| REPORTING SEGMENT AND OTHER OPERATIONS DATA |
13. REPORTING SEGMENT AND OTHER OPERATIONS DATA
The Company organizes its businesses based on a combination of factors, including its products and its regulatory environment. As a result, the Company manages its businesses through the following reporting segments and other operations: the Natural Gas Distribution segment consists of regulated energy and off-system, capacity and storage management operations; the Clean Energy Ventures segment consists of capital investments in clean energy projects; the Energy Services segment consists of unregulated wholesale and retail energy operations; the Midstream segment consists of the Company's investments in natural gas transportation and storage facilities; the Home Services and Other operations consist of heating, cooling and water appliance sales, installations and services, other investments and general corporate activities.
Information related to the Company's various reporting segments and other operations is detailed below: | | | | | | | | | Three Months Ended | | December 31, | (Thousands) | 2017 | 2016 | Operating revenues | | | Natural Gas Distribution | | | External customers | $ | 209,787 |
| $ | 185,556 |
| Clean Energy Ventures | | | External customers | 13,996 |
| 7,567 |
| Energy Services | | | External customers (1) | 472,171 |
| 338,930 |
| Intercompany | 5,810 |
| (1,749 | ) | Subtotal | 701,764 |
| 530,304 |
| Home Services and Other | | | External customers | 9,351 |
| 8,975 |
| Intercompany | 606 |
| 1,031 |
| Eliminations | (6,416 | ) | 718 |
| Total | $ | 705,305 |
| $ | 541,028 |
| Depreciation and amortization | | | Natural Gas Distribution | $ | 12,783 |
| $ | 12,030 |
| Clean Energy Ventures | 8,935 |
| 7,041 |
| Energy Services | 14 |
| 16 |
| Midstream | 1 |
| 1 |
| Subtotal | 21,733 |
| 19,088 |
| Home Services and Other | 188 |
| 221 |
| Eliminations | (67 | ) | (49 | ) | Total | $ | 21,854 |
| $ | 19,260 |
| Interest income (2) | | | Natural Gas Distribution | $ | 119 |
| $ | 75 |
| Midstream | 664 |
| 462 |
| Subtotal | 783 |
| 537 |
| Home Services and Other | 204 |
| 121 |
| Eliminations | (931 | ) | (583 | ) | Total | $ | 56 |
| $ | 75 |
|
| | (1) | Includes sales to Canada, which accounted for .02 and 1.9 percent of total operating revenues during the three months ended December 31, 2017 and 2016, respectively. |
| | (2) | Included in other income, net on the Unaudited Condensed Consolidated Statements of Operations. |
| | | | | | | | | Three Months Ended | | December 31, | (Thousands) | 2017 | 2016 | Interest expense, net of capitalized interest | | | Natural Gas Distribution | $ | 6,536 |
| $ | 6,824 |
| Clean Energy Ventures | 4,208 |
| 3,324 |
| Energy Services | 1,257 |
| 571 |
| Midstream | 309 |
| 56 |
| Subtotal | 12,310 |
| 10,775 |
| Home Services and Other | 90 |
| 74 |
| Eliminations | (495 | ) | (234 | ) | Total | $ | 11,905 |
| $ | 10,615 |
| Income tax provision (benefit) | | | Natural Gas Distribution | $ | 11,704 |
| $ | 14,887 |
| Clean Energy Ventures | (73,988 | ) | (11,887 | ) | Energy Services | 13,743 |
| (3,176 | ) | Midstream | (12,843 | ) | 1,649 |
| Subtotal | (61,384 | ) | 1,473 |
| Home Services and Other | 11,698 |
| (245 | ) | Eliminations | (482 | ) | 790 |
| Total | $ | (50,168 | ) | $ | 2,018 |
| Equity in earnings of affiliates | | | Midstream | $ | 4,129 |
| $ | 3,331 |
| Eliminations | (865 | ) | (1,020 | ) | Total | $ | 3,264 |
| $ | 2,311 |
| Net financial earnings | | | Natural Gas Distribution | $ | 34,109 |
| $ | 30,348 |
| Clean Energy Ventures | 71,250 |
| 2,842 |
| Energy Services | 20,274 |
| 3,487 |
| Midstream | 17,511 |
| 2,387 |
| Subtotal | 143,144 |
| 39,064 |
| Home Services and Other | (7,716 | ) | 1,542 |
| Eliminations | (95 | ) | (223 | ) | Total | $ | 135,333 |
| $ | 40,383 |
| Capital expenditures | | | Natural Gas Distribution | $ | 47,390 |
| $ | 38,855 |
| Clean Energy Ventures | 18,387 |
| 46,785 |
| Subtotal | 65,777 |
| 85,640 |
| Home Services and Other | 1,313 |
| 171 |
| Total | $ | 67,090 |
| $ | 85,811 |
| Investments in equity investees | | | Midstream | $ | 7,202 |
| $ | 4,636 |
| Total | $ | 7,202 |
| $ | 4,636 |
|
The Chief Executive Officer, who uses NFE as a measure of profit or loss in measuring the results of the Company's segments and operations, is the chief operating decision maker of the Company. A reconciliation of consolidated NFE to consolidated net income is as follows: | | | | | | | | | Three Months Ended | | December 31, | (Thousands) | 2017 | 2016 | Net financial earnings | $ | 135,333 |
| $ | 40,383 |
| Less: | | | Unrealized loss on derivative instruments and related transactions | 34,855 |
| 28,302 |
| Tax effect | (8,059 | ) | (9,757 | ) | Effects of economic hedging related to natural gas inventory | (25,387 | ) | (17,939 | ) | Tax effect | 8,244 |
| 6,204 |
| Net income to NFE tax adjustment | 1,981 |
| (1,356 | ) | Net income | $ | 123,699 |
| $ | 34,929 |
|
The Company uses derivative instruments as economic hedges of purchases and sales of physical gas inventory. For GAAP purposes, these derivatives are recorded at fair value and related changes in fair value are included in reported earnings. Revenues and cost of gas related to physical gas flow is recognized when the gas is delivered to customers. Consequently, there is a mismatch in the timing of earnings recognition between the economic hedges and physical gas flows. Timing differences occur in two ways:
| | • | unrealized gains and losses on derivatives are recognized in reported earnings in periods prior to physical gas inventory flows; and |
| | • | unrealized gains and losses of prior periods are reclassified as realized gains and losses when derivatives are settled in the same period as physical gas inventory movements occur. |
NFE is a measure of the earnings based on eliminating these timing differences, to effectively match the earnings effects of the economic hedges with the physical sale of gas, SRECs and foreign currency contracts. Consequently, to reconcile between net income and NFE, current period unrealized gains and losses on the derivatives are excluded from NFE as a reconciling item. Additionally, realized derivative gains and losses are also included in current period net income. However, NFE includes only realized gains and losses related to natural gas sold out of inventory, effectively matching the full earnings effects of the derivatives with realized margins on physical gas flows. Included in the tax effects are current and deferred income tax expense corresponding with the non-GAAP measure. Also included in the tax effects during the three month ended December 31, 2017, are the impacts of the Tax Act and resulting revaluation of the deferred income taxes that arose from derivative and hedging activity as measured under NFE. The revaluation caused the effective tax rate on reconciling items to differ from the statutory rate in effect for the quarter. NJR also calculates a quarterly tax adjustment based on an estimated annual effective tax rate for NFE purposes.
The Company's assets for the various business segments and business operations are detailed below: | | | | | | | | (Thousands) | December 31,
2017 | September 30,
2017 | Assets at end of period: | | | Natural Gas Distribution | $ | 2,590,623 |
| $ | 2,519,578 |
| Clean Energy Ventures | 797,951 |
| 771,340 |
| Energy Services | 547,388 |
| 398,277 |
| Midstream | 248,498 |
| 232,806 |
| Subtotal | 4,184,460 |
| 3,922,001 |
| Home Services and Other | 125,149 |
| 114,801 |
| Intercompany assets (1) | (122,681 | ) | (108,295 | ) | Total | $ | 4,186,928 |
| $ | 3,928,507 |
|
| | (1) | Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation. |
|