REGULATION

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

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

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

NJNG is subject to cost-based regulation, therefore, it is permitted to recover authorized operating expenses and earn a reasonable return on its utility investment based on the BPU's approval. 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.

As recovery of regulatory assets is subject to BPU approval, if there are any changes in regulatory positions that indicate recovery is not probable, the related cost would be charged to income in the period of such determination.

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



(Thousands)	2015		2014
Regulatory assets-current
New Jersey Clean Energy Program	$	14,293	$	14,285
Underrecovered gas costs	—		12,577
Derivatives at fair value, net	9,965		—
Total current regulatory assets	$	24,258	$	26,862
Regulatory assets-noncurrent
Environmental remediation costs
Expended, net of recoveries	$	18,886	$	30,916
Liability for future expenditures	180,400		177,000
Deferred income taxes	17,460		9,968
Derivatives at fair value, net	5,153		—
SAVEGREEN	26,882		29,180
Postemployment and other benefit costs	140,636		108,507
Deferred Superstorm Sandy costs	15,201		15,207
Other noncurrent regulatory assets	5,537		6,797
Total noncurrent regulatory assets	$	410,155	$	377,575
Regulatory liability-current
Conservation Incentive Program	$	5,167	$	5,752
Overrecovered gas costs	6,987		—
Derivatives at fair value, net	—		320
Total current regulatory liabilities	$	12,154	$	6,072
Regulatory liabilities-noncurrent
Cost of removal obligation	$	54,880	$	61,163
Derivatives at fair value, net	—		57
New Jersey Clean Energy Program	11,956		—
Other noncurrent regulatory liabilities	697		106
Total noncurrent regulatory liabilities	$	67,533	$	61,326

NJNG's recovery of costs is facilitated through its base tariff rates, BGSS and other regulatory tariff riders. NJNG is required to make an annual filing to the BPU by June 1 of each year for review of its BGSS, CIP and various other programs and related rates. Annual rate changes are requested to be effective at the beginning of the following fiscal year. In addition, NJNG is also permitted to request approval of certain rate or program changes on an interim basis. All rate and program changes are subject to proper notification and BPU review and approval. On November 13, 2015, NJNG filed a base rate case petition with the BPU.

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. Underrecovered gas costs represent a regulatory asset that generally occurs during periods when NJNG's BGSS rates are lower than actual costs and requests amounts to be recovered from customers in the future. Conversely, 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.

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 2016. NJNG recovers the costs associated with its portion of the NJCEP obligation, through its SBC rider. The recovery rates are set by the BPU and updated only by a filing made by the Company. In addition, the Company's future recoveries for this program will be reduced in the next SBC rate filing through the amortization of the regulatory liability.

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.

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.

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 tariff rates. See Note 10. Employee Benefit Plans.

Deferred Superstorm Sandy Costs

In October 2012, portions of NJNG's distribution system incurred significant damage as a result of Superstorm Sandy. NJNG filed a petition with the BPU in November 2012 requesting 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. These costs are included for recovery in NJNG's base rate case petition filed with the BPU on November 13, 2015.

Other Regulatory Assets

Other regulatory assets consists primarily of deferred costs associated with certain components of NJNG's SBC, as discussed further below, and NJNG's compliance with federal and state mandated PIM provisions. NJNG's related costs to maintain the operational integrity of its distribution and transmission main are recoverable, subject to BPU review and approval. NJNG is limited to recording a regulatory asset associated with PIM that does not exceed $700,000 per year. In addition, to the extent that project costs are lower than the approved PIM annual expense of $1.4 million, NJNG will record a regulatory liability that will be refundable as a credit to customers' gas costs when the net cumulative liability exceeds $1 million. As of September 30, 2015, NJNG has recorded $3.7 million of PIM in other regulatory assets. NJNG has included the PIM deferred expenses for recovery in the base rate case petition filed with the BPU on November 13, 2015.

Cost of Removal Obligation

NJNG accrues and collects for cost of removal in base tariff rates on its utility property, without interest. A regulatory liability represents the current collections in excess of actual expenditures, which the Company will return to customers over approximately 48 years, through a reduction in the depreciation expense component of NJNG's base tariff rates, as approved by the BPU in NJNG's October 2008 base rate case.

The following is a description of regulatory proceedings during fiscal 2014 and 2015:

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. On June 1, 2015, NJNG filed a petition proposing to continue its existing BGSS rate and notified the BPU that NJNG will provide 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. On October 27, 2015, NJNG notified the BPU that the estimated annual bill credits will be approximately $76 million and will result in an approximate 17 percent decrease to the average residential heat customer's bill. Commodity prices were relatively stable during fiscal 2014, therefore, no refunds or bill credits were issued to BGSS customers.

Concurrent with the annual BGSS filing, NJNG files for an annual review of its CIP. On May 21, 2014, the BPU approved the continuation of the CIP program with no expiration date; however, it will be subject to review in a future rate filing in 2017. In addition, the CIP baseline usage per customer will be reviewed and adjusted in the November 13, 2015, base rate case filing before the BPU. NJNG's annual BGSS and CIP filings are summarized as follows:

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June 2013 BGSS/CIP filing — NJNG proposed to maintain its BGSS rate. In addition, NJNG proposed a 1 percent reduction to an average residential heat customer's bill related to the CIP factor. The CIP rate reduction was provisionally approved by the BPU on October 16, 2013, effective November 1, 2013. On November 21, 2013, NJNG notified the BPU of its intent to reduce its BGSS rate, effective December 1, 2013, resulting in a 6 percent decrease to the average residential heat customer's bill. On July 23, 2014, the BPU approved these rates on a final basis.

•

June 2014 BGSS/CIP filing — NJNG proposed to maintain its BGSS rate. In addition, NJNG proposed a 4.3 percent reduction to an average residential heat customer's bill related to the CIP factor for fiscal 2015. On September 30, 2014, the BPU provisionally approved these rates effective October 1, 2014. Additionally, on October 1, 2014, NJNG implemented a decrease to its BGSS price resulting in a 5 percent decrease to the average residential heat customer's bill. On April 15, 2015, the BPU approved the BGSS and CIP rates on a final basis.


•	June 2015 BGSS/CIP filing — NJNG proposed 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 1, 2015. The BPU provisionally approved this rate on September 11, 2015.

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 implemented BPU-approved infrastructure projects that are designed to enhance the reliability of NJNG's gas distribution system, including AIP and SAFE. The AIP projects, which totaled approximately $148.7 million, were constructed and gas was introduced to the system from 2009 through October 2012. In May 2013, a base rate change was approved by the BPU that permits NJNG to recover a total of approximately $15.3 million annually. Depending on the infrastructure project, recoveries include a weighted average cost of capital of 7.76 percent or 7.12 percent with a return on equity of 10.3 percent.

In October 2012, the BPU approved NJNG's petition to implement the SAFE program, investing up to $130 million, exclusive of AFUDC, over a four-year period to replace portions of NJNG's gas distribution unprotected steel and cast iron infrastructure in order to improve the safety and reliability of the gas distribution system. The infrastructure costs incurred in the approved SAFE Program includes the deferral of infrastructure costs subject to review in NJNG's base rate case petition filed with the BPU on November 13, 2015.

In June 2012, the BPU approved a pilot program for NJNG to invest up to $10 million to build NGV refueling stations. On April 23, 2014, the BPU approved NJNG's request to include a cost recovery filing to the BPU within the Company's base rate case petition, which was filed with the BPU on November 13, 2015. As of September 30, 2015, NJNG has opened two NGV stations to the public and development of an additional NGV station continues in Middletown Township.

On September 3, 2013, NJNG filed a petition seeking approval of NJ RISE, which consists of six capital investment projects estimated to cost $102.5 million over a five-year period, excluding AFUDC, for gas distribution storm hardening and mitigation projects, along with incremental depreciation expense. 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 rates. In July 2014, the BPU approved a Stipulation of Settlement related to the recovery of the proposed NJ RISE capital infrastructure program. On May 29, 2015, NJNG filed a petition with the BPU requesting approval to recover costs through July 31, 2015. On October 15, 2015, the BPU approved a base rate increase resulting in a .07 percent increase to the average residential heat customer's bill, effective November 1, 2015. Investments through July 31, 2015 will earn a weighted average cost of capital of 6.74 percent, including a return on equity of 9.75 percent. Additional estimated capital expenditures through December 31, 2016, has been included for recovery in NJNG's base rate case petition, which was filed with the BPU on November 13, 2015.

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. On March 27, 2015, NJNG filed a letter 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, 2015, the BPU has approved total SAVEGREEN investments of approximately $219.3 million, of which, $117.5 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:


•	On December 17, 2014, NJNG filed a petition with the BPU to extend SAVEGREEN through June 30, 2018, with minor modifications. On July 22, 2015, the BPU approved the petition allowing the extension of SAVEGREEN through July 31, 2017, with an additional $75.2 million in investments and a weighted average cost of capital of 6.69 percent.


•	On March 18, 2015, the BPU approved the June 2014 compliance filing associated with SAVEGREEN to maintain the existing rate.


•	On July 31, 2015, NJNG submitted its 2015 SAVEGREEN rate recovery filing to maintain its existing SAVEGREEN recovery rate.

Societal Benefits Clause

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

•

July 2013 SBC filing — NJNG requested approval of its MGP expenditures incurred through June 2013, as well as a .2 percent reduction to the average residential heat customer's bill related to the SBC RA factor to recover $18.7 million annually, and a 1.9 percent increase related to its NJCEP factor. The rates were approved by the BPU on a provisional basis, effective December 1, 2013, and on a final basis in July 2014.


•	June 2014 USF filing — NJNG filed to increase the statewide USF rate, resulting in a .4 percent increase to the average residential heat customer's bill effective October 1, 2014. The rate was approved by the BPU in September 2014.


•	In June 2014, the BPU approved NJNG's funding obligations for NJCEP for the period from July 2014 to June 2015, of approximately $15.6 million. Accordingly, NJNG recorded the obligation and corresponding regulatory asset on the Consolidated Balance Sheets.

•

September 2014 SBC filing — On May 19, 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 1, 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 in the NJCEP factor to $16.3 million annually.


•	On June 19, 2015, NJNG submitted its annual USF compliance filing proposing to decrease the statewide USF rate, resulting in a .6 percent decrease to the average residential heat customer’s total bill effective October 1, 2015. The rate was approved by the BPU on September 11, 2015.

Other Regulatory Initiatives

In November 2012, NJNG filed a petition with the BPU requesting deferred accounting for uninsured incremental O&M costs associated with Superstorm Sandy, which was subsequently approved in May 2013. In March 2013, the BPU issued an Order establishing a generic proceeding to review the prudency of costs incurred by New Jersey utility companies in response to major storm events in 2011 and 2012. In July 2013, NJNG filed its detailed report including unreimbursed, uninsured incremental storm restoration costs and capital expenditures. As of September 30, 2015, NJNG has deferred $15.2 million of these costs as a regulatory asset. On October 22, 2014, the BPU approved, as prudent and reasonable, the deferred O&M storm costs, which are included for recovery in NJNG's base rate case petition, which was filed with the BPU on November 13, 2015.

In December 2012, NJNG filed a petition with the BPU requesting approval of a municipal consent in the Borough of Sayreville, New Jersey to provide natural gas distribution service to Red Oak Power, LLC, an electric generating facility. The municipal consent was approved by the BPU in September 2013. In December 2013, the BPU approved a gas transportation service agreement between TAQA Gen-X, LLC and NJNG that allows NJNG to deliver natural gas for consumption by Red Oak Power, LLC, through September 2022. Construction to connect to the plant commenced during the fourth quarter of fiscal 2014, and service began in the first quarter of fiscal 2015. The project cost approximately $1.4 million, which will be reimbursed by TAQA Gen-X, LLC through monthly demand charges that will be billed beginning the first quarter of fiscal 2016.

On April 23, 2014, the BPU approved a petition filed by NJNG requesting authorization over a three-year period to issue up to $300 million of medium-term notes with a maturity of not more than 30 years, renew its revolving credit facility expiring August 2014 for up to five years, enter into interest rate risk management transactions related to debt securities and redeem, refinance or defease any of NJNG's outstanding long-term debt securities.

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 April 2, 2015, NJNG filed two petitions with the BPU to construct, operate and finalize the route for its SRL project. On June 5, 2015, NJNG filed two petitions with the BPU to amend the previously proposed route. The capital investment costs associated with SRL have been included for recovery in the base rate case petition filed with the BPU on November 13, 2015.