XML 67 R15.htm IDEA: XBRL DOCUMENT v3.19.3.a.u2
DERIVATIVE INSTRUMENTS
 3 Months Ended
Dec. 31, 2019
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.

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.

Fair Value of Derivatives

The following table reflects the fair value of NJR's derivative assets and liabilities recognized on the Unaudited Condensed Consolidated Balance Sheets as of:
 
 
 
Fair Value
 
 
December 31, 2019
 
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
 
$
26

 
$
162

 
$
67

 
$
245

Financial commodity contracts
Derivatives - current
 
—

 
363

 
382

 
570

Energy Services:
 
 
 
 
 
 
 
 
 
Physical commodity contracts
Derivatives - current
 
12,706

 
22,259

 
6,847

 
27,540

 
Derivatives - noncurrent
 
2,453

 
15,369

 
1,710

 
12,641

Financial commodity contracts
Derivatives - current
 
35,813

 
14,100

 
17,806

 
29,057

 
Derivatives - noncurrent
 
3,133

 
9,683

 
5,716

 
6,105

Foreign currency contracts
Derivatives - current
 
7

 
103

 
1

 
211

 
Derivatives - noncurrent
 
8

 
21

 
—

 
75

Total fair value of derivatives
 
 
$
54,146

 
$
62,060

 
$
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 December 31, 2019:
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Energy Services
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
15,159

 
$
(3,569
)
 
$
(200
)
 
$
11,390

Financial commodity contracts
 
38,946

 
(21,988
)
 
—

 
16,958

Foreign currency contracts
 
15

 
(15
)
 
—

 
—

Total Energy Services
 
$
54,120

 
$
(25,572
)
 
$
(200
)
 
$
28,348

Natural Gas Distribution
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
26

 
$
(2
)
 
$
—

 
$
24

Total Natural Gas Distribution
 
$
26

 
$
(2
)
 
$
—

 
$
24

Derivative liabilities:
 
 
 
 
 
 
 
 
Energy Services
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
37,628

 
$
(3,569
)
 
$
—

 
$
34,059

Financial commodity contracts
 
23,783

 
(21,988
)
 
(1,671
)
 
124

Foreign currency contracts
 
124

 
(15
)
 
—

 
109

Total Energy Services
 
$
61,535

 
$
(25,572
)
 
$
(1,671
)
 
$
34,292

Natural Gas Distribution
 
 
 
 
 
 
 
 
Physical commodity contracts
 
$
162

 
$
(2
)
 
$
—

 
$
160

Financial commodity contracts
 
363

 
—

 
(363
)
 
—

Total Natural Gas Distribution
 
$
525

 
$
(2
)
 
$
(363
)
 
$
160

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 reflects the effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations as of:
(Thousands)
Location of gain (loss) recognized in income on derivatives
Amount of gain (loss) recognized
in income on derivatives
 
 
Three Months Ended
 
 
December 31,
Derivatives not designated as hedging instruments:
2019
 
2018
Energy Services:
 
 
 
 
Physical commodity contracts
Operating revenues
$
9,836

 
$
(1,532
)
Physical commodity contracts
Gas purchases
(1,410
)
 
(5,432
)
Financial commodity contracts
Gas purchases
46,093

 
(2,956
)
Foreign currency contracts
Gas purchases
115

 
(346
)
Home Services and Other:
 
 
 
 
Interest rate contracts
Interest expense
—

 
(123
)
Total unrealized and realized gains (losses)
$
54,634

 
$
(10,389
)


NJNG’s derivative contracts are part of the Company's risk management activities that relate to its natural gas purchases and BGSS incentive programs. These transactions are entered into pursuant to regulatory approval. 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 as of:
 
Three Months Ended
 
December 31,
(Thousands)
2019
 
2018
Natural Gas Distribution:
 
 
 
Physical commodity contracts
$
840

 
$
2,977

Financial commodity contracts
(1,088
)
 
4,396

Total unrealized and realized (losses) gains
$
(248
)
 
$
7,373



NJNG and Energy Services had the following outstanding long (short) derivatives as of:
 
 
 
Volume (Bcf)
 
 
 
December 31,
2019
 
September 30,
2019
Natural Gas Distribution
Futures
 
27.6

 
27.6

 
Physical
 
4.9

 
11.6

Energy Services
Futures
 
(34.6
)
 
(29.6
)
 
Physical
 
46.8

 
44.5

 
Swaps
 
(3.8
)
 
(5.0
)


Not included in the previous table are Energy Services' net notional amount of foreign currency transactions of approximately $6.8 million, and 886,000 SRECs at Energy Services that were open as of December 31, 2019.

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
December 31,
2019
September 30,
2019
Natural Gas Distribution
Restricted broker margin accounts
$
4,140

$
1,982

Energy Services
Restricted broker margin accounts
$
38,972

$
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 December 31, 2019. 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
 
$
197,369

 
Noninvestment grade
 
17,822

 
Internally rated investment grade
 
38,312

 
Internally rated noninvestment grade
 
35,331

 
Total
 
$
288,834

 


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. 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 December 31, 2019 and September 30, 2019, was $4,000 and $186,000, 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 December 31, 2019, the Company would not have been required to post additional amounts 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.