NEW JERSEY RESOURCES CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) If the acquisition is deemed to be a business, the acquisition method of accounting is applied. Identifiable assets acquired and liabilities assumed at the acquisition date are recorded at fair value. If the transaction is deemed to be an asset purchase, the cost accumulation and allocation model is used, whereby the assets and liabilities are recorded based on the purchase price and allocated to the individual assets and liabilities based on relative fair values. The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed are based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates and the number of years on which to base the cash flow projections, as well as other assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates based on the risk inherent in the acquired assets and related cash flows. The valuation of an acquired business is based on available information at the acquisition date and assumptions that are believed to be reasonable. However, a change in facts and circumstances as of the acquisition date can result in subsequent adjustments during the measurement period, but no later than one year from the acquisition date. Investments in Equity Investees The Company accounts for its investments in Steckman Ridge and PennEast using the equity method of accounting where it is not the primary beneficiary, as defined under ASC 810, Consolidation, in that its respective ownership interests are 50 percent or less and/or it has significant influence over operating and management decisions. The Company’s share of earnings is recognized as equity in earnings of affiliates on the Consolidated Statements of Operations. Equity method investments are reviewed for impairment when changes in facts and circumstances indicate that the current fair value may be less than the asset’s carrying amount. Factors that the Company analyzes in determining whether an impairment in its equity investments exists include reviewing the financial condition and near-term prospects of the investees, including economic conditions and trends in the general market, significant delays in or failure to complete significant projects, unfavorable regulatory or legal actions expected to substantially impact future earnings potential and lower-than-expected cash distributions from investees. If the Company determines the decline in the value of its equity method investment is other than temporary, an impairment charge is recorded in an amount equal to the excess of the carrying value of the asset over its fair value. When impairment indicators are present, the fair value of the Company’s investment in Steckman Ridge is determined using a discounted cash flow method and utilizes management’s best estimates and assumptions related to expected future results, including the price and capacity of firm natural gas storage contracting, operations and maintenance costs, the nature and timing of major maintenance and capital investment, and discount rates. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and other factors. As a result, it is reasonably possible that unfavorable developments, such as the failure to execute storage contracts and other services for available capacity at anticipated price levels could result in an other-than-temporary impairment charge in the Consolidated Financial Statements. In June 2021, we evaluated our equity investment in PennEast for impairment and determined that it was other-than-temporarily impaired. We estimated the fair value of our investment in PennEast using probability-weighted scenarios assigned to discounted future cash flows. The impairment is the result of management’s estimates and assumptions regarding the likelihood of certain outcomes related to required regulatory approvals and pending legal matters (the timing of which remains uncertain), the timing and magnitude of construction costs and in-service dates, the evaluation of the current environmental and political climate as it relates to interstate pipeline development and transportation capacity revenues and discount rates. The other-than-temporary impairment was recorded in equity in (losses) earnings from affiliates in the Consolidated Statements of Operations. In September 2021, it was determined that this project was no longer supported and all further development has ceased. Impairment of Long-lived Assets Property, plant and equipment and finite-lived intangible assets are reviewed periodically for impairment when changes in facts and circumstances indicate that the carrying amount of an asset may not be fully recoverable in accordance with the appropriate accounting guidance. Factors that the Company analyzes in determining whether an impairment in its long-lived assets exists include determining if a significant decrease in the market price of a long-lived asset is present; a significant adverse change in the extent to which a long-lived asset is being used in its physical condition; legal proceedings or factors; significant business climate changes; accumulations of costs in significant excess of the amounts expected; a current-period operating or cash flow loss coupled with historical negative cash flows or expected future negative cash flows; and current Page 32 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) expectations that more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. When an impairment indicator is present, the Company determines if the carrying value of the asset is recoverable by comparing it to its expected undiscounted future cash flows. If the carrying value of the asset is greater than the expected undiscounted future cash flows, an impairment charge is recorded in an amount equal to the excess of the carrying value of the asset over its fair value. Derivative Instruments We record our derivative instruments held as assets and liabilities at fair value on the Consolidated Balance Sheets. In addition, since we choose not to designate any of our physical and financial natural gas commodity derivatives as accounting hedges, changes in the fair value of Energy Services’ commodity derivatives are recognized in earnings, as they occur, as a component of operating revenues or natural gas purchases on the Consolidated Statements of Operations. Changes in the fair value of foreign exchange contracts are recognized in natural gas purchases on the Consolidated Statements of Operations. The fair value of derivative instruments is determined by reference to quoted market prices of listed exchange-traded contracts, published price quotations, pipeline tariff information or a combination of those items. Energy Services’ portfolio is valued using the most current and reasonable market information. If the price underlying a physical commodity transaction does not represent a visible and liquid market, Energy Services may utilize additional published pipeline tariff information and/or other services to determine an equivalent market price. As of September 30, 2022, the fair value of its derivative assets and liabilities reported on the Consolidated Balance Sheets that is based on such pricing is considered immaterial. Should there be a significant change in the underlying market prices or pricing assumptions, Energy Services may experience a significant impact on its financial position, results of operations and cash flows. Refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risks for a sensitivity analysis related to the impact to derivative fair values resulting from changes in commodity prices. The valuation methods we use to determine fair values remained consistent for fiscal 2022, 2021 and 2020. We apply a discount to our derivative assets to factor in an adjustment associated with the credit risk of its physical natural gas counterparties and to our derivative liabilities to factor in an adjustment associated with its own credit risk. We determine this amount by using historical default probabilities corresponding to the appropriate S&P issuer ratings. Since the majority of our counterparties are rated investment grade, this results in an immaterial credit risk adjustment. Gains and losses associated with derivatives utilized by NJNG to manage the price risk inherent in its natural gas purchasing activities are recoverable through its BGSS, subject to BPU approval. Accordingly, the offset to the change in fair value of these derivatives is recorded as either a regulatory asset or liability on the Consolidated Balance Sheets. Clean Energy Ventures hedges certain of its expected production of SRECs through forward and futures contracts. Clean Energy Ventures intends to physically deliver all SRECs it sells and recognizes SREC revenue as operating revenue on the Consolidated Statements of Operations upon delivery of the underlying SREC. We have not designated any derivatives as fair value or cash flow hedges as of September 30, 2022 and 2021. Income Taxes The determination of our provision for income taxes requires the use of estimates and the interpretation and application of tax laws. Judgment is required in assessing the deductibility and recoverability of certain tax benefits. We use the asset and liability method to determine and record deferred tax assets and liabilities, representing future tax benefits and taxes payable, which result from the differences in basis recorded in GAAP financial statements and amounts recorded in the income tax returns. The deferred tax assets and liabilities are recorded utilizing the statutorily enacted tax rates expected to be in effect at the time the assets are realized and/or the liabilities settled. An offsetting valuation allowance is recorded when it is more likely than not that some or all of the deferred income tax assets won’t be realized. Any significant changes to the estimates and judgments with respect to the interpretations, timing or deductibility could result in a material change to earnings and cash flows. Page 33 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) For state income tax and other taxes, estimates and judgments are required with respect to the apportionment among the various jurisdictions. In addition, we operate within multiple tax jurisdictions and are subject to audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We maintain a liability for the estimate of potential income tax exposure and, in our opinion, adequate provisions for income taxes have been made for all years reported. Any significant changes to the estimates and judgments with respect to the apportionment factor could result in a material change to earnings and cash flows. Occasionally, the federal and state taxing authorities determine that it is necessary to make certain changes to the income tax laws. These changes may include but are not limited to changes in the tax rates and/or the treatment of certain items of income or expense. Accounting guidance requires that the Company reflect the effect of changes in tax laws or tax rates at the date of enactment. Additionally, the Company is required to re-measure its deferred tax assets and liabilities as of the date of enactment. For non-regulated entities, the effect of changes in tax laws or tax rates are required to be included in income from continuing operations for the period that includes the enactment date. For regulated entities, if as the result of an action by a regulator it is probable that the future increase or decrease in taxes payable for items such as changes in tax laws or rates will be recovered from or returned to customers through future rates, an asset or liability shall be recognized for that probable increase or decrease in future revenue. Accounting guidance also requires that regulatory liabilities and/or assets be considered a temporary difference for which a related deferred tax asset and/or liability shall be recognized. Accounting guidance requires that we establish reserves for uncertain tax positions when it is more likely than not that the positions will not be sustained when challenged by taxing authorities. Any changes to the estimates and judgments with respect to the interpretations, timing or deductibility could result in a change to earnings and cash flows. Interest and penalties related to unrecognized tax benefits, if any, are recognized within income tax expense, and accrued interest and penalties are recognized within accrued taxes on the Consolidated Balance Sheets. To the extent that NJNG invests in property that qualifies for ITCs, the ITC is deferred and amortized to income over the life of the equipment in accordance with regulatory treatment. In general, for our unregulated subsidiaries, we record ITCs on the balance sheet as a contra-asset as a reduction to property, plant and equipment when the property is placed in service. The contra asset is amortized on the Consolidated Statements of Operations as a reduction to depreciation expense over the useful lives of the related assets. Changes to the federal statutes related to ITCs, which have the effect of reducing or eliminating the credits, could have a negative impact on earnings and cash flows. Recently Issued Accounting Standards Refer to Note 2. Summary of Significant Accounting Policies in the accompanying Consolidated Financial Statements for discussion of recently issued accounting standards. Management ’ s Overview Consolidated NJR is a diversified energy services holding company providing retail natural gas service in New Jersey and wholesale natural gas and related energy services to customers in the U.S. and Canada. In addition, we invest in clean energy projects and storage and transportation assets and provide various repair, sales and installation services. A more detailed description of our organizational structure can be found in Item 1. Business. The following sections include a discussion of results for fiscal 2022 compared to fiscal 2021. The comparative results for fiscal 2021 with fiscal 2020 have been omitted from this Form 10-K, but may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on Form 10-K of our Annual Report for the fiscal year ended September 30, 2021, filed with the SEC on November 18, 2021. Page 34 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Reporting Segments We have four primary reporting segments as presented in the chart below: In addition to our four reporting segments above, we have nonutility operations that either provide corporate support services or do not meet the criteria to be treated as a separate reporting segment. These operations, which comprise Home Services and Other, include: appliance repair services, sales and installations at NJRHS, commercial real estate holdings at CR&R and home warranty contracts at NJR Retail. Impacts of the COVID-19 Pandemic We continue to closely monitor developments related to the COVID-19 pandemic and have, when appropriate, taken steps intended to limit potential exposure for our employees and those we serve, including continuity in the safe operation of our business. These steps include working from home for our office-based employees utilizing a hybrid schedule, limiting direct contact with our customers and suspending late payment fees for our utility customers. And while we, along with other businesses, are continuing to return to normal operating practices, this remains an evolving situation. The timing for recovery of businesses and local economies, resurgences or mutations of the virus, and any potential future shutdowns remains unknown. Throughout the COVID-19 pandemic, we have continued to provide essential services to our customers. Both NJR and NJNG continue to have sufficient liquidity to meet their current obligations, and business operations remain fundamentally unchanged at this time. We cannot predict the nature and extent of the pandemic’s impacts to future operations or its effects on our financial condition, results of operations and cash flows. We will continue to monitor developments affecting our employees, customers and operations and take additional steps to address the COVID-19 pandemic and its impacts, as necessary. Page 35 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Results Net income (loss) and assets by reporting segment and other business operations for the fiscal years ended September 30, are as follows: (Thousands) 2022 2021 2020 Net Income Assets Net Income Assets Net Income Assets Natural Gas Distribution $ 140,124 $ 4,030,686 $ 107,375 $ 3,707,461 $ 126,902 $ 3,531,477 Clean Energy Ventures 39,403 1,015,065 16,789 914,788 22,111 814,277 Energy Services 69,650 333,064 58,957 365,423 (11,008) 244,836 Storage and Transportation 26,598 999,520 (67,787) 862,407 18,311 844,799 Home Services and Other (781) 159,068 (826) 162,134 5,784 138,375 Intercompany (1) (72) (275,987) 3,382 (289,935) 907 (257,287) Total $ 274,922 $ 6,261,416 $ 117,890 $ 5,722,278 $ 163,007 $ 5,316,477 (1) Consists of transactions between subsidiaries that are eliminated in consolidation. The increase in net income of $157.0 million during fiscal 2022, compared with fiscal 2021, is due primarily to increased earnings at Natural Gas Distribution due to higher base rates, increased SREC and electricity sales at Clean Energy Ventures, the impairment of our equity method investment in PennEast during fiscal 2021 that did not reoccur in fiscal 2022, and the commencement of AMAs at Energy Services with an investment grade public utility, which began in November 2021, partially offset by the strong market demand related to the extreme cold weather during February 2021, which did not reoccur to the same extent during 2022. The primary drivers of the changes noted above are described in more detail in the individual reporting segment and other business operations discussions. The increase in assets during fiscal 2022, compared with fiscal 2021, was increased infrastructure spend in Storage and Transportation primarily related to the conversion and construction of the southern end of Adelphia Gateway, which was put into service during fiscal 2022, additional investment in utility plant in Natural Gas Distribution and solar asset investments at Clean Energy Ventures, along with an increase in gas in storage at Natural Gas Distribution. Non-GAAP Financial Measures Our management uses NFE, a non-GAAP financial measure, when evaluating our operating results. Energy Services economically hedges its natural gas inventory with financial derivative instruments. NFE is a measure of the earnings based on eliminating timing differences surrounding the recognition of certain gains or losses, to effectively match the earnings effects of the economic hedges with the physical sale of natural gas and, therefore, eliminates the impact of volatility to GAAP earnings associated with the derivative instruments. To the extent we utilize forwards, futures or other derivatives to hedge forecasted SREC production, unrealized gains and losses are also eliminated from NFE. NFE also excludes certain transactions associated with equity method investments, including impairment charges, which are non-cash charges, and return of capital in excess of the carrying value of our investment. These are considered unusual in nature and occur infrequently such that they are not indicative of the Company’s performance for our ongoing operations. Included in the tax effects are current and deferred income tax expense corresponding with the components of NFE. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for or a replacement of, the comparable GAAP measure and should be read in conjunction with those GAAP results. Page 36 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Below is a reconciliation of consolidated net income, the most directly comparable GAAP measure, to NFE for the fiscal years ended September 30: (Thousands, except per share data) 2022 2021 2020 Net income $ 274,922 $ 117,890 $ 163,007 Add: Unrealized (gain) loss on derivative instruments and related transactions (59,906) 54,203 (9,644) Tax effect 14,248 (12,887) 2,296 Effects of economic hedging related to natural gas inventory (1) 19,939 (42,405) 12,690 Tax effect (4,738) 10,078 (3,016) (Gain on) impairment of equity method investment (5,521) 92,000 — Tax effect 1,377 (11,167) — Net financial earnings $ 240,321 $ 207,712 $ 165,333 Basic earnings per share $ 2.86 $ 1.23 $ 1.72 Add: Unrealized (gain) loss on derivative instruments and related transactions (0.62) 0.56 (0.10) Tax effect 0.15 (0.13) 0.02 Effects of economic hedging related to natural gas inventory (1) 0.21 (0.44) 0.13 Tax effect (0.05) 0.10 (0.03) (Gain on) impairment of equity method investment (0.06) 0.96 — Tax effect 0.01 (0.12) — Basic NFE per share $ 2.50 $ 2.16 $ 1.74 (1) Effects of hedging natural gas inventory transactions where the economic impact is realized in a future period. NFE by reporting segment and other business operations for the fiscal years ended September 30, discussed in more detail within the operating results sections of each reporting segment and other business operations, is summarized as follows: (Thousands) 2022 2021 2020 Natural Gas Distribution $ 140,124 58 % $ 107,375 52 % $ 126,902 77 % Clean Energy Ventures 39,403 17 16,789 8 22,111 13 Energy Services 39,121 16 71,117 34 (7,873) (5) Storage and Transportation 22,454 9 13,046 6 18,311 11 Home Services and Other (781) — (826) — 5,784 4 Eliminations (1) — — 211 — 98 — Total $ 240,321 100 % $ 207,712 100 % $ 165,333 100 % (1) Consists of transactions between subsidiaries that are eliminated in consolidation. The increase in NFE of $32.6 million during fiscal 2022, compared with fiscal 2021, was due primarily to higher base rates at NJNG, increased SREC and electricity sales at Clean Energy Ventures and the commencement of AMAs at Energy Services with an investment grade public utility, which began in November 2021, partially offset by the extreme cold weather during February 2021, as previously discussed. Natural Gas Distribution Overview Natural Gas Distribution is comprised of NJNG, a natural gas utility that provides regulated natural gas service throughout Burlington, Middlesex, Monmouth, Morris, Ocean and Sussex counties in New Jersey to approximately 569,300 residential and commercial customers in its service territory and also participates in the off-system sales and capacity release markets. The business is subject to various risks, including those risks associated with COVID-19, which may include but are not limited to impacts to customer growth and customer usage, customer collections, the timing and costs of capital expenditures and construction of infrastructure projects, operating and financing costs, fluctuations in commodity prices and customer conservation efforts. In addition, NJNG may be subject to adverse economic conditions such as inflation and rising natural gas costs, certain regulatory actions, environmental remediation and severe weather conditions. It is often difficult to predict the impact of events or trends associated with these risks. Page 37 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NJNG’s business is seasonal by nature, as weather conditions directly influence the volume of natural gas delivered to customers on an annual basis. Specifically, customer demand substantially increases during the winter months when natural gas is used for heating purposes. As a result, NJNG generates most of its natural gas distribution revenues during the first and second fiscal quarters and is subject to variations in earnings and working capital during the fiscal year. As a regulated company, NJNG is required to recognize the impact of regulatory decisions on its financial statements. See Note 4. Regulation in the accompanying Consolidated Financial Statements for a more detailed discussion on regulatory actions, including filings related to programs and associated expenditures, as well as rate requests related to recovery of capital investments and operating costs. NJNG’s operations are managed with the goal of providing safe and reliable service, growing its customer base, diversifying its Utility Gross Margin, promoting clean energy programs and mitigating the risks discussed above. Base Rate Case On November 17, 2021, the BPU issued an order adopting a stipulation of settlement approving a $79.0 million increase to base rates, effective December 1, 2021. In addition, the order also included approval for the final increase for the NJ RISE/SAFE II programs, which totaled $269,000. These increases include an overall rate of return on rate base of 6.84 percent, return on common equity of 9.6 percent, a common equity ratio of 54.0 percent and a composite depreciation rate of 2.78 percent. Infrastructure Projects NJNG has significant annual capital expenditures associated with the management of its natural gas distribution and transmission system, including new utility plant associated with customer growth and its associated PIM and infrastructure programs. Below is a summary of NJNG’s capital expenditures, including accruals for fiscal 2022 and estimates of expected investments over the next fiscal year: Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory oversight, environmental regulations, unforeseen events and the ability to access capital. NJNG continues to implement BPU-approved infrastructure projects that are designed to enhance the reliability and integrity of NJNG’s natural gas distribution system. Page 38 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Infrastructure Investment Program In February 2019, NJNG filed a petition with the BPU seeking authority to implement a five-year IIP. The IIP consisted of two components: transmission and distribution investments and information technology replacement and enhancements. The total investment for the IIP was approximately $507.0 million. All approved investments will be recovered through annual filings to adjust base rates. In October 2020, the BPU approved the Company’s transmission and distribution component of the IIP for $150.0 million over five years, effective November 1, 2020. NJNG voluntarily withdrew the information technology upgrade component and will seek to recover associated costs in future rate case proceedings. On March 31, 2022, NJNG filed its first rate recovery request for its BPU-approved IIP with capital expenditures estimated through June 30, 2022, including AFUDC. On July 13, 2022, NJNG filed its update with actual capital expenditures of $28.9 million through June 30, 2022. On September 7, 2022, the BPU approved the rate increase resulting in a $3.2 million revenue increase, effective October 1, 2022. SAFE II and NJ RISE The BPU approved the 5-year SAFE II program and the associated rate mechanism to replace the remaining unprotected steel mains and services from NJNG’s natural gas distribution system at an estimated cost of approximately $200 million, excluding AFUDC. With the approval of SAFE II, $157.5 million was approved for accelerated cost recovery methodology. The remaining $42.5 million in capital expenditures was requested for recovery in base rate cases, of which $23.4 million was approved in NJNG’s 2019 base rate case and $19.1 million was approved in the 2021 base rate case. The BPU approved NJNG’s NJ RISE capital infrastructure program, which consists of six capital investment projects estimated to cost $102.5 million, excluding AFUDC, for natural gas distribution storm hardening and mitigation projects, along with associated depreciation expense. These system enhancements are intended to minimize service impacts during extreme weather events to customers in the most storm-prone areas of NJNG’s service territory. Recovery of NJ RISE investments is included in NJNG’s base rates. In March 2021, NJNG filed a petition with the BPU requesting the final base rate increase for the recovery associated with NJ RISE and SAFE II capital investments costs of approximately $3.4 million made through June 30, 2021. In June 2021, this filing was consolidated with the 2021 base rate case. On November 17, 2021, the BPU issued an order for the consolidated matter which included approval for the final increase for the NJ RISE and SAFE II programs of $269,000.With this approval, the filings with respect to NJ RISE and SAFE II are complete. Southern Reliability Link The SRL is an approximately 30-mile, 30-inch transmission main designed to support improved system reliability and integrity in the southern portion of NJNG’s service territory. SRL was completed and placed in service in August 2021. Customer Growth In conducting NJNG’s business, management focuses on factors it believes may have significant influence on its future financial results. NJNG’s policy is to work with all stakeholders, including customers, regulators and policymakers, to achieve favorable results. These factors include the rate of NJNG’s customer growth in its service territory, which can be influenced by political and regulatory policies, the delivered cost of natural gas compared with competing fuels, interest rates and general economic and business conditions. NJNG’s total customers as of September 30, include the following: 2022 2021 2020 Firm customers Residential 512,264 502,546 497,779 Commercial, industrial & other 31,227 30,615 28,735 Residential transport 17,316 21,882 22,420 Commercial transport 8,397 8,815 9,184 Total firm customers 569,204 563,858 558,118 Other 96 47 48 Total customers 569,300 563,905 558,166 Page 39 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) During fiscal 2022, 2021 and 2020, NJNG added 7,808, 7,854 and 8,349 new customers, respectively. NJNG expects new customer additions, and those customers who added additional natural gas services to their premises to contribute approximately $6.5 million of incremental Utility Gross Margin on an annualized basis. NJNG expects its new customer annual growth rate to be approximately 1.6 percent. Based on information from municipalities and developers, as well as external industry analysts and management’s experience, NJNG estimates that approximately 65 percent of the growth will come from new construction markets and 35 percent from customer conversions to natural gas from other fuel sources. This new customer and conversion growth would increase Utility Gross Margin under NJNG’s base rates by approximately $7.7 million annually, as calculated under NJNG’s CIP tariff. Energy Efficiency Programs SAVEGREEN conducts home energy audits and provides various grants, incentives and financing alternatives designed to encourage the installation of high-efficiency heating and cooling equipment and other energy efficiency upgrades. Depending on the specific incentive or approval, NJNG recovers costs associated with the programs over a two- to 10-year period through a tariff rider mechanism. In March 2021, the BPU approved a three-year SAVEGREEN program consisting of approximately $126.1 million of direct investment, $109.4 million in financing options and approximately $23.4 million in operation and maintenance expenses, which resulted in a $15.6 million annual recovery increase, effective July 1, 2021. In May 2020, NJNG filed a petition with the BPU to decrease its EE recovery rate. In October, 2020, the BPU approved NJNG to maintain its existing rate, which resulted in an annual recovery of approximately $11.4 million, effective November 1, 2020. In June 2021, NJNG submitted its annual cost recovery filing for the SAVEGREEN programs established from 2010 through 2021. On January 26, 2022, the BPU approved the stipulation, which increased annual recoveries by $2.2 million, effective February 1, 2022. On June 1, 2022, NJNG submitted its annual cost recovery filing for the SAVEGREEN programs established from 2010 through the present. On September 28, 2022, the BPU approved the decrease, which will result in an annual decrease of approximately $3.5 million, effective October 1, 2022. The following table summarizes loans, grants, rebates and related investments as of September 30: (Thousands) 2022 2021 Loans $ 152,000 $ 132,800 Grants, rebates and related investments 132,200 98,100 Total $ 284,200 $ 230,900 Program recoveries from customers during the fiscal years ended September 30, 2022 and 2021, were $25.8 million and $12.4 million, respectively. The recovery includes a weighted average cost of capital that ranges from 6.69 percent to 7.76 percent, with a return on equity of 9.6 percent to 10.3 percent. Conservation Incentive Program/BGSS The CIP facilitates normalizing NJNG’s Utility Gross Margin for variances not only due to weather but also for other factors affecting customer usage, such as conservation and energy efficiency. Recovery of Utility Gross Margin for the non-weather variance through the CIP is limited to the amount of certain natural gas supply cost savings achieved and is subject to a variable margin revenue test. Additionally, recovery of the CIP Utility Gross Margin is subject to an annual earnings test. An annual review of the CIP must be filed by June 1, coincident with NJNG’s annual BGSS filing, during which NJNG can request rate changes to the CIP. NJNG’s total utility firm gross margin includes the following adjustments related to the CIP mechanism: (Thousands) 2022 2021 2020 Weather (1) $ 22,263 $ 13,273 $ 17,882 Usage 2,032 (1,852) 292 Total $ 24,295 $ 11,421 $ 18,174 (1) Compared with the 20-year average, weather was 8.3 percent, 6.5 percent and 7.6 percent warmer-than-normal during fiscal 2022, 2021 and 2020 respectively. Page 40 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Recovery of Natural Gas Costs NJNG’s cost of natural gas is passed through to our customers, without markup, by applying NJNG’s authorized BGSS rate to actual therms delivered. There is no Utility Gross Margin associated with BGSS costs; therefore, changes in such costs do not impact NJNG’s earnings. NJNG monitors its actual natural gas costs in comparison to its BGSS rates to manage its cash flows associated with its allowed recovery of natural gas costs, which is facilitated through BPU-approved deferred accounting and the BGSS pricing mechanism. Accordingly, NJNG occasionally adjusts its periodic BGSS rates or can issue credits or refunds, as appropriate, for its residential and small commercial customers when the commodity cost varies from the existing BGSS rate. BGSS rates for its large commercial customers are adjusted monthly based on NYMEX prices. NJNG’s residential and commercial markets are currently open to competition, and its rates are segregated between BGSS (i.e., natural gas commodity) and delivery (i.e., transportation) components. NJNG earns Utility Gross Margin through the delivery of natural gas to its customers and, therefore, is not negatively affected by customers who use its transportation service and purchase natural gas from another supplier. Under an existing order from the BPU, BGSS can be provided by suppliers other than the state’s natural gas utilities; however, customers who purchase natural gas from another supplier continue to use NJNG for transportation service. During fiscal 2021, NJNG notified the BPU of its intent to provide BGSS bill credits to residential and small commercial sales customers. The actual bill credits given to customers totaled $20.6 million, $19.3 million net of tax. In November 2021, the BPU approved on a preliminary basis a $2.9 million increase to the annual revenues credited to BGSS, a $13.0 million annual increase related to its balancing charge, as well as changes to CIP rates, which resulted in a $6.3 million annual recovery decrease, effective December 1, 2021, and approved on a final basis on May 4, 2022. In November 2021, NJNG submitted notification of its intent to self-implement an increase to its BGSS rate, which resulted in an approximately $24.2 million increase to annual revenues credited to BGSS, effective December 1, 2021. On June 1, 2022, NJNG submitted its annual petition to modify its BGSS, balancing charge and CIP rates for residential and small business customers, which was approved by the BPU on a preliminary basis on September 7, 2022. This includes an $81.9 million increase to the annual revenues credited to BGSS, a $9.0 million annual increase related to its balancing charge and a $10.2 million increase to CIP rates, effective October 1, 2022. The balancing charge rate includes the cost of balancing natural gas deliveries with customer usage for sales and transportation customers, and balancing charge revenues are credited to BGSS. 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 and storage incentive programs. These programs are designed to encourage better utilization and hedging of NJNG’s natural gas supply, transportation and storage assets. Depending on the program, NJNG shares 80 or 85 percent of Utility Gross Margin generated by these programs with firm customers. Utility Gross Margin from incentive programs was $19.6 million, $13.4 million and $9.5 million during the fiscal years ended September 30, 2022, 2021 and 2020, respectively. Hedging In order to provide relative price stability to its natural gas supply portfolio, NJNG employs a hedging strategy with the goal of having at least 75 percent of the Company’s projected winter periodic BGSS natural gas sales volumes hedged by each November 1 and at least 25 percent of the projected periodic BGSS natural gas sales hedged for the following April-through-March period. The hedging goal is typically achieved with gas in storage and the use of financial instruments to hedge storage injections. NJNG may also use various financial instruments including futures, swaps, options and weather related products to hedge its future delivery obligations. Commodity Prices Natural Gas Distribution is affected by the price of natural gas, which can have a significant impact on our cash flows, short-term financing costs, the price of natural gas charged to our customers through the BGSS clause, our ability to collect accounts receivable, which impacts our bad debt expense, and our ability to maintain a competitive advantage over other energy sources. Page 41 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Natural gas commodity prices are shown in the graph below, which illustrates the daily natural gas prices (1) in the Northeast market region, also known as TETCO M-3. (1) Data sourced from Standard & Poor’s Financial Services, LLC Global Platts. The maximum price per MMBtu was $17.69, $14.57 and $5.59 and the minimum price was $2.42, $0.28 and $0.68 for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. A more detailed discussion of the impacts of the price of natural gas on operating revenues, natural gas purchases and cash flows can be found in the Operating Results and Cash Flow sections of Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. Societal Benefits Charge NJNG’s qualifying customers are eligible for the USF program, which is administered by the New Jersey Department of Community Affairs, to help make energy bills more affordable. In April 2021, the BPU approved on a final basis NJNG’s annual SBC application to recover remediation expenses, including an increase in the RAC, of approximately $1.3 million annually and an increase to the NJCEP factor, of approximately $6.0 million, which was effective May 1, 2021. In September 2021, the BPU approved on a final basis NJNG’s annual USF compliance filing, which resulted in an annual increase of approximately $4.9 million, effective October 1, 2021. On March 23, 2022, the BPU approved on a final basis NJNG’s annual SBC application to recover remediation expenses, including an increase in the RAC, of approximately $600,000 annually and a decrease to the NJCEP factor of approximately $2.9 million, effective April 1, 2022. On June 27, 2022, NJNG filed its annual USF compliance filing proposing a decrease to the statewide USF rate. On August 25, 2022, an additional update was submitted on behalf of all NJ utilities with actual information through July 31, 2022. On September 28, 2022, the BPU approved a decrease based on the August update, which resulted in an annual decrease of approximately $1.6 million, effective October 1, 2022. On September 13, 2022, NJNG submitted its annual SBC filing to the BPU requesting approval of RAC expenditures through June 30, 2022, as well as an increase to the RAC annual recoveries of $3.8 million and an increase to the NJCEP annual recoveries of $2.2 million, with a proposed effective date of April 1, 2023. Page 42 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Environmental Remediation NJNG is responsible for the environmental remediation of former MGP sites, which contain contaminated residues from former gas manufacturing operations that ceased operating at these sites by the mid-1950s and, in some cases, had been discontinued many years earlier. Actual MGP remediation costs may vary from management’s estimates due to the developing nature of remediation requirements, regulatory decisions by the NJDEP and related litigation. NJNG reviews these costs at the end of each fiscal year and adjusts its liability and corresponding regulatory asset as necessary to reflect its expected future remediation obligation. Accordingly, NJNG recognized a regulatory asset and an obligation of $127.1 million as of September 30, 2022, a decrease of $7.9 million compared with the prior fiscal period. In June 2019, NJNG initiated a preliminary assessment of a site in Aberdeen, New Jersey to determine prior ownership and if former MGP operations were active at the location. The preliminary assessment and site investigation activities are ongoing at the Aberdeen site and, based on initial findings, will be moving to the remedial investigation phase. The costs associated with preliminary assessment, site investigation and remedial investigation activities are considered immaterial and are included as a component of NJNG’s annual SBC application to recover remediation expenses. We will continue to gather information to further refine and enhance the estimate of potential costs for this site as it becomes available. See Note 15. Commitments and Contingent Liabilities for a more detailed description. Other regulatory filings and a more detailed discussion of the filings in this section can be found in Note 4. Regulation in the accompanying Consolidated Financial Statements. Operating Results NJNG’s operating results for the fiscal years ended September 30, are as follows: (Thousands) 2022 2021 2020 Operating revenues (1) $ 1,128,767 $ 731,796 $ 729,923 Operating expenses Natural gas purchases (2) (3) 557,232 260,714 287,307 Operation and maintenance 198,546 203,740 162,792 Regulatory rider expense (4) 59,437 38,304 34,529 Depreciation and amortization 94,579 80,045 71,883 Total operating expenses 909,794 582,803 556,511 Operating income 218,973 148,993 173,412 Other income, net 7,686 13,841 11,486 Interest expense, net of capitalized interest 46,394 36,405 30,975 Income tax provision 40,141 19,054 27,021 Net income $ 140,124 $ 107,375 $ 126,902 (1) Includes nonutility revenue of approximately $1.4 million and $337,000 for fiscal 2022 and 2021, respectively, for lease agreements with various NJR subsidiaries leasing office space from NJNG at the Company’s headquarters that commenced in July 2021, which are eliminated in consolidation. There was no nonutility revenue for fiscal 2020. (2) Includes the purchased cost of the natural gas, fees paid to pipelines and storage facilities, adjustments as a result of BGSS incentive programs and hedging transactions. These expenses are passed through to customers and are offset by corresponding revenues. (3) Includes related party transactions of approximately $9.3 million, $13.0 million and $11.5 million for fiscal 2022, 2021 and 2020, respectively, a portion of which is eliminated in consolidation. (4) Consists of expenses associated with state-mandated programs, the RAC and energy efficiency programs, calculated on a per-therm basis. These expenses are passed through to customers and are offset by corresponding revenues. Operating Revenues and Natural Gas Purchases Operating revenues increased 54.2 percent during fiscal 2022 compared with fiscal 2021. Natural gas purchases increased 113.7 percent during fiscal 2022 compared with fiscal 2021. Page 43 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The factors contributing to the increases and decreases in operating revenues and natural gas purchases during fiscal 2022, are as follows: 2022 v. 2021 (Thousands) Operating revenues Natural gas purchases BGSS incentives $ 231,496 $ 225,324 Base rate impact 65,819 — Average BGSS rates 54,347 54,347 Bill credits 20,590 20,590 CIP adjustments 12,874 — Firm sales (11,040) (4,199) Riders and other (1) 22,885 456 Total increase (decrease) $ 396,971 $ 296,518 (1) Other includes changes in rider rates, including those related to EE, NJCEP and other programs, which is offset in regulatory rider expense. Non-GAAP Financial Measures Management uses Utility Gross Margin, a non-GAAP financial measure, when evaluating the operating results of NJNG. NJNG’s Utility Gross Margin is defined as operating revenues less natural gas purchases, sales tax, and regulatory rider expenses. This measure differs from gross margin as presented on a GAAP basis, as it excludes certain operations and maintenance expense and depreciation and amortization. Utility Gross Margin may also not be comparable to the definition of gross margin used by others in the natural gas distribution business and other industries. Management believes that Utility Gross Margin provides a meaningful basis for evaluating utility operations since natural gas costs, sales tax and regulatory rider expenses are included in operating revenues and passed through to customers and, therefore, have no effect on Utility Gross Margin. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure. Utility Gross Margin A reconciliation of gross margin, the closest GAAP financial measure to NJNG’s Utility Gross Margin for the fiscal years ended September 30, is as follows: (Thousands) 2022 2021 2020 Operating revenues $ 1,128,767 $ 731,796 $ 729,923 Less: Natural gas purchases 557,232 260,714 287,307 Operation and maintenance (1) 93,164 110,364 88,883 Regulatory rider expense 59,437 38,304 34,529 Depreciation and amortization 94,579 80,045 71,883 Gross margin 324,355 242,369 247,321 Add: Operation and maintenance (1) 93,164 110,364 88,883 Depreciation and amortization 94,579 80,045 71,883 Utility Gross Margin $ 512,098 $ 432,778 $ 408,087 (1) Excludes selling, general and administrative expenses of approximately $102.8 million, $97.0 million and $77.9 million for the fiscal years 2022, 2021 and 2020, respectively Utility Gross Margin consists of three components: • Utility firm gross margin generated from only the delivery component of either a sales tariff or a transportation tariff from residential and commercial customers who receive natural gas service from NJNG; • BGSS incentive programs, where revenues generated or savings achieved from BPU-approved off-system sales, capacity release or storage incentive programs are shared between customers and NJNG; and • Utility Gross Margin generated from off-tariff customers, as well as interruptible customers. Page 44 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The following provides more information on the components of Utility Gross Margin and associated throughput (Bcf) of natural gas delivered to customers: 2022 2021 2020 ($ in thousands) Margin Bcf Margin Bcf Margin Bcf Utility Gross Margin/Throughput Residential $ 341,167 45.5 $ 288,723 46.2 275,033 44.6 Commercial, industrial and other 77,629 8.7 64,950 8.6 57,929 8.2 Firm transportation 69,933 13.0 61,870 13.7 60,199 13.3 Total utility firm gross margin/throughput 488,729 67.2 415,543 68.5 393,161 66.1 BGSS incentive programs 19,587 95.2 13,415 101.3 9,471 118.4 Interruptible/off-tariff agreements 3,782 32.4 3,820 22.9 5,455 30.9 Total Utility Gross Margin/Throughput $ 512,098 194.8 $ 432,778 192.7 $ 408,087 215.4 Utility Firm Gross Margin Utility firm gross margin increased $73.2 million during fiscal 2022 compared with fiscal 2021, due primarily to the increase in base rates and the impact of riders, most notably EE, as previously discussed. BGSS Incentive Programs The factors contributing to the change in Utility Gross Margin generated by BGSS incentive programs are as follows: (Thousands) 2022 v. 2021 Off-system sales $ 6,897 Storage 1,737 Capacity release (2,462) Total increase $ 6,172 The increase in BGSS incentive programs was due primarily to increased margins from off-system sales and storage incentive, partially offset by lower capacity release volumes. Operation and Maintenance Expense O&M expense decreased $5.2 million during fiscal 2022 compared with fiscal 2021, due primarily to the deferral of bad debt costs in accordance with the July 2, 2020 BPU deferral order, partially offset by an increase in compensation and information technology expenditures. Depreciation Expense Depreciation expense increased $14.5 million in fiscal 2022, compared with fiscal 2021, as a result of additional utility plant being placed into service. Interest Expense Interest expense increased $10.0 million in fiscal 2022, compared with fiscal 2021, due primarily to increased outstanding long-term debt and lower AFUDC debt related to infrastructure projects completed and placed in service at the end of fiscal 2021. Other Income Other income decreased $6.2 million during fiscal 2022, compared with fiscal 2021, due primarily to decreased AFUDC equity as previously discussed, partially offset by increased pension costs. Page 45 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Income Tax Provision Income taxes increased $21.1 million during fiscal 2022, compared with fiscal 2021, due to higher income before income taxes. Net Income Net income increased $32.7 million during fiscal 2022, compared with fiscal 2021, due primarily to higher Utility Gross Margin, partially offset by the related increase in income taxes as previously discussed. Clean Energy Ventures Overview Clean Energy Ventures actively pursues opportunities in the renewable energy markets. Clean Energy Ventures enters into various agreements to install solar net-metered systems for residential and commercial customers, as well as large commercial grid-connected projects. In addition, Clean Energy Ventures enters into various long-term agreements, including PPAs, to supply energy from commercial solar projects. Capital expenditures related to clean energy projects are subject to change due to a variety of factors that may affect our ability to commence operations at these projects on a timely basis or at all, including logistics associated with the start-up of residential and commercial solar projects, such as timing of construction schedules, the permitting and regulatory process, any delays related to electric grid interconnection, economic trends, unforeseen events and the ability to access capital or allocation of capital to other investments or business opportunities. Clean Energy Ventures is also subject to various risks, including those associated with COVID-19, which may include impacts to residential solar customer growth and customer collections, our ability to identify and develop commercial solar asset investments, impacts to our supply chain and our ability to source materials for construction. The primary contributors toward the value of qualifying clean energy projects are tax incentives and RECs. Changes in the federal statutes related to the ITC and/or relevant state legislation and regulatory policies affecting the market for solar renewable energy credits could significantly affect future results. Solar Solar projects placed in service and related expenditures for the fiscal years ended September 30, are as follows: ($ in Thousands) 2022 2021 2020 Placed in service Projects MW Costs Projects MW Costs Projects MW Costs Grid-connected (1) (2) 3 14.0 $ 31,411 1 2.9 $ 3,433 9 60.1 $ 121,516 Net-metered: Commercial (1) 2 1.0 2,440 1 2.7 5,576 — — 43 Residential 360 3.9 11,544 421 4.8 13,885 481 5.9 17,474 Total placed in service 365 18.9 $ 45,395 423 10.4 $ 22,894 490 66.0 $ 139,033 (1) Includes projects subject to sale leaseback arrangements. (2) Includes an operational 2.9 MW commercial solar project acquired in December 2020. Clean Energy Ventures has approximately 386.6 MW of solar capacity in service. Projects that were placed in service through December 31, 2019, qualified for a 30 percent federal ITC. The credit declined to 26 percent for property under construction during 2020. In December 2020, the 26 percent federal ITC was extended through the end of 2022. Following the signing of the Inflation Reduction Act into law in August 2022, the federal ITC was restored to 30 percent through the end of 2032. There are additional opportunities to increase the credit amount up to 20 percent for certain facilities that are placed in service after December 31, 2022, based upon the type of project and location. ITC-eligible projects placed in service prior to the enactment of the Inflation Reduction Act are not impacted by the change. Page 46 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Clean Energy Ventures may enter into transactions to sell certain of its commercial solar assets concurrent with agreements to lease the assets back over a period of five to 15 years. The Company will continue to operate the solar assets and is responsible for related expenses and entitled to retain the revenue generated from RECs and energy sales. The ITCs and other tax benefits associated with these solar projects transfer to the buyer if applicable; however, the lease payments are structured so that Clean Energy Ventures is compensated for the transfer of the related tax incentives. Accordingly, for solar projects financed under sale leasebacks for which the assets were sold during the first 5 years of in-service life, Clean Energy Ventures recognizes the equivalent value of the ITC in other income on the Consolidated Statements of Operations over the respective five-year ITC recapture periods, starting with the second year of the lease. During fiscal 2022, 2021 and 2020, Clean Energy Ventures received proceeds of $24.1 million, $17.7 million and $42.9 million, respectively, in connection with the sale leaseback of commercial solar assets. As part of its solar investment portfolio, Clean Energy Ventures operates a residential and small commercial solar program, The Sunlight Advantage®, that provides qualifying homeowners and small business owners the opportunity to have a solar system installed at their home or place of business with no installation or maintenance expenses. Clean Energy Ventures owns, operates and maintains the system over the life of the contract in exchange for monthly payments. For solar installations placed in-service in New Jersey prior to April 30, 2020, each MWh of electricity produced creates an SREC that represents the renewable energy attribute of the solar-electricity generated that can be sold to third parties, predominantly load-serving entities that are required to comply with the solar requirements under New Jersey’s renewable portfolio standard. In December 2019, the BPU established the TREC as the successor program to the SREC program. TRECs provide a fixed compensation base multiplied by an assigned project factor in order to determine their value. The project factor is determined by the type and location of the project, as defined. All TRECs generated are required to be purchased monthly by a TREC program administrator as appointed by the BPU. In July 2021, the BPU established a new successor solar incentive program. This Administratively Determined Incentive Program, which we refer to as SREC IIs, provides administratively set incentives for net metered residential projects and net metered non-residential projects of 5 MW or less. REC activity consisted of the following: 2022 2021 2020 SRECs TRECs SRECs TRECs SRECs TRECs Inventory balance as of October 1, 108,104 6,944 35,011 9,270 53,395 — RECs generated 425,453 (1) 38,914 406,118 31,767 389,716 9,270 RECs delivered (417,305) (35,099) (333,025) (34,093) (408,100) — Inventory balance as of September 30, 116,252 10,759 108,104 6,944 35,011 9,270 (1) Includes 247 SREC IIs generated during fiscal 2022 related to residential solar. The average SREC sales price was $202 during fiscal 2022, $196 in fiscal 2021 and $199 in fiscal 2020, and the average TREC price was $139 during fiscal 2022 and $144 in both fiscal 2021 and 2020. Clean Energy Ventures hedges its expected SREC production through the use of forward sales contracts. The following table reflects the hedged percentage of our projected inventory of SRECs related to its in-service commercial and residential assets at September 30, 2022: Energy Year (1) Percent of SRECs Hedged 2023 98% 2024 98% 2025 89% 2026 29% (1) Energy years are compliance periods for New Jersey’s renewable portfolio standard that run from June 1 to May 31. There are no direct costs associated with the production of RECs by our solar assets. All related costs are included as a component of O&M expenses on the Consolidated Statements of Operations, including such expenses as facility maintenance and broker fees. Page 47 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Results Clean Energy Ventures’ financial results for the fiscal years ended September 30, are summarized as follows: (Thousands) 2022 2021 2020 Operating revenues $ 128,280 $ 95,275 $ 102,617 Operating expenses Operation and maintenance 40,706 36,715 30,310 Depreciation and amortization (1) 21,396 20,567 25,329 Total operating expenses (1) 62,102 57,282 55,639 Operating income (1) 66,178 37,993 46,978 Other income, net 6,554 6,392 6,420 Interest expense, net 21,968 22,548 20,253 Income tax provision (1) 11,361 5,048 11,034 Net income (1) $ 39,403 $ 16,789 $ 22,111 (1) Amounts in fiscal 2020 have been adjusted for the change in accounting method related to ITCs; see Note 2. Summary of Significant Accounting Policies for more detail. Operating Revenues Operating revenues increased $33.0 million in fiscal 2022, compared with fiscal 2021, due primarily to increased SREC and electricity sales. Operation and Maintenance Expense O&M expense increased $4.0 million in fiscal 2022, compared with fiscal 2021, due primarily to increased project maintenance, compensation, lease and consulting expenses. Income Tax Provision Income taxes increased $6.3 million during fiscal 2022, compared with fiscal 2021, due primarily to higher operating income. Net Income Net income in fiscal 2022 increased $22.6 million, compared with fiscal 2021, due primarily to the increased operating revenues, as previously discussed, partially offset by higher operating expenses and related income taxes. Energy Services Overview Energy Services markets and sells natural gas to wholesale and retail customers and manages natural gas transportation and storage assets throughout major market areas across North America. Energy Services maintains a strategic portfolio of natural gas transportation and storage contracts that it utilizes in conjunction with its market expertise to provide service and value to its customers. Availability of these transportation and storage contracts allows Energy Services to generate market opportunities by capturing price differentials over specific time horizons and between geographic market locations. Energy Services also provides management of transportation and storage assets for natural gas producers and regulated utilities. These management transactions typically involve the release of producer/utility-owned storage and/or transportation capacity in combination with an obligation to either purchase and/or deliver physical natural gas. In addition to the contractual purchase and/or sale of physical natural gas, Energy Services generates or pays fee-based margin in exchange for its active management and may provide the producer and/or utility with additional margin based on actual results. In conjunction with the active management of these contracts, Energy Services generates Financial Margin by identifying market opportunities and simultaneously entering into natural gas purchase/sale, storage or transportation contracts and financial derivative contracts. In cases where storage is utilized to fulfill these contracts, these forecast sales and/or purchases Page 48 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) are economically hedged through the use of financial derivative contracts. The financial derivative contracts consist primarily of exchange-traded futures, options and swap contracts, and are frequently used to lock in anticipated transactional cash flows and to help manage volatility in natural gas market prices. Generally, when its transportation and storage contracts are exposed to periods of increased market volatility, Energy Services is able to implement strategies that allow it to capture margin by improving the respective time or geographic spreads on a forward basis. Energy Services accounts for its physical commodity contracts and its financial derivative instruments at fair value on the Consolidated Balance Sheets. Changes in the fair value of physical commodity contracts and financial derivative instruments are included in earnings as a component of operating revenues or natural gas purchases on the Consolidated Statements of Operations. Volatility in reported net income at Energy Services can occur over periods of time due to changes in the fair value of derivatives, as well as timing differences related to certain transactions. Unrealized gains and losses can fluctuate as a result of changes in the price of natural gas, SRECs and foreign currency from the original transaction price. Volatility in earnings can also occur as a result of timing differences between the settlement of financial derivatives and the sale of the underlying physical commodity. For example, when a financial instrument settles and the physical natural gas is injected into inventory, the realized gains and losses associated with the financial instrument are recognized in earnings. However, the gains and losses associated with the physical natural gas are not recognized in earnings until the natural gas inventory is withdrawn from storage and sold, at which time Energy Services realizes the entire margin on the transaction. During December 2020, Energy Services entered into a series of AMAs with an investment grade public utility to release pipeline capacity associated with certain natural gas transportation contracts. The utility provides certain asset management services, and Energy Services may deliver natural gas to the utility in exchange for aggregate net proceeds of approximately $500 million, payable through November 1, 2030. The AMAs include a series of initial and permanent releases, which commenced on November 1, 2021. NJR will receive a total of approximately $260 million in cash from fiscal 2022 through fiscal 2024 and $34 million per year from fiscal 2025 through fiscal 2031 under the agreements. Energy Services recognized $53.0 million of operating revenue during fiscal 2022 on the Consolidated Statements of Operations. Amounts received in excess of revenue recognized, totaling $33.8 million, are included in deferred revenue on the Consolidated Balance Sheets. Operating Results Energy Services’ financial results for the fiscal years ended September 30, are summarized as follows: (Thousands) 2022 2021 2020 Operating revenues (1) $ 1,529,272 $ 1,228,420 $ 1,030,419 Operating expenses Natural gas purchases (including demand charges (2)(3) ) 1,394,405 1,098,261 1,024,579 Operation and maintenance 39,080 50,885 17,368 Depreciation and amortization 148 111 123 Total operating expenses 1,433,633 1,149,257 1,042,070 Operating income (loss) 95,639 79,163 (11,651) Other income, net 512 369 304 Interest expense, net 4,725 2,204 3,276 Income tax provision (benefit) 21,776 18,371 (3,615) Net income (loss) $ 69,650 $ 58,957 $ (11,008) (1) Includes related party transactions of approximately $94,000, $426,000 and $1.1 million for fiscal 2022, 2021 and 2020, respectively, which are eliminated in consolidation. (2) Costs associated with pipeline and storage capacity are expensed over the term of the related contracts, which generally varies from less than one year to ten years. (3) Includes related party transactions of approximately $1.0 million, $841,000 and $183,000 for fiscal 2022, 2021 and 2020, respectively, a portion of which is eliminated in consolidation. Page 49 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Energy Services’ portfolio of financial derivative instruments are composed of: (in Bcf) 2022 2021 2020 Net short futures and swaps contracts 0.7 13.7 29.3 During fiscal 2022 and 2021, the net short position resulted in an unrealized loss of $8.5 million and $53.5 million, respectively. Operating Revenues and Natural Gas Purchases Operating revenues increased $300.9 million and natural gas purchases increased $296.1 million during fiscal 2022, compared with fiscal 2021, due primarily to a 114.3 percent increase in natural gas prices. To a lesser extent, operating revenues also increased $53.0 million, due to AMAs with an investment grade public utility that commenced in November 2021, partially offset by increased natural gas price volatility related to the extreme weather in the mid-continent and southern regions of the U.S. during February 2021, which did not reoccur to the same extent during 2022. Future results at Energy Services are contingent upon natural gas market price volatility driven by variations in both the supply and demand balances caused by weather and other factors. As a result, variations in weather patterns in the key market areas served may affect earnings during the fiscal year. Changes in market fundamentals, such as an increase in supply and decrease in demand due to warmer temperatures and reduced volatility, can negatively impact Energy Services’ earnings. See Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations - Natural Gas Distribution for TETCO M-3 Daily Prices, which illustrates the daily natural gas prices in the Northeast market region. Operation and Maintenance Expense O&M expense decreased $11.8 million during fiscal 2022, compared with fiscal 2021, due primarily to decreased compensation costs, bad debt expense and charitable contributions. Income Tax Provision Income taxes increased $3.4 million during fiscal 2022, compared with fiscal 2021, due primarily to increased income before income taxes related to the increased natural gas price volatility, partially offset by decreased O&M. Net Income Net income increased $10.7 million during fiscal 2022, compared with fiscal 2021, due primarily to increased operating income, partially offset by higher income taxes, as previously discussed. Non-GAAP Financial Measures Management uses Financial Margin and NFE, non-GAAP financial measures, when evaluating the operating results of Energy Services. Financial Margin and NFE are based on removing timing differences associated with certain derivative instruments. GAAP also requires us, during the interim periods, to estimate our annual effective tax rate and use this rate to calculate the year-to-date tax provision. We also determine an annual estimated effective tax rate for NFE purposes and calculate a quarterly tax adjustment based on the differences between our forecasted net income and our forecasted NFE for the fiscal year. This adjustment is applied to Energy Services, as the adjustment primarily relates to timing differences associated with certain derivative instruments which impacts the estimate of the annual effective tax rate for NFE. No adjustment is needed during the fourth quarter, since the actual effective tax rate is calculated at year end. Management views these measures as representative of the overall expected economic result and uses these measures to compare Energy Services’ results against established benchmarks and earnings targets, as these measures eliminate the impact of volatility on GAAP earnings as a result of timing differences associated with the settlement of derivative instruments. To the extent that there are unanticipated impacts from changes in the market value related to the effectiveness of economic hedges, Energy Services’ actual non-GAAP results can differ from the results anticipated at the outset of the transaction. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure. Page 50 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) When Energy Services reconciles the most directly comparable GAAP measure to both Financial Margin and NFE, the current period unrealized gains and losses on derivatives are excluded as a reconciling item. Financial Margin and NFE also exclude the effects of economic hedging of the value of our natural gas in storage and, therefore, only include realized gains and losses related to natural gas withdrawn from storage, effectively matching the full earnings effects of the derivatives with realized margins on the related physical natural gas flows. Financial Margin differs from gross margin as defined on a GAAP basis, as it excludes certain operations and maintenance expense and depreciation and amortization as well as the effects of derivatives as discussed above. Financial Margin A reconciliation of gross margin, the closest GAAP financial measure, to Energy Services’ Financial Margin is as follows: (Thousands) 2022 2021 2020 Operating revenues $ 1,529,272 $ 1,228,420 $ 1,030,419 Less: Natural gas purchases 1,394,405 1,098,261 1,024,579 Operation and maintenance (1) 23,709 33,263 15,477 Depreciation and amortization 148 111 123 Gross margin 111,010 96,785 (9,760) Add: Operation and maintenance (1) 23,709 33,263 15,477 Depreciation and amortization 148 111 123 Unrealized (gain) loss on derivative instruments and related transactions (2) (60,000) 58,362 (8,583) Effects of economic hedging related to natural gas inventory (3) 19,939 (42,405) 12,690 Financial margin $ 94,806 $ 146,116 $ 9,947 (1) Excludes administrative and general expenses of $15.4 million, $17.6 million and $1.9 million for fiscal years ended September 30, 2022, 2021 and 2020, respectively. (2) Includes unrealized losses (gains) related to an intercompany transaction between NJNG and Energy Services that have been eliminated in consolidation of approximately $72,000, $(3.2) million and $(809,000), net of taxes for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. (3) Effects of hedging natural gas inventory transactions where the economic impact is realized in a future period. Financial Margin decreased $51.3 million during fiscal 2022, compared with fiscal 2021, due primarily to price volatility related to the extreme weather in the mid-continent and southern regions of the U.S. during February 2021, which did not reoccur to the same extent during 2022, partially offset by the AMAs which commenced November 2021, as previously discussed. Net Financial Earnings A reconciliation of Energy Services’ net income (loss), the most directly comparable GAAP financial measure to NFE, is as follows for the fiscal years ended September 30: (Thousands) 2022 2021 2020 Net income (loss) $ 69,650 $ 58,957 $ (11,008) Add: Unrealized (gain) loss on derivative instruments and related transactions (60,000) 58,362 (8,583) Tax effect (1) 14,270 (13,875) 2,044 Effects of economic hedging related to natural gas inventory 19,939 (42,405) 12,690 Tax effect (4,738) 10,078 (3,016) Net financial earnings $ 39,121 $ 71,117 $ (7,873) (1) Includes taxes related to an intercompany transaction between NJNG and Energy Services that have been eliminated in consolidation of approximately $(21,000), $988,000 and $252,000 for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. NFE decreased $32.0 million during fiscal 2022, compared with fiscal 2021, due primarily to lower Financial Margin, as previously discussed. Page 51 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Future results are subject to Energy Services’ ability to expand its wholesale sales and service activities and are contingent upon many other factors, including an adequate number of appropriate and credit-qualified counterparties in an active and liquid natural marketplace; volatility in the natural gas market due to weather or other fundamental market factors impacting supply and/or demand; transportation, storage and/or other market arbitrage opportunities; sufficient liquidity in the overall energy trading market; and continued access to liquidity in the capital markets. Storage and Transportation Overview Storage and Transportation invests in natural gas assets, such as natural gas transportation and storage facilities. We believe that acquiring, owning and developing these storage and transportation assets, which operate under a tariff structure that has either cost- or market-based rates, can provide us a growth opportunity. Storage and Transportation is subject to various risks, including the construction, development and operation of our transportation and storage assets, obtaining necessary governmental, environmental and regulatory approvals, our ability to obtain necessary property rights and our ability to obtain financing at reasonable costs for the construction, operation and maintenance of our assets. In addition, our storage and transportation assets may be subject to risk associated with the COVID-19 pandemic, such as disruption to the supply chain and availability of critical equipment and supplies, disruptions to the availability of our specialized workforce and contractors and changes to demand for natural gas, transportation and other downstream activities. Storage and Transportation is comprised of Leaf River, a 32.2 million Dth salt dome natural gas storage facility that operates under market-based rates, and Adelphia Gateway, an existing 84-mile pipeline in southeastern Pennsylvania. Adelphia Gateway operates under cost-of-service rates but can enter into negotiated rates with counterparties. The northern portion of the pipeline was operational upon acquisition, and it currently serves two natural gas generation facilities. On October 5, 2020, we began the conversion of the southern zone of the pipeline to natural gas, which became fully operational on September 2, 2022. Storage and Transportation also has a 50 percent ownership interest in Steckman Ridge, a storage facility located in western Pennsylvania that operates under market-based rates. As of September 30, 2022, our investment in Steckman Ridge was $106.6 million. Storage and Transportation also has a 20 percent interest in PennEast, a partnership whose purpose was to construct and operate a 120-mile natural gas pipeline that would have extended from northeast Pennsylvania to western New Jersey. PennEast received a Certificate of Public Convenience and Necessity for the project from FERC in January 2018. However, because of numerous regulatory and legal challenges, we evaluated our equity investment in PennEast for impairment during fiscal 2021, and determined that it was other-than-temporarily impaired. We estimated the fair value of our investment in PennEast using probability weighted scenarios assigned to discounted future cash flows. The impairment was the result of management’s estimates and assumptions regarding the likelihood of certain outcomes related to required regulatory approvals and pending legal matters, the timing and magnitude of construction costs and in-service dates, the evaluation of the current environmental and political climate as it relates to interstate pipeline development, and transportation capacity revenues and discount rates. During the third quarter of fiscal 2021, the PennEast partnership determined that this project is no longer supported, and all further development ceased. The Company recognized an other-than-temporary impairment charge of $92.0 million, or approximately $74.5 million, net of income taxes, which represents the best estimate of the salvage value of the remaining assets of the project. Other-than-temporary impairments are recorded in equity in (losses) earnings from affiliates in the Consolidated Statements of Operations. On December 16, 2021, the FERC dismissed PennEast’s pending applications. The order vacates the certificate authorization for the PennEast pipeline project in light of PennEast’s response to FERC staff’s November 23, 2021 request for a status update, in which PennEast informed the Commission it is no longer developing the project. The order vacates the certificate authorization, subject to leave of the U.S. Court of Appeals for the D.C. Circuit where the Commission’s certificate and rehearing orders are under review. During fiscal 2022, the PennEast board of managers approved cash distributions to members of the partnership following the sale of certain project-related assets and refunds of interconnection fees received from interstate pipelines. The return of capital received by the Company, which totaled $11.0 million, reduced the remaining carrying value of its equity method investment in PennEast to zero, with the excess recorded in equity in earnings (loss) of affiliates in the Consolidated Statements of Operations. Page 52 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Results The financial results of Storage and Transportation for the fiscal years ended September 30, are summarized as follows: (Thousands) 2022 2021 2020 Operating revenues (1) $ 67,735 $ 51,020 $ 44,728 Operating expenses Natural gas purchases 2,702 1,266 1,122 Operation and maintenance 30,568 29,135 21,862 Depreciation and amortization 12,302 9,960 9,293 Total operating expenses 45,572 40,361 32,277 Operating income 22,163 10,659 12,451 Other income, net 8,546 5,931 7,328 Interest expense, net 12,097 13,348 13,124 Income tax provision (benefit) 1,879 (10,043) 4,247 Equity in earnings (loss) of affiliates 9,865 (81,072) 15,903 Net income (loss) $ 26,598 $ (67,787) $ 18,311 (1) Includes related party transactions of approximately $2.4 million, $1.8 million and $2.7 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively, which are eliminated in consolidation. Operating Revenues Operating revenue increased $16.7 million during fiscal 2022, compared with fiscal 2021, due primarily to increased natural gas transportation revenue for Adelphia Gateway and increased hub services revenue for Leaf River. Equity in earnings of affiliates increased $90.9 million during fiscal 2022, compared with fiscal 2021, due primarily to the impairment of our equity method investment in PennEast during fiscal 2021, which did not reoccur during fiscal 2022. Operation and Maintenance Expense O&M expense increased $1.4 million during fiscal 2022, compared with fiscal 2021, due primarily to increased compensation expense. Depreciation Expense Depreciation expense increased $2.3 million during fiscal 2022, compared with fiscal 2021, due primarily to the southern end of Adelphia Gateway, which was not operational during fiscal 2021, being placed into service in fiscal 2022. Other Income, Net Other income increased $2.6 million during fiscal 2022, compared with fiscal 2021, due primarily to increased AFUDC equity related to the Adelphia Gateway project. Interest Expense Interest expense, net decreased $1.3 million during fiscal 2022, compared with fiscal 2021, due primarily to reduced debt related to the PennEast project. Net Income Net income increased $94.4 million during fiscal 2022, compared with fiscal 2021, due primarily to the absence of the impairment of our equity method investment in PennEast, as previously discussed. Page 53 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Non-GAAP Financial Measures Management uses NFE, a non-GAAP financial measure, when evaluating the operating results of Storage and Transportation. Certain transactions associated with equity method investments and their impact, including impairment charges, which are non-cash charges, and the return of capital in excess of the carrying value of our investment, are excluded for NFE purposes. The details of such adjustments can be found in the table below. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP, and should be considered in addition to, and not as a substitute for the comparable GAAP measure. A reconciliation of Storage and Transportations’ net income, the most directly comparable GAAP financial measure to NFE, is as follows: (Thousands) 2022 2021 2020 Net income (loss) $ 26,598 $ (67,787) $ 18,311 Add: (Gain on) impairment of equity method investment (5,521) 92,000 — Tax effect 1,377 (11,167) — Net financial earnings $ 22,454 $ 13,046 $ 18,311 NFE increased $9.4 million during fiscal 2022, compared with fiscal 2021, due primarily to increased operating revenue at both Adelphia Gateway and Leaf River along with and higher AFUDC at Adelphia Gateway as previously discussed. Home Services and Other Overview The financial results of Home Services and Other consist primarily of the operating results of NJRHS. NJRHS provides service, sales and installation of appliances to service contract customers and has been focused on growing its installation business and expanding its service contract customer base. Home Services and Other also includes organizational expenses incurred at NJR and home warranty contract income at NJR Retail. Operating Results The condensed financial results of Home Services and Other for the fiscal years ended September 30, are summarized as follows: (Thousands) 2022 2021 2020 Operating revenues $ 56,182 $ 52,229 $ 51,017 Income (loss) before income taxes $ 278 $ (1,022) $ 3,306 Income tax provision (benefit) $ 1,059 $ (196) $ (2,478) Net (loss) income $ (781) $ (826) $ 5,784 Operating Revenues Operating revenues increased $4.0 million during fiscal 2022, compared with fiscal 2021, due primarily to increased installation revenue at NJRHS. Net Income Net income increased $45,000 during fiscal 2022, compared with fiscal 2021, due primarily to increased revenue as previously discussed, partially offset by an increase in income taxes. Page 54 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources Our objective is to maintain an efficient consolidated capital structure that reflects the different characteristics of each reporting segment and other business operations and provides adequate financial flexibility for accessing capital markets as required. Our consolidated capital structure as of September 30, was as follows: 2022 2021 Common stock equity 38 % 38 % Long-term debt 52 51 Short-term debt 10 11 Total 100 % 100 % Common Stock Equity We satisfy our external common equity requirements, if any, through issuances of our common stock, including the proceeds from stock issuances under our DRP. The DRP allows us, at our option, to use treasury shares or newly issued shares to raise capital. NJR raised approximately $14.7 million and $15.1 million of equity through the DRP during fiscal 2022 and 2021, respectively. In December 2019, we completed an equity offering of 6,545,454 common shares, consisting of 5,333,334 common shares issued directly by NJR and 1,212,120 common shares issuable pursuant to forward sales agreements with investment banks. In March 2021, we cash settled a portion of the forward sale agreement for a payout of approximately $388,000 in lieu of the issuance of 727,272 common shares. In May 2021, we cash settled the rest of the forward sale agreements for a payout of approximately $2.4 million in lieu of the issuance of 484,848 common shares. In 1996, the Board of Directors authorized us to implement a share repurchase program, which has been expanded seven times since the inception of the program, authorizing a total of 19.5 million shares of common stock for repurchase. As of September 30, 2022, we had repurchased a total of approximately 17.8 million of those shares and may repurchase an additional 1.7 million shares under the approved program. There were no shares repurchased during fiscal 2022 and 746,000 shares repurchased during fiscal 2021. Debt NJR and its unregulated subsidiaries generally rely on cash flows generated from operating activities and the utilization of committed credit facilities to provide liquidity to meet working capital and short-term debt financing requirements. NJNG also relies on the issuance of commercial paper for short-term funding. NJR and NJNG, as borrowers, periodically access the capital markets to fund long-life assets through the issuance of long-term debt securities. We believe that our existing borrowing availability, equity proceeds and cash flows from operations will be sufficient to satisfy our working capital, capital expenditures and dividend requirements for at least the next 12 months. NJR, NJNG, Clean Energy Ventures, Storage and Transportation and Energy Services currently anticipate that each of their financing requirements for the next 12 months will be met primarily through the issuance of short- and long-term debt, and meter or solar asset sale leasebacks. We believe that as of September 30, 2022, NJR and NJNG were, and currently are, in compliance with all existing debt covenants, both financial and non-financial. As a result of the COVID-19 pandemic, recent geopolitical tensions and inflationary pressures, there has been uncertainty and volatility in the credit and capital markets. We have been able to obtain sufficient financing to meet our funding requirements for operations and capital expenditures; however, our ability to access funds from financial institutions at a reasonable cost in the future may impact the nature and timing of future capital market transactions. Short-Term Debt We use our short-term borrowings primarily to finance Energy Services’ short-term liquidity needs, Storage and Transportation investments, share repurchases and, on an initial basis, Clean Energy Ventures’ investments. Energy Services’ use of high-volume storage facilities and anticipated pipeline park and loan arrangements, combined with related economic hedging activities in the volatile wholesale natural gas market, create significant short-term cash requirements. As of September 30, 2022, NJR had a revolving credit facility and a term loan totaling $800 million, with $440.2 million available under the facility and term loan. Page 55 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NJNG satisfies its debt needs by issuing short-term and long-term debt based on its financial profile. The seasonal nature of NJNG’s operations creates large short-term cash requirements, primarily to finance natural gas purchases and customer accounts receivable. NJNG obtains working capital for these requirements, and for the temporary financing of construction and MGP remediation expenditures and energy tax payments, based on its financial profile, through the issuance of commercial paper supported by the NJNG Credit Facility or through short-term bank loans under the NJNG Credit Facility. NJNG’s commercial paper is sold through several commercial banks under an issuing and paying agency agreement and is supported by the $250 million NJNG Credit Facility. As of September 30, 2022, the unused amount available under the NJNG Credit Facility, including amounts allocated to the backstop under the commercial paper program and the issuance of letters of credit, was $175.5 million. Short-term borrowings were as follows: Twelve Months Ended (Thousands) September 30, 2022 NJR Notes Payable to banks: Balance at end of period $ 350,150 Weighted average interest rate at end of period 3.90 % Average balance for the period $ 362,429 Weighted average interest rate for average balance 1.84 % Month end maximum for the period $ 494,060 NJNG Commercial Paper and Notes Payable to banks: Balance at end of period $ 73,800 Weighted average interest rate at end of period 3.34 % Average balance for the period $ 65,480 Weighted average interest rate for average balance 0.80 % Month end maximum for the period $ 177,700 Due to the seasonal nature of natural gas prices and demand, and because inventory levels are built up during its natural gas injection season (April through October), NJR and NJNG’s short-term borrowings tend to peak in the November through January time frame. NJR During fiscal 2021, NJR entered into a Second Amended and Restated Credit Agreement governing a $500 million NJR Credit Facility, which was to expire on September 2, 2026. The NJR Credit Facility is subject to two mutual options for a one-year extension beyond that date and includes an accordion feature, which allows NJR, in the absence of a default or event of default, to increase from time to time, with the existing or new lenders, the revolving credit commitments under the NJR Credit Facility in increments of $50 million up to a maximum of $250 million. The NJR Credit Facility also permits the borrowing of revolving loans and swingline loans, as well as a $75 million sublimit for the issuance of letters of credit. On August 30, 2022, NJR amended the Second Amended and Restated Credit Agreement to $650 million and extended the maturity date of the facility to September 2, 2027. The amendment also increased the swingline to $70 million from $60 million and moved to SOFR as the benchmark rate, replacing the existing LIBOR. Certain of NJR’s unregulated subsidiaries have guaranteed all of NJR’s obligations under the NJR Credit Facility. The credit facility is used primarily to finance its share repurchases, to satisfy Energy Services’ short-term liquidity needs and to finance, on an initial basis, unregulated investments. As of September 30, 2022, NJR had seven letters of credit outstanding totaling $9.7 million, which reduced the amount available under the NJR Credit Facility by the same amount. NJR does not anticipate that these letters of credit will be drawn upon by the counterparties. On February 8, 2022, NJR entered into a 364-day $150 million term loan credit agreement with an interest rate based on SOFR plus 0.85 percent, which expires on February 7, 2023. The Company borrowed $50 million on February 9, 2022 and $100 million on February 14, 2022 under the term loan. Page 56 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Based on its average borrowings during fiscal 2022, NJR’s average interest rate was 1.84 percent, resulting in interest expense of approximately $7.1 million. Based on average borrowings of $362.4 million during the period, a 100 basis point change in the underlying average interest rate would have caused a change in interest expense of approximately $3.7 million during fiscal 2022. Neither NJNG nor its assets are obligated or pledged to support the NJR Credit Facility. NJNG During fiscal 2021, NJNG entered into a Second Amended and Restated Credit Agreement governing a $250 million NJNG Credit Facility, which was to expire on September 2, 2026. The NJNG Credit Facility is subject to two mutual options for a one-year extension beyond that date and permits the borrowing of revolving loans and swingline loans, as well as a $30 million sublimit for the issuance of letters of credit. The NJNG Credit Facility also includes an accordion feature, which would allow NJNG, in the absence of a default or event of default, to increase from time to time, with the existing or new lenders, the revolving credit commitments under the NJNG Credit Facility in minimum increments of $50 million up to a maximum of $100 million. On August 30, 2022, NJNG amended the Second Amended and Restated Credit Agreement to extend the maturity date of the facility to September 2, 2027 and moved to SOFR as the benchmark rate, replacing the existing LIBOR. As of September 30, 2022, NJNG had two letters of credit outstanding for $731,000, which reduced the amount available under the NJNG Credit Facility by the same amount. NJNG does not anticipate that these letters of credit will be drawn upon by the counterparties. Based on its average borrowings during fiscal 2022, NJNG’s average interest rate was 0.80 percent, resulting in interest expense of $223,000. Based on average borrowings of $65.5 million during the period, a 100 basis point change in the underlying average interest rate would have caused a change in interest expense of approximately $667,000 during fiscal 2022. Short-Term Debt Covenants Borrowings under the NJR Credit Facility, term loan credit agreement and NJNG Credit Facility are conditioned upon compliance with a maximum leverage ratio (consolidated total indebtedness to consolidated total capitalization as defined in the applicable agreements) of not more than .70 to 1.00 for NJR and .65 to 1.00 for NJNG. These revolving credit facilities and term loan credit agreement contain customary representations and warranties for transactions of this type. They also contain customary events of default and certain covenants that will limit NJR’s or NJNG’s ability, beyond agreed upon thresholds, to, among other things: • incur additional debt; • incur liens and encumbrances; • make dispositions of assets; • enter into transactions with affiliates; and • merge, consolidate, transfer, sell or lease all or substantially all of the borrowers’ or guarantors’ assets. These covenants are subject to a number of exceptions and qualifications set forth in the applicable agreements. Default Provisions The agreements governing our long-term and short-term debt obligations include provisions that, if not complied with, could require early payment or similar actions. Default events include, but are not limited to, the following: • defaults for non-payment; • defaults for breach of representations and warranties; • defaults for insolvency; • defaults for non-performance of covenants; • cross-defaults to other debt obligations of the borrower; and • guarantor defaults. The occurrence of an event of default under these agreements could result in all loans and other obligations of the borrower becoming immediately due and payable and the termination of the credit facilities or term loan. Page 57 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Long-Term Debt NJR As of September 30, 2022, NJR had the following outstanding: • $50 million of 3.20 percent senior notes due August 18, 2023; • $100 million of 3.48 percent senior notes due November 7, 2024; • $100 million of 3.54 percent senior notes due August 18, 2026; • $110 million of 4.38 percent senior notes due June 23, 2027; • $100 million of 3.96 percent senior notes due June 8, 2028; • $150 million of 3.29 percent senior notes due July 17, 2029; • $130 million of 3.50 percent senior notes due July 23, 2030; • $130 million of 3.60 percent senior notes due July 23, 2032; • $80 million of 3.25 percent senior notes due September 1, 2033; • $120 million of 3.13 percent senior notes due September 1, 2031; and • $50 million of 3.64 percent senior notes due September 19, 2034. On June 23, 2022, NJR entered into a Note Purchase Agreement under which NJR issued $110 million, Series 2022A senior notes at a fixed rate of 4.38 percent, maturing in 2027. On September 16, 2022, NJR amended an existing Note Purchase Agreement to provide for the issuance of $50 million, Series C senior notes at a fixed rate of 3.64 percent, maturing in 2034. The senior notes are unsecured and guaranteed by certain unregulated subsidiaries of NJR. Neither NJNG nor its assets are obligated or pledged to support NJR’s long-term debt. NJNG As of September 30, 2022, NJNG’s long-term debt consisted of $1.3 billion in fixed-rate debt issuances secured by the Mortgage Indenture, with maturities ranging from 2024 to 2061, and $23.8 million in finance leases with various maturities ranging from 2024 to 2028. On October 28, 2021, NJNG entered into a Note Purchase Agreement providing for the issuance of $100 million of its senior notes, of which $50 million were issued at an interest rate of 2.97 percent, maturing in 2051, and $50 million were issued at an interest rate of 3.07 percent, maturing in 2061. On May 27, 2022, NJNG entered into a Note Purchase Agreement for $100 million of its senior notes, of which $50 million were issued at an interest rate of 4.37 percent, maturing in 2037, and $50 million were issued at an interest rate of 4.71 percent, maturing in 2052. On October 24, 2022, NJNG entered into a Note Purchase Agreement for $125 million of its senior notes at an interest rate of 5.47 percent, maturing in 2052. Senior notes are secured by an equal principal amount of NJNG’s FMBs issued under NJNG’s Mortgage Indenture. NJR is not obligated directly or contingently with respect to the NJNG’s fixed-rate debt issuances. Long-Term Debt Covenants and Default Provisions The NJR and NJNG long-term debt instruments contain customary representations and warranties for transactions of their type. They also contain customary events of default and certain covenants that will limit NJR or NJNG’s ability beyond agreed upon thresholds to, among other things: • incur additional debt (including a covenant that limits the amount of consolidated total debt of the borrower at the end of a fiscal quarter to 70 percent for NJR and 65 percent for NJNG of the consolidated total capitalization of the borrower, as those terms are defined in the applicable agreements, and a covenant limiting priority debt to 20 percent of the borrower’s consolidated total capitalization, as those terms are defined in the applicable agreements); • incur liens and encumbrances; • make loans and investments; Page 58 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • make dispositions of assets; • make dividends or restricted payments; • enter into transactions with affiliates; and • merge, consolidate, transfer, sell or lease substantially all of the borrower’s assets. The aforementioned covenants are subject to a number of exceptions and qualifications set forth in the applicable note purchase agreements. In addition, the FMBs issued by NJNG under the Mortgage Indenture are subject to certain default provisions. Events of Default, as defined in the Mortgage Indenture, consist mainly of: • failure for 30 days to pay interest when due; • failure to pay principal or premium when due and payable; • failure to make sinking fund payments when due; • failure to comply with any other covenants of the Mortgage Indenture after 30 days’ written notice from the Trustee; • failure to pay or provide for judgments in excess of $30 million in aggregate amount within 60 days of the entry thereof; or • certain events that are or could be the basis of a bankruptcy, reorganization, insolvency or receivership proceeding. Upon the occurrence and continuance of such an Event of Default, the Mortgage Indenture, subject to any provisions of law applicable thereto, provides that the Trustee may take possession and conduct the business of NJNG, may sell the trust estate or proceed to foreclose the lien of the Mortgage Indenture. The interest rate on defaulted principal and interest, to the extent permitted by law, on the FMBs issued under the Mortgage Indenture is the rate stated in the applicable supplement or, if no such rate is stated, six percent per annum. Sale Leaseback NJNG NJNG received $17.3 million and $4.0 million in fiscal 2022 and 2020, respectively, in connection with the sale leaseback of its natural gas meters. NJNG records a financing lease obligation that is paid over the term of the lease and has the option to purchase the meters back at fair value upon expiration of the lease. NJNG continues to evaluate this sale leaseback program based on current market conditions. Natural gas meters are excepted from the lien on NJNG property under the Mortgage Indenture. There were no natural gas meter sale leasebacks recorded during fiscal 2021. Clean Energy Ventures Clean Energy Ventures enters into transactions to sell the commercial solar assets concurrent with agreements to lease the assets back over a period of five to 15 years. These transactions are considered failed sale leasebacks for accounting purposes and are therefore treated as financing obligations, which are typically secured by the renewable energy facility asset and its future cash flows from RECs and energy sales. ITCs and other tax benefits associated with these solar projects are transferred to the buyer, if applicable; however, the lease payments are structured so that Clean Energy Ventures is compensated for the transfer of the related tax incentives. Clean Energy Ventures continues to operate the solar assets, including related expenses, and retain the revenue generated from RECs and energy sales, and has the option to renew the lease or repurchase the assets sold at the end of the lease term. During fiscal 2022, 2021 and 2020, Clean Energy Ventures received proceeds of $24.1 million, $17.7 million and $42.9 million, respectively, in connection with the sale leaseback of commercial solar projects. The proceeds received were recognized as a financing obligation on the Consolidated Balance Sheets. Contractual Obligations and Capital Expenditures As of September 30, 2022, there were NJR guarantees covering approximately $261.7 million of natural gas purchases and Energy Services demand fee commitments and nine outstanding letters of credit totaling $10.4 million, as previously mentioned, not yet reflected in accounts payable on the Consolidated Balance Sheets. Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory constraints, environmental regulations, unforeseen events and the ability to access capital. Page 59 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NJNG’s total capital expenditures are projected to be between $352 million and $378 million during fiscal 2023. Total capital expenditures spent or accrued during fiscal 2022 were $282.2 million. NJNG expects to fund its obligations with a combination of cash flows from operations, cash on hand, issuance of commercial paper, available capacity under its revolving credit facility and the issuance of long-term debt. As of September 30, 2022, NJNG’s future MGP expenditures are estimated to be $127.1 million. For a more detailed description of MGP expenditures, see Note 15. Commitments and Contingent Liabilities in the accompanying Consolidated Financial Statements. During fiscal 2022, Storage and Transportation had capital expenditures spent or accrued for the Adelphia Gateway project totaling $123.8 million, and capital expenditures spent or accrued for Leaf River totaling $17.6 million. During fiscal 2023, we expect expenditures related to the Adelphia Gateway project to be between $12 million and $16 million and expenditures related to Leaf River to be between $8 million and $12 million. During fiscal 2022, total capital expenditures spent or accrued related to the purchase and installation of solar equipment were $144.9 million. Clean Energy Ventures’ expenditures include clean energy projects that support our goal to promote renewable energy. Accordingly, Clean Energy Ventures enters into agreements to install solar equipment involving both residential and commercial projects. We estimate solar-related capital expenditures for projects placed in service during fiscal 2023 to be between $100 million and $200 million. Capital expenditures related to clean energy projects are subject to change due to a variety of factors that may affect our ability to commence operations at these projects on a timely basis or at all, including sourcing projects that meet our investment criteria, logistics associated with the start-up of residential and commercial solar projects, such as timing of construction schedules, the permitting and regulatory process, any delays related to electric grid interconnection, economic trends or unforeseen events and the ability to access capital or allocation of capital to other investments or business opportunities. Energy Services does not currently anticipate any significant capital expenditures during fiscal 2023 and 2024. During December 2020, Energy Services entered into a series of AMAs with an investment grade public utility to release pipeline capacity associated with certain natural gas transportation contracts. The utility provides certain asset management services, and Energy Services may deliver natural gas to the utility in exchange for aggregate net proceeds of approximately $500 million, payable through November 1, 2030. The AMAs include a series of initial and permanent releases which commenced on November 1, 2021. NJR will receive a total of approximately $260 million in cash from fiscal 2022 through fiscal 2024 and $34 million per year from fiscal 2025 through fiscal 2031 under the agreements. During fiscal 2022, Energy Services recognized $53.0 million of operating revenue on the Consolidated Statements of Operations. Amounts received in excess of revenue, totaling $33.8 million as of September 30, 2022, are included in deferred revenue on the Consolidated Balance Sheets. Cash Flows Operating Activities Cash flows from operating activities during fiscal 2022 totaled $323.5 million compared with $391.0 million during fiscal 2021. Operating cash flows are primarily affected by variations in working capital, which can be impacted by several factors, including: • seasonality of our business; • fluctuations in wholesale natural gas prices and other energy prices, including changes in derivative asset and liability values; • timing of storage injections and withdrawals; • the deferral and recovery of natural gas costs; • changes in contractual assets utilized to optimize margins related to natural gas transactions; • broker margin requirements; • impact of unusual weather patterns on our wholesale business; Page 60 New Jersey Resources Corporation Part II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • timing of the collections of receivables and payments of current liabilities; • volumes of natural gas purchased and sold; and • timing of SREC deliveries. The decrease of $67.5 million in cash flows from operating activities during fiscal 2022, compared with fiscal 2021, was due primarily to additional working capital requirements related to the rising energy prices along with the outsized performance at Energy Services during February 2021 that did not reoccur during fiscal 2022, partially offset by the AMAs, which commenced November 2021, as previously discussed. Investing Activities Cash flows used in investing activities totaled $590.6 million during fiscal 2022, compared with $622.1 million during fiscal 2021. The decrease of $31.5 million was due primarily to decreased utility plant expenditures, partially offset by an increase in capital expenditures for Storage and Transportation related to the conversion of the southern portion of Adelphia Gateway’s pipeline to natural gas along with increased solar expenditures. Financing Activities Financing cash flows generally are seasonal in nature and are impacted by the volatility in pricing in the natural gas and other energy markets. NJNG’s inventory levels are built up during its natural gas injection season (April through October) and reduced during withdrawal season (November through March) in response to the supply requirements of its customers. Changes in financing cash flows can also be impacted by natural gas management and marketing activities at Energy Services and clean energy investments at Clean Energy Ventures. Cash flows from financing activities totaled $262.5 million during fiscal 2022, compared with $117.8 million during fiscal 2021. The increase of $144.7 million is due primarily to the issuance of $360 million in long-term debt, a new $150 million term loan, along with proceeds of $17.3 million for meter sale leasebacks and higher proceeds of $6.4 million from solar sale leasebacks, partially offset by increased net payments of short-term debt of $355.3 million and increased dividend payments of $10.7 million. Credit Ratings The table below summarizes NJNG’s credit ratings as of September 30, 2022, issued by two rating entities, Moody’s and Fitch: Moody’s Fitch Corporate Rating N/A A- Commercial Paper P-2 F-2 Senior Secured A1 A+ Ratings Outlook Stable Stable Fitch ratings and outlook were reaffirmed on April 14, 2022. The Moody’s ratings and outlook were reaffirmed on September 28, 2022. NJNG’s Moody’s and Fitch ratings are investment-grade ratings. NJR is not rated by Moody’s or Fitch. Although NJNG is not party to any lending agreements that would accelerate the maturity date of any obligation caused by a failure to maintain any specific credit rating, if such ratings are downgraded below investment grade, borrowing costs could increase, as would the costs of maintaining certain contractual relationships, and future financing and our access to capital markets would be reduced. Even if ratings are downgraded without falling below investment grade, NJR and NJNG could face increased borrowing costs under their credit facilities. A rating set forth above is not a recommendation to buy, sell or hold NJR’s or NJNG’s securities and may be subject to revision or withdrawal at any time. Each rating set forth above should be evaluated independently of any other rating. The timing and mix of any external financings will target a common equity ratio that is consistent with maintaining NJNG’s current short-term and long-term credit ratings. Page 61 New Jersey Resources Corporation Part II ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Financial Risk Management Commodity Market Risks Natural gas is a nationally traded commodity. Its prices are determined effectively by the NYMEX, ICE and over-the-counter markets. The prices on the NYMEX, CME, ICE and over-the-counter markets generally reflect the national balance of natural gas supply and demand, but are also significantly influenced from time to time by other events. Our regulated and unregulated businesses are subject to market risk due to fluctuations in the price of natural gas. To economically hedge against such fluctuations, we have entered into forwards, futures, options and swap agreements. To manage these derivative instruments, we have well-defined risk management policies and procedures that include daily monitoring of volumetric limits and monetary guidelines. Our natural gas businesses are conducted through two of our operating subsidiaries. NJNG is a regulated utility that uses futures, options and swaps to provide relative price stability, and its recovery of natural gas costs is governed by the BPU. Energy Services uses futures, options, swaps and physical contracts to economically hedge purchases and sales of natural gas. The following table reflects the changes in the fair market value of financial derivatives related to natural gas purchases and sales: Balance Increase Less Balance (Thousands) September 30, 2021 (Decrease) in Fair Market Value Amounts Settled September 30, 2022 Natural Gas Distribution $ 2,033 $ 30,584 $ 38,813 $ (6,196) Energy Services (29,487) (36,019) (58,820) (6,686) Total $ (27,454) $ (5,435) $ (20,007) $ (12,882) There were no changes in methods of valuations during the fiscal year ended September 30, 2022. The following is a summary of fair market value of financial derivatives as of September 30, 2022, excluding foreign exchange contracts discussed below, by method of valuation and by maturity for each fiscal year period: (Thousands) 2023 2024 2025 - 2027 After 2027 Total Fair Value Price based on NYMEX/CME $ (168) $ — $ — $ — $ (168) Price based on ICE (18,092) 4,225 1,153 — (12,714) Total $ (18,260) $ 4,225 $ 1,153 $ — $ (12,882) The following is a summary of financial derivatives by type as of September 30, 2022: Volume Bcf Price per MMBtu (1) Amounts included in Derivatives (Thousands) Natural Gas Distribution Futures 30.5 $2.62 - $15.00 $ (6,196) Energy Services Futures (0.7) $2.41 - $13.75 (6,518) Swaps — $2.82 - $3.03 (168) Total $ (12,882) (1) Million British thermal units The following table reflects the changes in the fair market value of physical commodity contracts: Balance Increase Less Balance (Thousands) September 30, 2021 (Decrease) in Fair Market Value Amounts Settled September 30, 2022 Natural Gas Distribution - Prices based on other external data $ 20 4,671 4,450 $ 241 Energy Services - Prices based on other external data (34,678) (8,231) (22,530) (20,379) Total $ (34,658) (3,560) (18,080) $ (20,138) Page 62 New Jersey Resources Corporation Part II