NewJersey Resources Corporation

Good day and welcome to the New Jersey Resources Fiscal 2020 First Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Dennis Puma, Director of Investor Relations. Please go ahead.

Thank you, Sharon. Good morning, everybody. Welcome to New Jersey Resources' first quarter fiscal 2020 conference call and webcast. I'm joined here today by Steve Westhoven, our President and CEO, Pat Migliaccio, our Senior Vice President and Chief Financial Officer, as well as other members of our senior management team. As you know, certain statements in today's call contain estimates and other forward-looking statements within the meaning of the securities laws. We wish to caution listeners of this call that the current expectations, assumptions, and beliefs forming the basis for our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to materially differ from our expectations as found on slide one. These items can also be found in our forward looking statement section of today's earnings release furnished on form 8K and in our most recent form 10K and Q as filed with the SEC. We do not by including this statement assume any obligation to review or revise any particular forward looking statement referenced herein in light of future events. We will also be referring to certain non-GAAP financial measures such as net financial earnings or NFE. We believe that NFE provides a more complete understanding of our financial performance However, NFC is not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in Item 7 of our Form 10-K. Our agenda is found on Slide 2. Steve will begin today's call with highlights from the quarter, followed by Pat, who will review our financial results. Then we'll open the call up to your questions. The slides accompanying today's presentation are available on our website and were furnished on our Form 8-K file this morning. That said, I'd like to turn the call over to our President and CEO, Steve Westhoven. Steve?

Thanks, Dennis, and good morning. Before we get to our fiscal 2020 first quarter results, I'd like to talk briefly about New Jersey's Energy Master Plan, which was released by Governor Murphy last week. The plan is a policy document that outlines the use, management, and development of energy in New Jersey. The goals of the plan are to achieve 100% clean energy and to reduce emissions to 80% of 2006 levels by 2050. We support the state's emission reduction goal and recognize the opportunities it creates for a diversified energy company like ours. In fact, at our annual shareholders meeting last month, I outlined a sustainability agenda that aligns with the state's 2050 target, including a voluntary reduction of our operational emissions in New Jersey to 50% of 2006 levels by 2030. Importantly, the EMP recognizes the role our infrastructure plays in meeting 75% of the state's home heating needs. It also recognizes the long-term value of this infrastructure in delivering decarbonized gas supply to our customers through technologies like renewable natural gas and green hydrogen. With the policies outlined in the Energy Master Plan, our planned capital expenditures and our long-term NFE growth rate of 68% remain unchanged. New Jersey Resources has the assets, expertise, and team to capitalize on these opportunities and grow our business while helping meet the state's climate goals. We have a world-class gas distribution system that can be leveraged to deliver clean, decarbonized fuel to heat homes and businesses. We are a significant long-term investor in New Jersey's solar market, and we manage one of the state's most successful energy efficiency programs. These strengths, together with our own sustainability agenda, will be critical in helping the state reach its submission goals, and they will allow us to remain focused on growing the company and generating long-term results for our shareholders. Now let's turn to the quarter. Turning to slide four, you can see the highlights from the first quarter. We reported net financial earnings of 44 cents per share compared with 61 cents per share last year. The difference is primarily due to the timing of SREC sales and lower results from energy services. Customer growth continued at New Jersey Natural Gas, adding nearly 2,300 new customers in the first quarter. We are on track to reach our goal of adding 9,800 new customers this fiscal year. Adelphia Gateway received its Certificate of Public Convenience and Necessity from FERC and now for the first time in our company's history we're the operator of a FERC regulated pipeline. Conversion of the southern end from oil to natural gas is expected to begin upon receipt of our final regulatory approvals and necessary permits. During the quarter we completed the acquisition of the Leaf River Energy Center and it performed in line with our expectations. Clean Energy Ventures placed 2.9 megawatts commercial solar project into service and our solar portfolio is now nearly 300 megawatts and that's enough energy to power approximately 27,000 homes. On slide five, while we were affirming our 2020 NFE guidance of 205 to 215 per share, we've adjusted the contributions from certain segments. First, we expect our utility to contribute about 60% to NFE. That's about a 3% increase from the midpoint of our prior guidance range, and it's primarily due to a reduction in O&M expense. Second, we expect energy services to contribute between 1% to 5%, down from our prior estimate of 5% to 15%. This adjustment reflects the lack of volatility in natural gas prices through January due to the mild weather in the Northeast. And third, we expect CEV to contribute between 25% to 30%, up from the prior estimate of 20% to 25%. This is primarily due to additional investment opportunities. this year. On slide six, we have summarized the key growth drivers for New Jersey natural gas. In the upper left, you can see we expect steady customer growth thanks to the favorable demographics in our service territory. And we are on track to achieve our annual 1.8% customer growth rate. In the top right is an update on the Southern Reliability Link. To date, we've completed over 65% of the project and expect it to be in service in 2021. On the bottom left, our infrastructure investment program is currently in the regulatory review process and is expected to conclude this fiscal year. And finally, on the bottom right, about 37% of the capital we invested this quarter will provide returns with minimal regulatory lag. An update on Adelphia Gateway is on slide seven. During the quarter, the project received its FERC certificate and we subsequently closed on the $166 million acquisition. These are significant milestones for our midstream business and the company. The northern end of the pipeline is already in service in supplying natural gas to the Martins Creek and Lower Mount Bethel generation facilities under a 10-year supply agreement. We will convert the southern portion, which is already in the ground, to cleaner natural gas to serve constrained markets in the greater Philadelphia region. Once we receive our final permits and regulatory approvals, we will begin adding compression, new laterals, and interconnects to the southern portion. which will be the largest driver of cash flow and earnings for the project. Our capital investment to improve Adelphia Gateway is expected to be in the range of $180 to $200 million. On slide eight, I'll take you through the latest developments for Penn East. On January 28th, Penn East was granted a 30-day extension to submit a petition for review with the Supreme Court of the United States. The filing deadline for this petition is now March 4th of this year. On January 30th, FERC issued a declaratory order supporting Penn East's eminent domain rights. FERC's support of Penn East's position is significant as the project pursues the U.S. Supreme Court review. Penn East also filed an application to amend its FERC certificate, requesting approval to pursue the project through a phased-in approach, which is supported by shipper demand. First phase will consist of construction in Pennsylvania with interconnections within the state. Because Penn East has the majority of approvals and permits needed in Pennsylvania, construction is expected to begin soon after FERC approves the amendment. The second phase includes the remainder of the original route in New Jersey and Pennsylvania and will begin after Penn East has secured all the necessary approvals. As we said before, we remain committed to the project and its important role in our energy future. Moving to slide nine, I'll take you through the operational highlights for CEB this quarter. Pat will provide more context around our Q1 financial results in a moment. At the top, you'll note that we placed one commercial solar project into service, adding about three megawatts of incremental capacity. We plan on placing eight projects into service this fiscal year, adding about 55 megawatts. This will bring our total portfolio to about 350 megawatts of capacity. At the bottom left, you can see that our capital expenditures through the first quarter totaled $15.7 million and we recognized $4.2 million in investment tax credits. The bottom right shows our expected SREC revenue in 2020, which is anticipated to be approximately $80 million. Turning to slide 10, I'd like to provide an update on the solar market in New Jersey. As part of the 2018 Clean Energy Act, the BPU is required to close the existing SREC market when the installed solar capacity in the state reaches 5.1% of retail electric sales. In December, a transitional market was approved to bridge the gap between the current SREC market and what will become the successor program. The transitional credit will be called a TREC. So let me take you through some of the details. First, all the solar investments we made to date will continue to generate SRECs, and the market will function as it does today. Projects eligible for TRECs will receive a 15-year fixed-price subsidy. And as shown in the table, the transitional market will incent the development of certain types of projects. We believe the transitional plan will allow NJR to meet its investment targets, and the BPU is refining its successor program with more details to come. I'll now turn the call over to Pat for details on the financial results.

Thanks, Steve. Good morning, everyone. Slide 12 shows the main drivers behind our quarterly NFE changes. We reported an NFE of $40.4 million, or $0.44 per share, compared to $54.1 million, or $0.61 per share, in 2019. On the regulated side, NJG's utility gross margin increased in the first quarter, due primarily to higher rates resulting from our rate case settlement. NFE at NGR Midstream slightly decreased during the first quarter due to the recognition of a gain in the first quarter of 2019 on equity investment in Dominion that did not recur this year because we sold the shares. This decrease was partially offset by contributions from Leaf River, which with operating revenue of approximately $9 million performed in line with our expectations. At CEV, NFE decreased for three reasons. First, the timing of SREC sales. In fiscal 2019, a larger portion of our annual SREC sales occurred in the first quarter. Second, first quarter 2019 included contributions from the wind portfolio that was subsequently divested in February of 2019. Third, we recognized fewer ITC credits in the first quarter compared to last year. As Steve mentioned, NFE and energy services declined due to narrow pricing spreads caused by milder weather in the Northeast. Slide 13 outlines our capital spending for the first quarter of the next three years. There are a few points I'd like to highlight. For the quarter, utility spend was up 28% year-over-year, primarily due to increases in SRL and the combined investment in SAFE II and NJRISE. For fiscal 2020, over 70% of total capital spend will be at NJNG, helping to support a rate-based CAGR of approximately 10%. With pennies pursuing a phased-in approach to the project, we're reducing our capital expenditure estimates for 2021 and 2022, We now expect to spend between 105 to 115 million to construct phase one in Pennsylvania. Clean Energy Ventures' projected capital spend for the year increased about $10 million due to an additional investment opportunity. Moving to slide 14, you can see an update on our cash flows and financing projections. Cash flow from operations in the first quarter was negative 43 million, which reflects the seasonality of our business. As you can see, we expect a significant improvement for the full year, due to new higher rates at NJ&G. As a reminder, these rates went into effect on November the 15th. Early in fiscal 2020, we acquired the Leaf River Energy Center for $367.5 million, which was initially financed through a $350 million bridge facility. We've issued the equity needed as part of the acquisition's permanent funding and partially repaid the bridge loan. Our equity raise resulted in the issuance of 5.3 million shares of common stock with net proceeds of $213 million. We tend to issue 1.2 million common shares later in the year as part of the forward sale portion of our equity raise. The equity tuition satisfies our planned needs for fiscal 2020 and 2021, excluding the drip. The results of our ESSEC hedging program are highlighted on slide 15. As we approached the BGS auction in February, we saw an increase in ESSEC prices for energy years 2022 and 2023. For those years, prices have increased 8% and 12%, respectively, since our last earnings call. With the increase in prices, we've been actively hedging, and now have 71% of our SRE revenues hedged for 2022, an increase from 50% when we last reported the data. For each year 2023, we're now 22% hedged, and we'll continue to monitor the market to add to our hedge position. For each years 2020 and 2021, we are nearly 100% hedged. At these ratios, our SREC revenues will be largely unaffected by future changes in SREC prices. I'll show the call back to Steve.

Steve? Thanks, Pat. Before I open the call to questions, I want to thank our employees for all their hard work and dedication that drives our performance, and I appreciate you taking the time to join us today. I'll now open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Travis Miller with Morningstar. Please go ahead.

Good morning. Thank you. Morning, Travis. I just wanted a technical question here. I saw that your earnings share from the Clean Energy Ventures segment went up a little bit for your projection this year. Anything there that's notable that drove that increase?

Travis, this is Patrick Migliaccio. It's really the increase of approximately $10 million in our expected spend on commercial solar projects would drive the good portion of that increase to the range of $10 25% to 30%.

Okay. Are those from opportunities that you're seeing now in the market that might not have been as economic before or is something else going on there?

No, just a further change in the pipeline.

Okay. A higher level question, obviously there's been a lot of talk about the potential opposition residential side natural gas use. I think AGA had come out with some statements and I wonder if you're seeing that either in any of your neighborhood, local towns, anything in the policy discussions? New Jersey went through its environmental policy debates. Anything along those lines in terms of cutting back residential gas use?

Hey Travis, this is Steve. And no, we haven't seen any of that to date. In fact, our customer growth, as we've just said, continues on pace. We expect over the next three years to add Once again, if you have a question, please press star then 1.

At this time, there are no further questions. I would like, oh, pardon me. I see we have Richard Ciccarelli from Bank of America. Please go ahead.

Hey, morning. Can you guys hear me? Yeah. Hey, Richard. Hey, I was just wondering with your guidance range, you just reaffirmed it. It seems like a pretty big miss relative to expectations. Just how do you see yourself trending within that range?

Richard, this is Patrick Migliaccio. I mean, we reaffirmed the guidance range of 205 to 215. At this point, it would be premature for us to give any more refined guidance than that.

Okay, so just reaffirming the guidance, but not necessarily trending higher or lower.

Yeah, I think that's a fair statement.

Okay, thanks a lot.

This concludes our question and answer session. I would like to turn the conference back over to Dennis Puma for any closing remarks.

All right, Sarah. I want to thank everybody for joining us this morning. As a reminder, a recording of this call is available for replay on our website. As always, we appreciate your interest and investment in New Jersey Resources. Goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.