost for SAFE II is approximately $200 million, excluding AFUDC and related costs to be recovered are approximately $157.5 million. As a condition of approval of the extension, NJNG is required to file a base rate case no later than November 2019.

NJ RISE

In July 2014, the BPU approved NJ RISE, which consists of six capital investment projects estimated to cost $102.5 million over a five-year period, excluding AFUDC, for gas distribution storm hardening and mitigation projects, along with incremental depreciation expense. On October 15, 2015, the BPU approved a base rate increase to recover capital costs through July 2015, resulting in a .07 percent increase to the average residential heat customer’s bill, effective November 1, 2015, and earned a weighted average cost of capital of 6.74 percent, including a return on equity of 9.75 percent. NJ RISE investments through June 30, 2016 were approved for recovery through NJNG’s new base rates effective October 1, 2016. Requests for recovery of future NJ RISE capital costs will occur in conjunction with SAFE II, commencing with the rate recovery filing to be submitted in March 2017 with a weighted cost of capital of 6.9 percent, including a return on equity of 9.75 percent.

NGV refueling stations

In June 2012, the BPU approved a pilot program for NJNG to invest up to $10 million to build NGV refueling stations. As of September 30, 2016, NJNG has opened all three of its NGV stations to the public and NJNG’s capital investments were approved for recovery through NJNG’s new base rates, effective October 1, 2016.

SRL

The SRL is an approximate 30-mile, 30-inch transmission main designed to support improved system integrity and reliability in the southern portion of NJNG’s service territory, estimated to cost between $175 million and $180 million. On January 27, 2016, the BPU issued an order approving NJNG’s proposed SRL pipeline installation, operation and route selection, as modified by NJNG, including specific requirements regarding permitting, safety and integrity assessment. On March 18, 2016, the BPU issued an order designating the SRL route and exempting the SRL from municipal land use ordinances, regulations, permits and license requirements. These two BPU orders have been appealed by third parties. We believe that they will be upheld on appeal.

The capital investment associated with the SRL was initially included for recovery in NJNG’s base rate case petition, filed with the BPU on November 13, 2015. On May 4, 2016, NJNG supplemented its base rate case testimony supporting its November 2015 petition, which amended the accounting treatment and noted that the project would not be completed by December 31, 2016. As construction has not yet commenced, rate treatment for SRL was not included in its new base rates. NJNG expects to request rate treatment in a future rate proceeding.

Other Regulatory Initiatives

On May 20, 2016, NJNG included a proposal in its base rate case to recover certain capital costs and incremental operation and maintenance costs related to a March 2016 BPU Order regarding new cyber security requirements. On June 2016, NJNG’s liquefaction project became operational, allowing NJNG to convert natural gas into LNG and to fill NJNG’s existing LNG storage tanks. Costs for this project along with other plant upgrades were approximately $36.5 million. Costs associated with both initiatives were approved for recovery through NJNG’s new base rates, effective October 1, 2016.