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DERIVATIVE INSTRUMENTS | 9 Months Ended
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Jun. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS | 5. DERIVATIVE INSTRUMENTS The Company is subject primarily 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 is exposed to foreign currency and interest rate risk and may utilize foreign currency derivatives to hedge Canadian dollar denominated gas purchases and/or sales and interest rate derivatives to reduce exposure to fluctuations in interest rates. All of these types of contracts 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 Unaudited Condensed Consolidated Balance Sheets. For a more detailed discussion of the Company's fair value measurement policies and level disclosures associated with NJR'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. The 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 Unaudited Condensed 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 rates 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. 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 Unaudited Condensed 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. Energy Services 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. 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 Unaudited Condensed 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 Unaudited Condensed Consolidated Balance Sheets when the contract settles and the natural gas is delivered. The average cost of natural gas is charged to expense in the current period earnings based on the BGSS factor times the therm sales. Effective for contracts executed on or after January 1, 2016, NJNG no longer elects NPNS accounting treatment on all physical forward commodity contracts. However, since NPNS is a contract-by-contract election, where it makes sense to do so, NJNG 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 Unaudited Condensed Consolidated Balance Sheets. In February 2020 and March 2020, NJNG entered into treasury lock transactions to fix the benchmark treasury rate associated with a forecasted debt issuance expected during the fiscal year. The change in fair value of NJNG's treasury lock agreement is recorded as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets since NJNG believes that the market value upon settlement will be reflected in future rates. Upon settlement, any gain or loss will be amortized in earnings over the life of the future debt issuance as a component of interest expense on the Consolidated Statements of Operations. Clean Energy Ventures The Company elects NPNS accounting treatment on PPA contracts that Clean Energy Ventures enters into that meet the definition of a derivative and accounts for the contract on an accrual basis. Accordingly, electricity sales are recognized in revenues throughout the term of the PPA as electricity is delivered. NPNS is a contract-by-contract election and where it makes sense to do so, the Company can and may elect certain contracts to be normal. Home Services and Other In January 2018, NJR entered into a variable-for-fixed interest rate swap on its existing $100 million variable rate term loan, which fixed the variable rate at 2.84 percent. The swap terminated on August 16, 2019, which coincided with the maturity of the debt. The change in the fair value of the interest rate swap was recorded as a component of interest expense on the Unaudited Condensed Consolidated Statements of Operations. In February 2020 and March 2020, NJR entered into treasury lock transactions, designated as cash flow hedges, to fix the benchmark treasury rate associated with a forecasted debt issuance expected during the fiscal year. The treasury lock transaction is recorded as a derivative asset or liability at fair value on the Unaudited Condensed Consolidated Balance Sheets. Upon settlement, any gain or loss will be amortized in earnings over the life of the future debt issuance as a component of interest expense on the Consolidated Statements of Operations. Fair Value of Derivatives The following table presents the fair value of NJR's derivative assets and liabilities recognized on the Unaudited Condensed Consolidated Balance Sheets as of:
|  |  | Fair Value
|  | June 30, 2020 |  | September 30, 2019
(Thousands) | Balance Sheet Location | Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Natural Gas Distribution: |  |  |  |  |  |  |  |  |
Physical commodity contracts | Derivatives - current |  | $ | 66 |  |  | $ | 133 |  |  | $ | 67 |  |  | $ | 245 |
Financial commodity contracts | Derivatives - current |  | — |  |  | 190 |  |  | 382 |  |  | 570 |
Interest rate contracts | Derivatives - current |  | — |  |  | 5,056 |  |  | — |  |  | — |
Energy Services: |  |  |  |  |  |  |  |  |
Physical commodity contracts | Derivatives - current |  | 5,440 |  |  | 17,242 |  |  | 6,847 |  |  | 27,540 |
| Derivatives - noncurrent |  | 2,671 |  |  | 22,448 |  |  | 1,710 |  |  | 12,641 |
Financial commodity contracts | Derivatives - current |  | 23,852 |  |  | 13,447 |  |  | 17,806 |  |  | 29,057 |
| Derivatives - noncurrent |  | 3,647 |  |  | 1,129 |  |  | 5,716 |  |  | 6,105 |
Foreign currency contracts | Derivatives - current |  | 9 |  |  | 230 |  |  | 1 |  |  | 211 |
| Derivatives - noncurrent |  | 29 |  |  | 23 |  |  | — |  |  | 75 |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Home Services and Other: |  |  |  |  |  |  |  |  |
Interest rate contracts | Derivatives - current |  | — |  |  | 10,796 |  |  | — |  |  | — |
Total fair value of derivatives |  |  | $ | 35,714 |  |  | $ | 70,694 |  |  | $ | 32,529 |  |  | $ | 76,444 |
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 Unaudited Condensed 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 Unaudited Condensed Consolidated Balance Sheets but elects not to.
(Thousands) | Amounts Presented on Balance Sheets (1) | Offsetting Derivative Instruments (2) | Financial Collateral Received/Pledged (3) | Net Amounts (4)
As of June 30, 2020: |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |
Energy Services |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 8,111 |  |  | $ | (3,097 | ) |  | $ | (200 | ) |  | $ | 4,814 |
Financial commodity contracts |  | 27,499 |  |  | (14,576 | ) |  | — |  |  | 12,923 |
Foreign currency contracts |  | 38 |  |  | (38 | ) |  | — |  |  | — |
Total Energy Services |  | $ | 35,648 |  |  | $ | (17,711 | ) |  | $ | (200 | ) |  | $ | 17,737 |
Natural Gas Distribution |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 66 |  |  | $ | (39 | ) |  | $ | — |  |  | $ | 27 |
Total Natural Gas Distribution |  | $ | 66 |  |  | $ | (39 | ) |  | $ | — |  |  | $ | 27 |
Derivative liabilities: |  |  |  |  |  |  |  |
Energy Services |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 39,690 |  |  | $ | (3,097 | ) |  | $ | — |  |  | $ | 36,593 |
Financial commodity contracts |  | 14,576 |  |  | (14,576 | ) |  | — |  |  | — |
Foreign currency contracts |  | 253 |  |  | (38 | ) |  | — |  |  | 215 |
Total Energy Services |  | $ | 54,519 |  |  | $ | (17,711 | ) |  | $ | — |  |  | $ | 36,808 |
Natural Gas Distribution |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 133 |  |  | $ | (39 | ) |  | $ | — |  |  | $ | 94 |
Financial commodity contracts |  | 190 |  |  | — |  |  | (190 | ) |  | — |
Interest rate contracts |  | 5,056 |  |  | — |  |  | — |  |  | 5,056 |
Total Natural Gas Distribution |  | $ | 5,379 |  |  | $ | (39 | ) |  | $ | (190 | ) |  | $ | 5,150 |
Home Services and Other |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 10,796 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,796 |
Total Home Services and Other |  | $ | 10,796 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,796 |
As of September 30, 2019: |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |
Energy Services |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 8,557 |  |  | $ | (2,906 | ) |  | $ | (200 | ) |  | $ | 5,451 |
Financial commodity contracts |  | 23,522 |  |  | (19,646 | ) |  | — |  |  | 3,876 |
Foreign currency contracts |  | 1 |  |  | (1 | ) |  | — |  |  | — |
Total Energy Services |  | $ | 32,080 |  |  | $ | (22,553 | ) |  | $ | (200 | ) |  | $ | 9,327 |
Natural Gas Distribution |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 67 |  |  | $ | (9 | ) |  | $ | — |  |  | $ | 58 |
Financial commodity contracts |  | 382 |  |  | (382 | ) |  | — |  |  | — |
Total Natural Gas Distribution |  | $ | 449 |  |  | $ | (391 | ) |  | $ | — |  |  | $ | 58 |
Derivative liabilities: |  |  |  |  |  |  |  |
Energy Services |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 40,181 |  |  | $ | (2,906 | ) |  | $ | — |  |  | $ | 37,275 |
Financial commodity contracts |  | 35,162 |  |  | (19,646 | ) |  | (15,516 | ) |  | — |
Foreign currency contracts |  | 286 |  |  | (1 | ) |  | — |  |  | 285 |
Total Energy Services |  | $ | 75,629 |  |  | $ | (22,553 | ) |  | $ | (15,516 | ) |  | $ | 37,560 |
Natural Gas Distribution |  |  |  |  |  |  |  |
Physical commodity contracts |  | $ | 245 |  |  | $ | (9 | ) |  | $ | — |  |  | $ | 236 |
Financial commodity contracts |  | 570 |  |  | (382 | ) |  | (188 | ) |  | — |
Total Natural Gas Distribution |  | $ | 815 |  |  | $ | (391 | ) |  | $ | (188 | ) |  | $ | 236 |
(1) | Derivative assets and liabilities are presented on a gross basis on the balance sheet as the Company does not elect balance sheet offsetting under ASC 210-20.
(2) | Includes 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 presents the effect of derivative instruments recognized on the Unaudited Condensed Consolidated Statements of Operations for the periods set forth below:
(Thousands) | Location of gain (loss) recognized in income on derivatives | Amount of gain (loss) recognized in income on derivatives
|  | Three Months Ended | Nine Months Ended
|  | June 30, | June 30,
Derivatives not designated as hedging instruments: | 2020 |  | 2019 | 2020 |  | 2019
Energy Services: |  |  |  |  |  |  |
Physical commodity contracts | Operating revenues | $ | (18,061 | ) |  | $ | 1,435 |  | $ | 3,871 |  |  | $ | 74 |
Physical commodity contracts | Gas purchases | 1,014 |  |  | 2,392 |  | (2,288 | ) |  | 266 |
Financial commodity contracts | Gas purchases | 2,408 |  |  | 22,919 |  | 71,820 |  |  | 17,732 |
Foreign currency contracts | Gas purchases | 181 |  |  | 37 |  | (179 | ) |  | (188 | )
Home Services and Other: |  |  |  |  |  |  |
Interest rate contracts | Interest expense | — |  |  | (43 | ) |  |  | (228 | )
Total unrealized and realized gains (losses) | $ | (14,458 | ) |  | $ | 26,740 |  | $ | 73,224 |  |  | $ | 17,656 |
NJNG’s derivative contracts are part of the Company's risk management activities that relate to its natural gas purchases and BGSS incentive programs. At settlement, the resulting gains and/or losses are payable to or recoverable from utility customers and 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 for the periods set forth below:
| Three Months Ended | Nine Months Ended
| June 30, | June 30,
(Thousands) | 2020 |  | 2019 | 2020 |  | 2019
Natural Gas Distribution: |  |  |  |  |  |
Physical commodity contracts | $ | 308 |  |  | $ | 812 |  | $ | 1,357 |  |  | $ | 5,225 |
Financial commodity contracts | 1,029 |  |  | (10,368 | ) | (11,493 | ) |  | (7,129 | )
Interest rate contracts | 1,636 |  |  | — |  | (5,056 | ) |  | — |
Total unrealized and realized (losses) gains | $ | 2,973 |  |  | $ | (9,556 | ) | $ | (15,192 | ) |  | $ | (1,904 | )
NJR designates its treasury lock contracts as cash flow hedges, therefore, changes in fair value of the effective portion of the hedges are recorded in OCI and upon settlement of the contracts, realized gains and (losses) are reclassified from OCI to interest expense on the Unaudited Condensed Consolidated Statements of Operations. The following table reflects the effect of derivative instruments designated as cash flow hedges in OCI for the periods set forth below:
(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)
| Three Months Ended | Three Months Ended
| June 30, | June 30,
Derivatives in cash flow hedging relationships: | 2020 | 2019 | 2020 | 2019
Interest rate contracts | $ | (807 | ) | $ | — |  | $ | — |  | $ | — |
| Nine Months Ended | Nine Months Ended
| June 30, | June 30,
Derivatives in cash flow hedging relationships: | 2020 | 2019 | 2020 | 2019
Interest rate contracts | $ | (13,299 | ) | $ | — |  | $ | — |  | $ | — |
NJNG and Energy Services had the following outstanding long (short) derivatives as of:
|  |  | Volume (Bcf)
|  |  | June 30, 2020 |  | September 30, 2019
Natural Gas Distribution | Futures |  | 18.8 |  |  | 27.6 |
| Physical |  | 10.3 |  |  | 11.6 |
Energy Services | Futures |  | (38.4 | ) |  | (29.6 | )
| Physical |  | 12.6 |  |  | 44.5 |
| Swaps |  | (2.3 | ) |  | (5.0 | )
Not included in the previous table are Energy Services' net notional amount of foreign currency transactions of approximately $6.4 million, notional amounts related to treasury lock transactions of approximately $60 million and $195 million at NJNG and NJR respectively, and 1,276,000 SRECs at Energy Services that were open as of June 30, 2020. Broker Margin Futures exchanges have contract specific 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 the Natural Gas Distribution and Energy Services segments. The balances are as follows:
(Thousands) | Balance Sheet Location | June 30, 2020 | September 30, 2019
Natural Gas Distribution | Restricted broker margin accounts | $ | — |  | $ | 1,982 |
| Accounts payable and other | $ | (219 | ) | $ | — |
Energy Services | Restricted broker margin accounts | $ | 52,211 |  | $ | 71,741 |
Wholesale Credit Risk NJNG, Energy Services, Clean Energy Ventures and Midstream are exposed to credit risk as a result of their sales/wholesale marketing activities. As a result of services performed or sold, 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., failed to deliver or pay for natural gas, SRECs, electricity, RECs or Midstream services), then the Company could sustain a loss. NJR 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 commercial teams regarding credit status and the use of credit mitigation measures, such as collateral requirements and netting agreements. Examples of collateral include letters of credit and cash received for either prepayment or margin deposit. Collateral may be requested due to NJR's election not to extend credit or because exposure exceeds defined thresholds. Most of NJR's wholesale marketing contracts contain standard netting provisions. These contracts include those governed by ISDA and the NAESB. The netting provisions refer to payment netting, whereby receivables and payables with the same counterparty are offset and the resulting net amount is paid to the party to which it is due. 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 June 30, 2020. 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 |  | $ | 126,026 |  |
Noninvestment grade |  | 8,915 |  |
Internally rated investment grade |  | 22,877 |  |
Internally rated noninvestment grade |  | 12,319 |  |
Total |  | $ | 170,137 |  |
Conversely, certain of NJR's, 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. 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 June 30, 2020, was $15.9 million, 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 June 30, 2020, the Company would have been required to post an additional $15.9 million to its counterparties. These amounts differ from the respective net derivative liabilities reflected on the Unaudited Condensed 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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