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DERIVATIVE INSTRUMENTS | 12 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS | 5. DERIVATIVE INSTRUMENTS The Company is subject to commodity price risk due to fluctuations in the market price of natural gas, SRECs and electricity. To manage this risk, the Company enters into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial options and swaps to economically hedge the commodity price risk associated with its existing and anticipated commitments to purchase and sell natural gas, SRECs and electricity. In addition, the Company may utilize foreign currency derivatives to hedge Canadian dollar denominated gas purchases and/or sales. Therefore, the Company’s primary underlying risks include commodity prices, interest rates and foreign currency. These contracts, with a few exceptions as described below, are accounted for as derivatives. Accordingly, all of the financial and certain of the Company’s physical derivative instruments are recorded at fair value on the Consolidated Balance Sheets. For a more detailed discussion of the Company’s fair value measurement policies and level disclosures associated with the Company’s derivative instruments, see Note 6. Fair Value. Energy Services Energy Services chooses not to designate its financial commodity and physical forward commodity derivatives as accounting hedges or to elect NPNS, and therefore changes in the fair value of these derivatives are recorded as a component of gas purchases or operating revenues, as appropriate for Energy Services, on the Consolidated Statements of Operations as unrealized gains or (losses). For Energy Services at settlement, realized gains and (losses) on all financial derivative instruments are recognized as a component of gas purchases and realized gains and (losses) on all physical derivatives follow the presentation of the related unrealized gains and (losses) as a component of either gas purchases or operating revenues. Energy Services also enters into natural gas transactions in Canada and, consequently, is exposed to fluctuations in the value of Canadian currency relative to the U.S. dollar. Energy Services may utilize foreign currency derivatives to lock in the exchange rate associated with natural gas transactions denominated in Canadian currency. The derivatives may include currency forwards, futures, or swaps and are accounted for as derivatives. These derivatives are typically used to hedge demand fee payments on pipeline capacity, storage and gas purchase agreements. For transactions occurring on or before December 31, 2015, Energy Services designates its foreign exchange contracts as cash flow hedges, and the effective portion of the hedges are recorded in OCI. Effective January 1, 2016, on a prospective basis, the Company has elected not to designate its foreign currency derivatives as accounting hedges. Accordingly, changes in the fair value of foreign exchange contracts entered into from January 1, 2016, are recognized in gas purchases on the Consolidated Statements of Operations. As a result of Energy Services entering into transactions to borrow natural gas, commonly referred to as “park and loans,” an embedded derivative is recognized relating to differences between the fair value of the amount borrowed and the fair value of the amount that will ultimately be repaid, based on changes in the forward price for natural gas prices at the borrowed location over the contract term. This embedded derivative is accounted for as a forward sale in the month in which the repayment of the borrowed gas is expected to occur, and is considered a derivative transaction that is recorded at fair value on the Consolidated Balance Sheets, with changes in value recognized in current period earnings. Expected production of SRECs is hedged through the use of forward and futures contracts. All contracts require the Company to physically deliver SRECs through the transfer of certificates as per contractual settlement schedules. For transactions occurring on or before December 31, 2015, the Company elected NPNS accounting treatment on SREC forward and futures contracts. Effective January 1, 2016, on a prospective basis, Energy Services no longer elects NPNS accounting treatment on SREC contracts entered into from January 1, 2016, and recognizes changes in the fair value of these derivatives as a component of operating revenues. Upon settlement of the contract, the related revenue is recognized when the SREC is transferred to the counterparty. NPNS is a contract-by-contract election and, where it makes sense to do so, we can and may elect certain contracts to be normal. Natural Gas Distribution Changes in fair value of NJNG’s financial commodity derivatives are recorded as a component of regulatory assets or liabilities on the Consolidated Balance Sheets. The Company elects NPNS accounting treatment on all physical commodity contracts that NJNG entered into on or before December 31, 2015, and accounts for these contracts on an accrual basis. Accordingly, physical natural gas purchases are recognized in regulatory assets or liabilities on the Consolidated Balance Sheets when the contract settles and the natural gas is delivered. The average cost of natural gas is amortized in current period earnings based on the current BPU BGSS factor and therm sales. Effective January 1, 2016, on a prospective basis, NJNG no longer elects NPNS accounting treatment on all of its physical commodity contracts entered into from January 1, 2016. However, since NPNS is a contract-by-contract election, where it makes sense to do so, we can and may elect certain contracts to be normal. Because NJNG recovers these amounts through future BGSS rates as increases or decreases to the cost of natural gas in NJNG’s tariff for gas service, the changes in fair value of these contracts are deferred as a component of regulatory assets or liabilities on the Consolidated Balance Sheets. In an April 2014 BPU Order, NJNG received regulatory approval to enter into interest rate risk management transactions related to long-term debt securities. On June 1, 2015, NJNG entered into a treasury lock transaction to fix a benchmark treasury rate of 3.26 percent associated with a forecasted $125 million debt issuance expected in May 2018. This forecasted debt issuance coincides with the maturity of NJNG’s existing $125 million, 5.6 percent notes due May 15, 2018. The change in fair value of NJNG’s treasury lock agreement is recorded as a component of regulatory assets or liabilities on the Consolidated Balance Sheets since NJNG believes that the market value upon settlement will be recovered in future rates. Upon settlement, any gain or loss will be amortized into earnings over the life of the future underlying debt issuance. Fair Value of Derivatives The following table reflects the fair value of the Company’s derivative assets and liabilities recognized on the Consolidated Balance Sheets as of September 30:
|  |  | Fair Value
|  |  | 2017 |  | 2016
(Thousands) | Balance Sheet Location | Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
NJNG: |  |  |  |  |  |  |  |  |
Physical commodity contracts | Derivatives - current |  | $ | 151 |  |  | $ | 72 |  |  | $ | 235 |  |  | $ | 1,154 |
Financial commodity contracts | Derivatives - current |  | — |  |  | 1,149 |  |  | 805 |  |  | 2,979 |
| Derivatives - noncurrent |  | — |  |  | — |  |  | 75 |  |  | 386 |
Interest rate contracts | Derivatives - current |  | — |  |  | 8,467 |  |  | — |  |  | — |
Interest rate contracts | Derivatives - noncurrent |  | — |  |  | — |  |  | — |  |  | 23,073 |
Energy Services: |  |  |  |  |  |  |  |  |
Physical commodity contracts | Derivatives - current |  | 14,588 |  |  | 16,589 |  |  | 5,994 |  |  | 11,660 |
| Derivatives - noncurrent |  | 7,127 |  |  | 8,710 |  |  | 3,987 |  |  | 1,212 |
Financial commodity contracts | Derivatives - current |  | 15,302 |  |  | 20,267 |  |  | 22,929 |  |  | 45,255 |
| Derivatives - noncurrent |  | 2,033 |  |  | 2,620 |  |  | 1,165 |  |  | 581 |
Foreign currency contracts | Derivatives - current |  | 40 |  |  | — |  |  | 1 |  |  | 32 |
| Derivatives - noncurrent |  | 4 |  |  | — |  |  | — |  |  | — |
Total fair value of derivatives |  |  | $ | 39,245 |  |  | $ | 57,874 |  |  | $ | 35,191 |  |  | $ | 86,332 |
Offsetting of Derivatives The Company transacts under master netting arrangements or equivalent agreements that allow it to offset derivative assets and liabilities with the same counterparty. However, the Company’s policy is to present its derivative assets and liabilities on a gross basis at the contract level unit of account on the Consolidated Balance Sheets. The following table summarizes the reported gross amounts, the amounts that the Company has the right to offset but elects not to, financial collateral, as well as the net amounts the Company could present on the Consolidated Balance Sheets but elects not to.
(Thousands) | Amounts Presented in Balance Sheets (1) | Offsetting Derivative Instruments (2) | Financial Collateral Received/Pledged (3) | Net Amounts (4)
As of September 30, 2017: |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |
Energy Services |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 21,715 |  |  | $ | (2,173 | ) |  | $ | (200 | ) |  | $ | 19,342 |
Financial commodity contracts |  | 17,335 |  |  | (14,121 | ) |  | — |  |  | 3,214 |
Foreign currency contracts |  | 44 |  |  | — |  |  | — |  |  | 44 |
Total Energy Services |  | $ | 39,094 |  |  | $ | (16,294 | ) |  | $ | (200 | ) |  | $ | 22,600 |
NJNG |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 151 |  |  | $ | (20 | ) |  | $ | — |  |  | $ | 131 |
Financial commodity contracts |  | — |  |  | — |  |  | — |  |  | — |
Interest rate contracts |  | — |  |  | — |  |  | — |  |  | — |
Total NJNG |  | $ | 151 |  |  | $ | (20 | ) |  | $ | — |  |  | $ | 131 |
Derivative liabilities: |  |  |  |  |  |  |  |
Energy Services |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 25,299 |  |  | $ | (2,173 | ) |  | $ | — |  |  | $ | 23,126 |
Financial commodity contracts |  | 22,887 |  |  | (14,121 | ) |  | (8,766 | ) |  | — |
Foreign currency contracts |  | — |  |  | — |  |  | — |  |  | — |
Total Energy Services |  | $ | 48,186 |  |  | $ | (16,294 | ) |  | $ | (8,766 | ) |  | $ | 23,126 |
NJNG |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 72 |  |  | $ | (20 | ) |  | $ | — |  |  | $ | 52 |
Financial commodity contracts |  | 1,149 |  |  | — |  |  | (1,149 | ) |  | — |
Interest rate contracts |  | 8,467 |  |  | — |  |  | — |  |  | 8,467 |
Total NJNG |  | $ | 9,688 |  |  | $ | (20 | ) |  | $ | (1,149 | ) |  | $ | 8,519 |
As of September 30, 2016: |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |
Energy Services |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 9,981 |  |  | $ | (2,837 | ) |  | $ | (755 | ) |  | $ | 6,389 |
Financial commodity contracts |  | 24,094 |  |  | (17,945 | ) |  | (6,149 | ) |  | — |
Foreign currency contracts |  | 1 |  |  | (1 | ) |  | — |  |  | — |
Total Energy Services |  | $ | 34,076 |  |  | $ | (20,783 | ) |  | $ | (6,904 | ) |  | $ | 6,389 |
NJNG |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 235 |  |  | $ | (31 | ) |  | $ | — |  |  | $ | 204 |
Financial commodity contracts |  | 880 |  |  | (880 | ) |  | — |  |  | — |
Interest rate contracts |  | — |  |  | — |  |  | — |  |  | — |
Total NJNG |  | $ | 1,115 |  |  | $ | (911 | ) |  | $ | — |  |  | $ | 204 |
Derivative liabilities: |  |  |  |  |  |  |  |
Energy Services |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 12,872 |  |  | $ | (2,837 | ) |  | $ | 1,200 |  |  | $ | 11,235 |
Financial commodity contracts |  | 45,836 |  |  | (17,945 | ) |  | (27,891 | ) |  | — |
Foreign currency contracts |  | 32 |  |  | (1 | ) |  | — |  |  | 31 |
Total Energy Services |  | $ | 58,740 |  |  | $ | (20,783 | ) |  | $ | (26,691 | ) |  | $ | 11,266 |
NJNG |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 1,154 |  |  | $ | (31 | ) |  | $ | — |  |  | $ | 1,123 |
Financial commodity contracts |  | 3,365 |  |  | (880 | ) |  | (2,485 | ) |  | — |
Interest rate contracts |  | 23,073 |  |  | — |  |  | — |  |  | 23,073 |
Total NJNG |  | $ | 27,592 |  |  | $ | (911 | ) |  | $ | (2,485 | ) |  | $ | 24,196 |
(1) | Derivative assets and liabilities are presented on a gross basis in the balance sheet as the Company does not elect balance sheet offsetting under ASC 210-20.
(2) | Offsetting derivative instruments include transactions with NAESB netting election, transactions held by FCMs with net margining and transactions with ISDA netting.
(3) | Financial collateral includes cash balances at FCMs, as well as cash received from or pledged to other counterparties.
(4) | Net amounts represent presentation of derivative assets and liabilities if the Company were to elect balance sheet offsetting under ASC 210-20.
Energy Services utilizes financial derivatives to economically hedge the gross margin associated with the purchase of physical gas to be used for storage injection and its subsequent sale at a later date. The gains or (losses) on the financial transactions that are economic hedges of the cost of the purchased gas are recognized prior to the gains or (losses) on the physical transaction, which are recognized in earnings when the natural gas is delivered. Therefore, mismatches between the timing of the recognition of realized gains or (losses) on the financial derivative instruments and gains or (losses) associated with the actual sale of the natural gas that is being economically hedged, along with fair value changes in derivative instruments, creates volatility in the results of Energy Services, although the Company’s intended economic results relating to the entire transaction are unaffected. The following table reflects the effect of derivative instruments on the Consolidated Statements of Operations as of September 30:
(Thousands) | Location of gain (loss) recognized in income on derivatives | Amount of gain (loss) recognized in income on derivatives
Derivatives not designated as hedging instruments: | 2017 |  | 2016 |  | 2015
Energy Services: |  |  |  |  |  |
Physical commodity contracts | Operating revenues | $ | 8,912 |  |  | $ | 33,034 |  |  | $ | 32,568 |
Physical commodity contracts | Gas purchases | (27,461 | ) |  | (45,637 | ) |  | (34,438 | )
Financial commodity contracts | Gas purchases | 26,563 |  |  | 45,579 |  |  | 109,082 |
Foreign currency contracts | Gas purchases | 41 |  |  | (34 | ) |  | — |
Total unrealized and realized gains (losses) | $ | 8,055 |  |  | $ | 32,942 |  |  | $ | 107,212 |
Energy Services designated its foreign exchange contracts, entered into prior to January 1, 2016, as cash flow hedges and, as a result, changes in fair value of the effective portion of the hedges are recorded in OCI and, upon settlement of the contracts, realized gains and (losses) are reclassified from AOCI to gas purchases on the Consolidated Statements of Operations. The following table reflects the effect of derivative instruments designated as cash flow hedges on OCI as of September 30:
(Thousands) | Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) | Amount of Gain or (Loss) Reclassified from OCI into Income (Effective Portion) | Amount of Gain or (Loss) Recognized on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in cash flow hedging relationships: | 2017 | 2016 | 2017 | 2016 | 2017 | 2016
Foreign currency contracts | $ | — |  | $ | (27 | ) | $ | — |  | $ | 27 |  | $ | — |  | $ | — |
NJNG’s derivative contracts are part of the Company’s risk management activities that relate to its natural gas purchases, BGSS incentive programs and debt financing. These transactions are entered into pursuant to regulatory approval and, at settlement, the resulting gains and/or losses are payable to or recoverable from utility customers. Any changes in the value of NJNG’s financial derivatives are deferred in regulatory assets or liabilities resulting in no impact to earnings. The following table reflects the (losses) gains associated with NJNG’s derivative instruments as of September 30:
(Thousands) | 2017 |  | 2016 |  | 2015
NJNG: |  |  |  |  |
Physical commodity contracts | $ | (12,303 | ) |  | $ | (15,756 | ) |  | $ | — |
Financial commodity contracts | 5,595 |  |  | (7,984 | ) |  | (33,428 | )
Interest rate contracts | 14,606 |  |  | (18,845 | ) |  | (4,228 | )
Total unrealized and realized (losses) gains | $ | 7,898 |  |  | $ | (42,585 | ) |  | $ | (37,656 | )
NJNG and Energy Services had the following outstanding long (short) derivatives as of September 30:
|  |  | Volume (Bcf)
|  |  | 2017 |  | 2016
NJNG | Futures |  | 18.2 |  |  | 23.6 |
| Physical |  | 32.1 |  |  | 9.2 |
Energy Services | Futures |  | (16.4 | ) |  | (79.1 | )
| Financial Options |  | — |  |  | 1.2 |
| Physical |  | (13.1 | ) |  | 94.6 |
Not included in the previous table are Energy Services’ gross notional amount of foreign currency transactions of approximately $4.5 million, NJNG’s treasury lock agreement, as previously discussed, and 283,000 SRECs at Energy Services that are open as of September 30, 2017. Broker Margin Futures exchanges have contract specific performance bond requirements, also known as margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily marked-to-market relative to maintenance margin requirements. The Company maintains separate broker margin accounts for NJNG and Energy Services. The balances as of September 30, by company, are as follows:
(Thousands) | Balance Sheet Location | 2017 | 2016
NJNG | Broker margin - Current assets | $ | 2,661 |  | $ | 4,822 |
Energy Services | Broker margin - Current assets | $ | 23,166 |  | $ | 42,822 |
Due to CME rulebook changes that took effect in January 2017, variation margin is being treated as a settlement payment, rather than collateral. As a result, the Company is now required to present variation margin net with the related derivative assets and/or liabilities on the Consolidated Balance Sheets for any derivatives the Company clears through the CME. This change is being applied on a prospective basis. In September 30, 2016, prior to the rule change, the Company reported the variation margin as a separate unit of account within restricted broker margin on the Consolidated Balance Sheets. There was no impact to the Company’s derivative gains or losses in the Consolidated Statements of Operations as a result of the CME rule amendment. Wholesale Credit Risk NJNG, Energy Services and Clean Energy Ventures are exposed to credit risk as a result of their sales/wholesale and retail marketing activities. As a result of the inherent volatility in the prices of natural gas commodities, derivatives, SRECs, electricity and RECs, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty fails to perform the obligations under its contract (e.g., fails to deliver or pay for natural gas, SRECs, electricity or RECs), the Company could sustain a loss. The Company monitors and manages the credit risk of its wholesale operations through credit policies and procedures that management believes reduce overall credit risk. These policies include a review and evaluation of current and prospective counterparties’ financial statements and/or credit ratings, daily monitoring of counterparties’ credit limits and exposure, daily communication with traders regarding credit status and the use of credit mitigation measures, such as collateral requirements and netting agreements. Examples of collateral include letters of credit and cash received for either prepayment or margin deposit. Collateral may be requested due to the Company’s election not to extend credit or because exposure exceeds defined thresholds. Most of the Company’s wholesale marketing contracts contain standard netting provisions. These contracts include those governed by ISDA and the NAESB. The netting provisions refer to payment netting, whereby receivables and payables with the same counterparty are offset and the resulting net amount is paid to the party to which it is due. Internally-rated exposure applies to counterparties that are not rated by S&P or Moody’s. In these cases, the counterparty’s or guarantor’s financial statements are reviewed, and similar methodologies and ratios used by S&P and/or Moody’s are applied to arrive at a substitute rating. Gross credit exposure is defined as the unrealized fair value of physical and financial derivative commodity contracts, plus any outstanding wholesale receivable for the value of natural gas delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received. The following is a summary of gross credit exposures grouped by investment and noninvestment grade counterparties, as of September 30, 2017.The amounts presented below have not been reduced by any collateral received or netting and exclude accounts receivable for NJNG retail natural gas sales and services and Clean Energy Ventures residential solar installations.
(Thousands) | Gross Credit Exposure
Investment grade |  | $ | 136,804 |  |
Noninvestment grade |  | 16,889 |  |
Internally-rated investment grade |  | 16,378 |  |
Internally-rated noninvestment grade |  | 68,498 |  |
Total |  | $ | 238,569 |  |
Conversely, certain of NJNG’s and Energy Services’ derivative instruments are linked to agreements containing provisions that would require cash collateral payments from the Company if certain events occur. These provisions vary based upon the terms in individual counterparty agreements and can result in cash payments if NJNG’s credit rating were to fall below its current level. NJNG’s credit rating, with respect to S&P, reflects the overall corporate credit profile of the Company. Specifically, most, but not all, of these additional payments will be triggered if NJNG’s debt is downgraded by the major credit agencies, regardless of investment grade status. In addition, some of these agreements include threshold amounts that would result in additional collateral payments if the values of derivative liabilities were to exceed the maximum values provided for in relevant counterparty agreements. Other provisions include payment features that are not specifically linked to ratings, but are based on certain financial metrics. Collateral amounts associated with any of these conditions are determined based on a sliding scale and are contingent upon the degree to which the Company’s credit rating and/or financial metrics deteriorate, and the extent to which liability amounts exceed applicable threshold limits. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on September 30, 2017 and 2016, is $8.7 million and $23.1 million, respectively, for which the Company had not posted collateral. If all thresholds related to the credit-risk-related contingent features underlying these agreements had been invoked on September 30, 2017 and 2016, the Company would have been required to post an additional $8.6 million and $23.1 million, respectively, to its counterparties. These amounts differ from the respective net derivative liabilities reflected on the Consolidated Balance Sheets because the agreements also include clauses, commonly known as “Rights of Offset,” that would permit the Company to offset its derivative assets against its derivative liabilities for determining additional collateral to be posted, as previously discussed.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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