New Jersey Resources Corp: Form 10-Q for the period ended Jun 30, 2023

OPERATIONS

Critical Accounting Estimates

A summary of our critical accounting policies is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended September 30, 2022. Our critical accounting policies have not changed from those reported in the 2022 Annual Report on Form 10-K.

Recently Issued Accounting Standards

Refer to Note 2. Summary of Significant Accounting Policies 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, 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 of our 2022 Annual Report on Form 10-K.

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 Commercial Realty & Resources Corp. and home warranty contracts at NJR Retail.

Operating Results

Net income (loss) by reporting segment and other business operations, which are discussed in detail within the operating results sections of each reporting segment and other business operations, are as follows:

(1) Consists of transactions between subsidiaries that are eliminated in consolidation.

The decrease in net income during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, was due primarily to lower operating income at Energy Services due to decreased natural gas prices, partially offset by an increase in the benefit from income taxes at Clean Energy Ventures due to the reversal of a valuation allowance for certain deferred tax assets during June 2023. The increase in net income during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, was due primarily to an increase in the benefit from income taxes at Clean Energy Ventures, as previously discussed.

Assets by reporting segment and operations are as follows:

(1) Consists of transactions between subsidiaries that are eliminated in consolidation.

The increase in assets was due primarily to additional investment in utility plant at Natural Gas Distribution and solar asset investments at Clean Energy Ventures, partially offset by a decrease in accounts receivable at Energy Services, and a decrease in gas in storage and restricted broker margin at Natural Gas Distribution and Energy Services due primarily to the decline in natural gas prices.

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. Included in the tax effects are current and deferred income tax expense corresponding with the components of 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.

GAAP 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. Since the annual estimated effective tax rate is based on certain forecasted assumptions, the rate and resulting NFE are subject to change. No adjustment is needed during the fourth quarter, since the actual effective tax rate is calculated at year end.

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. Below is a reconciliation of consolidated net income, the most directly comparable GAAP measure, to NFE:

(Thousands, except per share data)

(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, which are discussed in detail within the operating results sections of each reporting segment and other business operations, is summarized as follows:

(1) Consists of transactions between subsidiaries that are eliminated in consolidation.

The increase in NFE during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, was due primarily to an increase in the benefit from income taxes at Clean Energy Ventures, as previously discussed. The increase in NFE during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, was due primarily to higher Financial Margin at Energy Services along with an increase in the benefit from income taxes at Clean Energy Ventures, 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 574,900 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, 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.

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 Unaudited Condensed 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 expenditures associated with customer growth and its associated pipeline integrity management and infrastructure programs. Below is a summary of NJNG’s capital expenditures, including accruals, for the nine months ended June 30, 2023, and estimates of expected investments for fiscal 2023 and 2024:

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.

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.

On March 30, 2023, NJNG submitted its annual IIP filing to the BPU requesting a rate increase for estimated capital expenditures of $31.4 million through June 30, 2023. This filing was updated on July 28, 2023, with actual expenses of approximately $28.2 million through June 30, 2023, which will result in a $3.2 million revenue increase, which would be effective October 1, 2023.

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 include the following:

During the nine months ended June 30, 2023 and 2022, respectively, NJNG added 5,892 and 5,274 new customers, respectively. NJNG expects new customer additions, and those customers who added additional natural gas services to their premises to contribute approximately $5.0 million of incremental Utility Gross Margin on an annualized basis.

NJNG expects its new customer annual growth rate to be approximately 1.7 percent. Based on information from municipalities and developers, as well as external industry analysts and management's experience, NJNG estimates that approximately 63 percent of the growth will come from new construction markets and 37 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 $7.9 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 O&M.

In June 2021, NJNG submitted its annual cost recovery filing for the SAVEGREEN programs established from 2010 through 2021. In January 2022, the BPU approved the stipulation, which increased annual recoveries by $2.2 million, effective February 1, 2022.

In June 2022, NJNG submitted its annual cost recovery filing for the SAVEGREEN programs established from 2010 through the present. In September 2022, the BPU approved the rate decrease, which resulted in an annual decrease of approximately $3.5 million, effective October 1, 2022.

On June 1, 2023, the NJNG submitted its annual cost recovery filing for the SAVEGREEN programs established from 2010 through the present, which would increase annual recoveries by approximately $10.7 million, which would be effective October 1, 2023.

The following table summarizes, loans, grants, rebates and related investments as of:

Program recoveries from customers during the nine months ended June 30, 2023 and 2022, were $15.9 million and $23.5 million, respectively. The recovery includes a weighted average cost of capital that ranges from 6.84 percent to 6.9 percent, with a return on equity of 9.6 percent to 9.75 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, along 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:

(1) Compared with the 20-year average, weather was 17.2 percent and 13.5 percent warmer-than-normal during the three and nine months ended June 30, 2023, respectively, and 6.4 percent and 8.5 percent warmer-than-normal during the three and nine months ended June 30, 2022, respectively.

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.

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.

In May 2022, the BPU approved on a final 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.

On April 12, 2023, the BPU approved on a final basis 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.

On April 12, 2023, the BPU approved on a final basis, NJNG's February 22, 2023 filing that advised the BPU of a bill credit and a reduction to the BGSS rate for residential and small commercial customers, which will reduce recoveries by approximately $29.9 million, effective March 1, 2023. Total bill credits given back to customer from March 2023 through May 2023, totaled approximately $32.4 million.

On June 1, 2023, the NJNG filed its annual petition to modify its BGSS, balancing charge and CIP rates for residential and small business customers. This included a $38.6 million decrease to the annual revenues credited to BGSS, a $7.4 million annual decrease related to its balancing charge and a $27.5 million increase to CIP rates, which would be effective October 1, 2023. 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 $2.9 million and $17.4 million during the three and nine months ended June 30, 2023, respectively, and $1.9 million and $12.1 million during the three and nine months ended June 30, 2022, 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. 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 $32.46 and $17.69 and the minimum price was $0.67 and $2.42 for the nine months ended June 30, 2023 and 2022, 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 2. 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 March 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.

In June 2022, NJNG filed its annual USF compliance filing proposing a decrease to the statewide USF rate. In August 2022, an additional update was submitted on behalf of all NJ utilities with actual information through July 31, 2022. In September 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 April 12, 2023, the BPU approved on a final basis, NJNG's annual SBC filing of RAC expenditures through June 30, 2022, as well as an increase to the RAC annual recoveries of $3.7 million and a decrease to the NJCEP annual recoveries of $900,000, effective May 1, 2023.

On June 28, 2023, NJNG submitted its annual USF filing to the BPU requesting an increase to the statewide USF rate, which will result in a $740,000 increase to annual recoveries, which would be effective October 1, 2023.

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 $123.1 million as of June 30, 2023, a decrease of $4.0 million compared with the prior fiscal period. See Note 13. Commitments and Contingent Liabilities for more details.

Other regulatory filings and a more detailed discussion of the filings in this section can be found in Note 4. Regulation in the accompanying Unaudited Condensed Consolidated Financial Statements.

Operating Results

NJNG's operating results are as follows:

(1) Includes nonutility revenue of approximately $337,000 and $338,000 for the three months ended June 30, 2023 and 2022, respectively, and $1.0 million for both the nine months ended June 30, 2023 and 2022, for lease agreements with various NJR subsidiaries leasing office space from NJNG at the Company’s headquarters, which are eliminated in consolidation.

(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 $2.3 million and $7.0 million for both the three and nine months ended June 30, 2023 and 2022, respectively, a portion of which is eliminated in consolidation.

(4) Consists of expenses associated with state-mandated programs, the RAC and energy efficiency programs, and are 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 decreased by 27.2 percent and decreased 3.7 percent and natural gas purchases decreased 56.5 percent and decreased 12.3 percent during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022.

The factors contributing to the increases and decreases in operating revenues and natural gas purchases are as follows:

(1) Rider and other includes changes in rider rates, including those related to Energy Efficiency, 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, is as follows:

(1) Excludes selling, general and administrative expenses of approximately $26.9 million and $78.1 million for the three and nine months ended June 30, 2023, respectively, and $26.5 million and $76.1 million for the three and nine months ended June 30, 2022, 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.

The following provides more information on the components of Utility Gross Margin and associated throughput (Bcf) of natural gas delivered to customers:

($ in thousands)

Utility Firm Gross Margin

Utility firm gross margin increased $4.7 million and $22.8 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to increased base rates along with increased residential and transportation customers.

The factors contributing to the change in Utility Gross Margin generated by BGSS incentive programs are as follows:

The increase in BGSS incentive programs during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, was due primarily to increased margins from the acceleration of storage incentives.

Operation and Maintenance Expense

O&M expense increased $6.7 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to increased employee related costs. O&M expense increased $25.5 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due primarily to the deferral of $10.7 million in pandemic related costs in accordance with the July 2, 2020 BPU deferral order in December 2021 that did not reoccur along with increased employee related costs.

Depreciation Expense

Depreciation expense increased $1.9 million and $5.8 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, as a result of additional utility plant being placed into service.

Interest Expense

Interest expense increased $1.8 million and $7.6 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to increased outstanding long-term debt.

Other Income

Other income increased $1.5 million and $4.4 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to increased AFUDC equity.

Income Tax Provision

Income tax provision decreased $1.3 million and $5.9 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due to lower income before income taxes.

Net Income

Net income decreased $1.8 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to higher O&M, depreciation and interest expenses, partially offset by higher Utility Gross Margin, increased other income and lower income taxes as previously discussed. Net income remained relatively flat during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022.

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, 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 projects placed in service and related expenditures are as follows:

($ in Thousands)

(1) Includes projects subject to sale leaseback arrangements.

On July 17, 2023, CEV acquired two operating solar assets totaling 20.7 MW for approximately $14.1 million.

Clean Energy Ventures has approximately 440.6 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 opportunities to increase the credit amount up to an additional 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.

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 are 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 Unaudited Condensed Consolidated Statements of Operations over the respective five-year ITC recapture periods, starting with the second year of the lease. Clean Energy Ventures received proceeds of $101.8 million and $163.6 million during the three and nine months ended June 30, 2023, respectively, and $3.3 million during the nine months ended June 30, 2022, in connection with sale leasebacks of commercial solar assets. There were no solar sale leasebacks during the three months ended June 30, 2022.

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.

The average SREC sales price was $211 and $202 during the nine months ended June 30, 2023 and 2022, respectively, the average TREC price was $141 and $138 during the nine months ended June 30, 2023 and 2022, respectively, and the average SREC II price was $91 during the nine months ended June 30, 2023.

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:

(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 Unaudited Condensed Consolidated Statements of Operations, including such expenses as facility maintenance and broker fees.

Operating Results

Clean Energy Ventures’ financial results are summarized as follows:

Operating Revenues

Operating revenues decreased $617,000 during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to decreased electricity sales related to lower average electricity prices. Operating revenues increased $4.6 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due primarily to increased REC sales.

Operation and Maintenance Expense

O&M expense remained relatively flat during the three months ended June 30, 2023, compared with the three months ended June 30, 2022. O&M expense increased $2.6 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due primarily to higher operating expenses.

Income Tax Benefit

Income tax benefit increased $16.7 million and $17.6 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due to the reversal of a valuation allowance for certain deferred tax assets during June 2023.

Net Income (Loss)

Net income increased $12.4 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due to the reversal of a valuation allowance for certain deferred tax assets during June 2023. Net loss decreased $12.7 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due to the reversal of a valuation allowance, as previously discussed.

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 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 Unaudited Condensed 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 Unaudited Condensed 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 operating revenue of $9.5 million and $39.0 million during the three and nine months ended June 30, 2023, respectively, and $10.3 million and $42.7 million during the three and nine months ended June 30, 2022, respectively, on the Unaudited Condensed Consolidated Statements of Operations. Amounts received in excess of revenue totaling $68.2 million and $33.8 million as of June 30, 2023 and September 30, 2022, respectively, are included in deferred revenue on the Unaudited Condensed Consolidated Balance Sheets.

Operating Results

Energy Services’ financial results are summarized as follows:

(1) Includes related party transactions of approximately $630,000 and $9.2 million during the three and nine months ended June 30, 2023, respectively, and $1.4 million and $3.6 million for the three and nine months ended June 30, 2022, 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 $232,000 and $705,000 during the three and nine months ended June 30, 2023, respectively, and $257,000 and $752,000 during the three and nine months ended June 30, 2022, respectively, a portion of which is eliminated in consolidation.

Energy Services' portfolio of financial derivative instruments are composed of:

During the nine months ended June 30, 2023 and 2022, the net short position resulted in an unrealized gain of $15.6 million and $6.2 million, respectively.

Operating Revenues and Natural Gas Purchases

Operating revenues decreased $237.6 million and natural gas purchases decreased $214.2 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to decrease in natural gas prices of 70.7 percent. Operating revenues decreased $501.0 million and natural gas purchases decreased $509.6 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due to decreased natural gas prices of 34.0 percent, partially offset by periods of volatility in natural gas prices during the first two quarters of fiscal 2023.

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 2. 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 $2.5 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to decreased compensation due to the timing of the change in incentive accruals related to outsized performance during the first quarter of fiscal 2023. O&M expense decreased $1.4 million during the nine months ended June 30, 2023, compared to the nine months ended June 30, 2022, due primarily to a reduction in the reserve for bad debt.

Interest Expense

Interest expense increased $1.4 million and $5.7 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to increased borrowings and higher interest rates.

Net (Loss) Income

Net loss increased $16.8 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to the operating loss related to decreased operating revenue along with higher interest expense, partially offset by an income tax benefit related to the operating loss. Net income increased $4.1 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, respectively, due primarily to higher operating income, partially offset by interest expense, 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.

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:

(1) Includes unrealized losses (gains) related to an intercompany transaction between NJNG and Energy Services that have been eliminated in consolidation of approximately $630,000 and $9.2 million during the three and nine months ended June 30, 2023, respectively, and $(1.4) million and $3.6 million during the three and nine months ended June 30, 2022, respectively.

(2) Excludes selling, general and administrative expenses of approximately $455,000 and $(1.2) million during the three and nine months ended June 30, 2023, respectively, and $564,000 and $1.7 million during the three and nine months ended June 30, 2022, respectively.

(3) Effects of hedging natural gas inventory transactions where the economic impact is realized in a future period.

Financial Margin increased $3.1 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to decreased O&M as previously discussed. Financial Margin increased $42.3 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due primarily to higher natural gas price volatility in December 2022 and February 2023, as a result of cold weather in regions where Energy Services had contracted rights to transportation and storage assets.

Net Financial Earnings

A reconciliation of Energy Services' net income, the most directly comparable GAAP financial measure, to NFE is as follows:

(1) Includes taxes related to an intercompany transaction between NJNG and Energy Services that have been eliminated in consolidation of approximately $149,000 and $(2.2) million during the three and nine months ended June 30, 2023, respectively, and $339,000 and $859,000 during the three and nine months ended June 30, 2022, respectively.

NFE increased $3.4 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to higher Financial Margin, as previously discussed. NFE increased $29.6 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due primarily to higher Financial Margin, partially offset by higher interest expenses, as previously discussed.

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.

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. 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 has a 50 percent ownership interest in Steckman Ridge, a storage facility that operates under market-based rates. As of June 30, 2023, our investment in Steckman Ridge was $104.4 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.

On December 16, 2021, the FERC dismissed PennEast’s pending applications. The order vacated 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.

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 of affiliates in the Consolidated Statements of Operations. On February 15, 2023 and June 20, 2023, we received additional capital distributions of $200,000 and $100,000, respectively.

Operating Results

The financial results of Storage and Transportation are summarized as follows:

(1) Includes related party transactions of approximately $766,000 and $3.5 million during the three and nine months ended June 30, 2023, respectively, and $611,000 and $1.7 million during the three and nine months ended June 30, 2022, respectively, which are eliminated in consolidation.

Operating Revenues

Operating revenues increased $5.8 million and $28.1 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to increased fixed price contract revenue for Adelphia Gateway and increased hub services at Leaf River.

Depreciation Expense

Depreciation expense increased $2.8 million and $10.0 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to the southern portion of the Adelphia Gateway project, which was placed in service in September 2022.

Other Income, Net

Other income remained relatively flat during the three months ended June 30, 2023, compared with the three months ended June 30, 2022. Other income decreased $2.3 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due primarily to decreased AFUDC equity related to the Adelphia Gateway project.

Interest Expense

Interest expense increased $3.3 million and $12.1 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to increased borrowings and higher interest rates.

Net Income

Net income decreased $4.1 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to increased depreciation and interest expenses along with decreased other income, partially offset by increased revenue, as previously discussed. Net income decreased $2.9 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due primarily to increased interest expense and decreased other income, as previously discussed, partially offset by increased operating revenue.

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:

NFE decreased $1.2 million during the three months ended June 30, 2023, compared with the three months ended June 30, 2022, due primarily to increased depreciation and interest expenses along with decreased other income, partially offset by increased revenue, as previously discussed. NFE remained relatively flat during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022.

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 are summarized as follows:

Operating Revenues

Operating revenues increased $735,000 and $1.3 million during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to increased installation and service contract revenue.

Net Income

Net income increased $308,000 and $194,000 during the three and nine months ended June 30, 2023, compared with the three and nine months ended June 30, 2022, respectively, due primarily to increased operating income, as previously discussed, along with decreased pension costs, partially offset by increased income taxes related to the higher operating income.

Liquidity and Capital Resources

Our objective is to maintain an efficient consolidated capital structure that reflects the different characteristics of each reporting segment and business operations and provides adequate financial flexibility for accessing capital markets as required.

Our consolidated capital structure was as follows:

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 $3.8 million and $11.4 million of equity through the DRP during the three and nine months ended June 30, 2023, respectively, and $3.6 million and $11.1 million during the three and nine months ended June 30, 2022, respectively. We raised approximately $24.9 million and $42.8 million of equity by issuing approximately 519,000 and 887,000 shares through the waiver discount feature of the DRP during the three and nine months ended June 30, 2023, respectively. There were no shares issued through the waiver discount feature during the three and nine months ended June 30, 2022.

In 1996, the Board of Directors authorized us to implement a share repurchase program, which was expanded seven times since the inception of the program, authorizing a total of 19.5 million shares of common stock for repurchase. As of June 30, 2023, 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 the three and nine months ended June 30, 2023 and 2022.

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, respectively, 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 June 30, 2023, NJR and NJNG were, and currently are, in compliance with all existing debt covenants, both financial and non-financial.

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 June 30, 2023, NJR had a revolving credit facility totaling $650 million, with $510.3 million available under the facility.

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 June 30, 2023, 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 $238.6 million.

Short-term borrowings were as follows:

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

On August 30, 2022, NJR entered into a First Amendment to NJR's Second Amended and Restated Credit Agreement governing a $650 million NJR Credit Facility with a maturity date of September 2, 2027. The NJR Credit Facility is subject to 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 with the total revolving credit commitments not exceeding $750 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. 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 June 30, 2023, NJR had seven letters of credit outstanding totaling $5.2 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.

In February 2022, NJR entered into a 364-day $150 million term loan credit agreement with an interest rate based on SOFR plus 0.85 percent, that expired on February 7, 2023. The Company borrowed $50 million on February 9, 2022 and $100 million on February 14, 2022 under the term loan, which was paid in full at expiration of the term loan agreement.

Based on its average borrowings during fiscal 2023, NJR’s average interest rate was 5.55 percent, resulting in interest expense of approximately $11.1 million. Based on average borrowings of $275.0 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 $2.1 million during fiscal 2023.

Neither NJNG nor its assets are obligated or pledged to support the NJR Credit Facility or term loan credit agreement.

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 entered into a First Amendment to 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 June 30, 2023, 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 2023, NJNG’s average interest rate was 4.56 percent, resulting in interest expense of $1.1 million. Based on average borrowings of $45.2 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 $260,000 during fiscal 2023.

Short-Term Debt Covenants

Borrowings under the NJR Credit Facility, term loan credit agreement and the 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 borrower's 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.

Long-Term Debt

NJR

As of June 30, 2023, 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;
• $50 million of 3.64 percent senior notes due September 19, 2034; and
• $50 million of 6.14 percent senior notes due December 15, 2032.

On October 24, 2022, NJR entered into a Note Purchase Agreement, which closed on December 15, 2022, under which NJR issued $50 million, Series 2022B senior notes at a fixed rate of 6.14 percent, maturing in 2032. 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 June 30, 2023, NJNG's long-term debt consisted of $1.4 billion in fixed-rate debt issuances secured by the Mortgage Indenture, with maturities ranging from 2024 to 2061, and $24.6 million in finance leases with various maturities ranging from 2024 to 2028.

On October 24, 2022, NJNG entered into a Note Purchase Agreement under which it sold $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;
• 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 $8.4 million and $17.3 million during the nine months ended June 30, 2023 and 2022, in connection with the sale leaseback of its natural gas meters. NJNG records a financing obligation that is paid over the term of the lease and has the option to purchase the meters back at fair value upon expiration. Natural gas meters are excepted from the lien on NJNG property under the Mortgage Indenture.

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 the nine months ended June 30, 2023 and 2022, Clean Energy Ventures received proceeds of $163.6 million and $3.3 million, respectively, in connection with the sale leaseback of commercial solar projects. The proceeds received were recognized as a financing obligation on the Unaudited Condensed Consolidated Balance Sheets.

Contractual Obligations and Capital Expenditures

As of June 30, 2023, there were NJR guarantees covering approximately $177.4 million of natural gas purchases and Energy Services demand fee commitments and nine outstanding letters of credit totaling $5.9 million, as previously mentioned, not yet reflected in accounts payable on the Unaudited Condensed 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.

NJNG's total capital expenditures are projected to be between $362 million and $388 million during fiscal 2023. Total capital expenditures spent or accrued during the nine months ended June 30, 2023, were $274.9 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 June 30, 2023, NJNG's future MGP expenditures are estimated to be $123.1 million. For a more detailed description of MGP expenditures see Note 13. Commitments and Contingent Liabilities in the accompanying Unaudited Condensed Consolidated Financial Statements.

During the nine months ended June 30, 2023, our Storage and Transportation segment had capital expenditures spent or accrued for the Adelphia Gateway project totaling $15.6 million and capital expenditures spent or accrued for Leaf River totaling $5.7 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 $23 million and $27 million.

During the nine months ended June 30, 2023, total capital expenditures spent or accrued related to the purchase and installation of solar equipment were $73.4 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 during fiscal 2023 to be between $100 million and $150 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 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 the nine months ended June 30, 2023, Energy Services recognized $39.0 million of operating revenue on the Unaudited Condensed Consolidated Statements of Operations. Amounts received in excess of revenue totaling $68.2 million as of June 30, 2023, are included in deferred revenue on the Unaudited Condensed Consolidated Balance Sheets.

Cash Flows

Operating Activities

Cash flows from operating activities during the nine months ended June 30, 2023, totaled $387.9 million, compared with $235.9 million during the nine months ended June 30, 2022. 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;
• timing of the collections of receivables and payments of current liabilities;
• volumes of natural gas purchased and sold; and
• timing of SREC deliveries.

Cash flows from operating activities increased $152.0 million during the nine months ended June 30, 2023, compared with the nine months ended June 30, 2022, due primarily to decreased working capital requirements related to the decline in natural gas prices.

Investing Activities

Cash flows used in investing activities totaled $378.2 million during the nine months ended June 30, 2023, compared with $434.9 million during the nine months ended June 30, 2022. The decrease of $56.7 million was due primarily to lower capital expenditures for Storage and Transportation related to the conversion of the southern portion of Adelphia Gateway's pipeline to natural gas, which was placed into service during September 2022, partially offset by increased utility plant 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 (used in) from financing activities totaled $(10.2) million during the nine months ended June 30, 2023, compared with $221.0 million during the nine months ended June 30, 2022. The increase in the use of cash of $231.2 million is due primarily to the repayment of the term loan of $150.0 million that was borrowed during fiscal 2022, decreased long-term debt borrowings of $135.0 million and a decrease in proceeds from meter sale leasebacks of $8.9 million, partially offset by an increase in proceeds of $160.3 million from solar sale leasebacks, $42.8 million from the waiver discount issuance of common stock and a decrease in payments of short-term debt of $28.2 million.

Credit Ratings

The table below summarizes NJNG's credit ratings as of June 30, 2023, issued by two rating entities, Moody's and Fitch:

Fitch ratings and outlook were reaffirmed on April 24, 2023. 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.

Our market price risk is predominately linked with changes in the price of natural gas at the Henry Hub, the delivery point for the NYMEX natural gas futures contracts. Based on price sensitivity analysis, an illustrative 10 percent movement in the natural gas futures contract price, for example, increases (decreases) the reported derivative fair value of all open, unadjusted Henry Hub natural gas futures and fixed price swap positions by approximately $4.6 million. This analysis does not include potential changes to reported credit adjustments embedded in the $10.8 million reported fair value.

Wholesale Credit Risk

The following is a summary of gross and net credit exposures, grouped by investment and non-investment grade counterparties, as of June 30, 2023. Gross credit exposure for Energy Services is defined as the unrealized fair value of derivative and energy trading contracts plus any outstanding wholesale receivable for the value of natural gas or power delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received. Gross credit exposure for Storage and Transportation is defined as demand and estimated usage fees for contracted services and/or market value of loan balances for which payment has not yet been received. Net credit exposure is defined as gross credit exposure reduced by collateral received from counterparties and/or payables, where netting agreements exist. The amounts presented below exclude accounts receivable for NJNG retail natural gas sales and services.

Energy Services', Clean Energy Ventures' and Storage and Transportation's counterparty credit exposure as of June 30, 2023, is as follows:

NJNG's counterparty credit exposure as of June 30, 2023, is as follows:

Due to the inherent volatility in the market price for natural gas, electricity and SRECs, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty failed to perform the obligations under its contract (for example, failed to make payment for natural gas received), we could sustain a loss. This loss would comprise the loss on natural gas delivered but not paid for and/or the cost of replacing natural gas not delivered or received at a price that exceeds the original contract price. Any such loss could have a material impact on our financial condition, results of operations or cash flows.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of end of the period covered by this report, our disclosure controls and procedures are effective, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical, under the circumstances, some level of risk and uncertainty will always be present. Part I, Item 1A. Risk Factors of our 2022 Annual Report on Form 10-K includes a detailed discussion of our risk factors. Those risks and uncertainties have the potential to materially affect our financial condition and results of operations. There have been no material changes in our risk factors from those previously disclosed in Part I, Item 1A, of our 2022 Annual Report on Form 10-K.