NewJersey Resources Corporation

Good morning and welcome to the New Jersey Resources Third Quarter Fiscal 2020 Earnings Teleconference. All participants will be in a 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 touchtone 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. Please go ahead.

Dennis Puma Thank you, Brendan. Good morning, everybody. Welcome to New Jersey Resources' third quarter fiscal 2020 conference call and webcast. I'm joined here today by Steve Westhoven, our president and CEO, Pat Migliaccio, our 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 be found in the forward-looking statements in today's section of our 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 NFV, net financial loss, and utility gross margin provide a more complete understanding of our financial performance. However, they are 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. Turning to Slide 2, we have our agenda for today. Steve will begin today's call with highlights from the quarter, followed by Pat, who will give our financial results. will then open the call up to your questions. The slides accompanying today's presentation are available on our website and were furnished on our form AK file this morning. With that said, I'd like to turn the call over to our president and CEO, Steve Westhoven.

Steve? Thanks, Dennis, and good morning, everyone, and thank you for joining us today. Before we review the third quarter results, I want to provide a status update on COVID-19 impacts on NJR. In June, New Jersey Natural Gas resumed in-home inspection work for Save Green, our energy efficiency program. And over the last month, we started to resume other services that had been scaled back at the peak of the pandemic. We are now performing non-emergency service-related utility work at customers' requests. Our team has done a terrific job of navigating pandemic-related restrictions. Despite a COVID-related delay in certain home construction activities during the quarter, the utility continued to add customers. We've added nearly 5,900 new customers so far this fiscal year. We have over 2,500 pending installations as of today. We are likely to lag our original goal of adding 9,800 new customers in fiscal 2020, but we view this as a near-term delay and remain confident in reaching our three-year target of 28,000 to 30,000 new customers by the end of 2022. As always, the safety and well-being of our employees, customers, and the communities we serve take priority. We continue to voluntarily suspend customer disconnects and late fees and provide assistance to those in need through various federal and state programs and through our gift of warmth, an NJR charity designed to assist customers in paying their bills. Moving to slide four, despite the challenging environment, we are reaffirming our fiscal 2020 NFE guidance range of 205 to 215 per share with the expectation of NFE falling towards the lower end of the range. We now expect New Jersey Natural Gas to contribute 64-67% of total NFE compared to our previous range of 61-65% due to decreased O&M expenses. We lowered the contribution range in our midstream segment to 8-10% from 10-15% due to lower AFUDC earnings on our Adelphia Gateway project. The permits for Adelphia are under final review by the Pennsylvania DEP. And once the agency's review is complete, we'll file for our FERC notice to proceed. And despite the longer than anticipated permit review period, Adelphia remains on track for 2021 in service date. And at Energy Services, we now expect a loss of negative three to negative 5% of total NFA. Moving to slide five, as mentioned before, despite some unavoidable delays related to the pandemic, We continue to add customers and remain confident in reaching our three-year target of 28,000 to 30,000 new customers by the end of 2022. New Jersey Natural Gas's capital program has not been materially affected by the pandemic, and we see minimal downside risk to our previously disclosed CAGR of 10.3% for the three-year period between 2019 and 2022. Also during the quarter, the New Jersey Board of Public Utilities released an order establishing rules for future energy efficiency filings. New Jersey Natural Gas has a strong track record of working constructively with our regulators to design energy efficiency programs aligned with the state's goals. And as such, we view this change as positive for the utility, the state, and our customers. The Southern Reliability Link continues to make progress with over 75% of construction complete, leaving approximately 6.8 miles to go. However, in the third quarter during a return drilling operation, New Jersey Natural Gas experienced an inadvertent return which caused damage to a structure near the drilling site. New Jersey Natural Gas takes the issue of safety seriously and we responded accordingly. We took immediate action, stopped drilling, activated our mitigation plan and in New Jersey the part of environmental protection was notified. No permanent environmental impacts are expected as a result of this release. But following the inadvertent return on July 8th, the DEP suspended New Jersey Natural Gas's permits for certain sections of SRL. And after several productive consultations with the DEP, a risk mitigation strategy required to lift the permit suspension was submitted, and we are now awaiting the DEP's review. Construction activities continue to progress on the remaining portions of the project as we resolve the DEP permitting matter. And we do not expect the completion timeline of SRL to be effective. Turning to slide six, CEV had another productive quarter, and we are on track to meet our goal of adding nine commercial solar projects to our portfolio this fiscal year. The growth of our clean energy segment is an important part of the sustainability agenda we outlined earlier this year, and another example of our commitment to help achieve a clean energy future. In the third quarter, we added three commercial projects totaling 32 megawatts of incremental capacity, including the New Jersey Oak Solar Facility, are first acquisition of an operating solar asset. Given our team's expertise and successful track record of asset management, we believe there's an opportunity related to the New Jersey Oak Solar Project that can be realized through minor upgrades and O&M efficiencies. As pandemic-related restrictions ease, we're beginning to see signs of improvement in the residential lease and small commercial solar markets. During the quarter, the Sunlight Advantage Program added 90 customers and now serves over 8,400 customers in total. and through the third quarter, the team at CEV has satisfied the majority of their investment targets and is on pace for another very successful year. We expect to recognize approximately $68 million of SREC revenue and approximately $20 million from ITCs in the fourth quarter. Moving to slide seven, I'll cover some highlights from NJR Midstream and Energy Services. At NJR Midstream, the Leaf River Energy Center continues to be a positive addition to our portfolio of managed storage and transmission assets. Performing well and in line with our expectations. The northern portion of our Adelphia Gateway project is flowing gas and we're working through final permitting for construction in the southern portion of the project and our in-service date of 2021 remains unchanged. For Penn East, on August 3rd FERC issued a positive environmental assessment for phase one of the project, finding no significant environmental impact. And as you may recall, On June 29th, the U.S. Supreme Court requested the view of the U.S. Solicitor General regarding the New Jersey portion of the Pennies project. We await the opinion of the Solicitor General on the decision by the Supreme Court on whether to hear the case, and we will provide updates when they become available. Energy Services continues to pursue steps that will reduce the risk profile of its business and increase the stability and predictability of its cash flows. We've made progress on one of our objectives and reduced O&M expenses over the first nine months of this year. and in summary, despite a difficult environment, the strength of our diversified businesses has allowed us to reaffirm guidance, maintain our capital programs and continue to provide uninterrupted service to our customers. And with that, I'd like to turn the call over to Pat for some details on the financials.

Thanks, Steve, and good morning, everyone. Slide nine shows the main drivers of our quarterly NFE and net financial loss changes. During the third fiscal quarter of 2020, NGR reported a net financial loss of $5.8 million or 6 cents per share compared to a net financial loss of 17.5 million or 20 cents per share in 2019. New Jersey Natural Gas saw an NFE improvement quarter on quarter of 15.8 million due to higher base rates and lower OM expenses. Midstream saw modest improvement during the quarter with increased operating income from Leaf River and Adelphia mostly offset by income taxes and interest expense. Clean Energy Ventures was down $6.8 million, primarily due to the timing of SREC sales and investment tax credit recognition, which, as Steve mentioned, will mostly occur in the fourth quarter. Energy Services improved $7.1 million due to higher financial margin this quarter when compared to the same period in 2019. Home Services another decreased $5 million, mainly due to the timing of some expenses related to our IT system replacement project. Slide 10 outlines our capital spending for the first nine months of fiscal 2020 and the next two years. Steve mentioned earlier the delay in the Delphi Gateways permitting process that resulted in a portion of our fiscal 2020 capital spend getting pushed to fiscal 2021. We now expect capital expenditures for Delphi Gateway to be in the range of 140 to 160 million for 2021 and 2022 compared to our previous estimate of 100 to 120 million. As you can see on slide 11, NGR remains well positioned in terms of liquidity. as of June 30th, we had almost $600 million of liquidity available to us. In addition, in July, NGR received a total of $335 million for the issuance of unsecured NGR notes and NGNG mortgage bonds. We use those funds to pay off our outstanding Leaf River Bridge Loan and to reduce short-term debt balances. Moving to slide 12, you can see an update on our cash flows and financing projections. As previously communicated, we have no equity needs for this fiscal year or fiscal 2021 due to the offering we completed last December. I also want to take a moment to discuss the stability of our dividend in light of the pandemic. On July 14th, we declared our regular quarterly dividend of $0.315 per share and currently do not expect changes in our long-term dividend growth rate of 6% to 8%. On slide 13, we've highlighted the details of our SREC hedging program. We continue to actively hedge to ensure ESSERC revenues are largely unaffected by future changes in ESSERC prices. For Energy Year 2021, we are 94% hedged, and for 2022, we have 92% of our volumes hedged. While for Energy Year 2023, we've increased our hedge position to 55% from 22% when we last reported this data. For Energy Year 2024, market fundamentals are strong. With our current energy year 2024 SRECs trading at $185, or 85% of the SACP, we've begun hedging energy year 2024 and now have 21% of our volumes hedged at an average price of $184. I'll now turn the call back over to Steve.

Thanks, Pat. Before I open the call to questions, I want to thank our employees for their hard work and dedication, especially considering the circumstances that we're all dealing with. Back in March, we had to pivot quickly to this new working environment, and all of our associates embraced the challenge, and our performance through this period has been largely unaffected. Whether in the field or working remotely, we've excelled at serving our customers' needs and respecting their wishes for how that service should take place. Our focus on customer service is why we were recognized in June for the seventh straight year as the most trusted utility in the nation, according to Cogent, syndicated by Escalant. I appreciate you taking the time to join us today. and 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 one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gabe Maureen with Musoho. Please go ahead.

Good morning, everybody. A couple questions. One, if I may, I could start with the energy efficiency programs and the solicitation and the VPU. Can you just talk about maybe the magnitude of what you're looking to do there over and above, you know, your safe green programs and what you've done in the past?

Hey, Gabe, this is Steve. I'm going to pass this question over to Mark Cara, who's the head of our regulatory, to give you some details on those programs.

Yeah, so just to give you a quick background, as you know, our State Green program, called State Green 5, was a vast improvement over our prior program. We'd been investing about $15 million a year in the prior programs, and we got approval in the last one to do $135 million over a three-year period. When we take a look at the upcoming filing, we're still working through that. That is due on September 25th. will know better what that program will look like when it gets approved, and the target date right now is May of 2021. We expect it to be somewhat similarly sized. There'll be some ins and outs in the programs, but for right now, we're really uncertain and can't discuss what the final details will be. The positive aspect is that there are many programs that were run previously by the Clean Energy Program of the BPU. Those programs, specifically on residential and commercial customers, will be coming over to the utilities and to New Jersey Natural Gas. So we look forward to that and working with the BPU on creating a good collaborative. Those programs, once they get approved, and we're hopeful by May 1st, there'll be implementation required by July 1st of 2021. So right now, there's still a lot of uncertainties of what those programs look like, the size, We know there'll be about a three-year program, so expect it's about similar to what State Green 5 is or it could even be a little bit bigger.

I appreciate that. Thank you. And then maybe if I can turn to COVID costs or potential COVID costs. It doesn't sound like there's been much of an impact directly. Do you anticipate at all calling out some of the potential COVID impacts? I know the BPU has allowed for that. One of your peers, I think, noted that they were doing so yesterday when they reported. Is that something you anticipate going forward?

This is Patrick Migliaccio. Certainly, we are aware of the order. To date, COVID-19 costs for us have been largely immaterial. And so we continue to monitor that. We've not seen a material increase in net write-offs related to bad debt expense. To put some ranges around that, In a typical year, we'll see the $2 to $3 million. Going all the way back to the Great Recession of 08-09, that got as high as $7 million, just to give you some sense of the magnitude. But as I mentioned earlier, to date, those costs, both COVID-19 specific as well as bad debt, are largely immaterial.

And this is Mark again. We have been having productive conversations with the Board of Public Utilities about the whole aspect of uncollectibles. and so they're acutely aware of that. We'll work through that over the next period as we work through and getting some of these customers the assistance that they need to be able to help pay their bills.

Thanks, Pat. Thanks, Mark. And then maybe my final question is just on SRL. Can you just talk about whether the total cost there has changed for the project? Looking at the SRL specific slide, this quarter versus last, I think the costs have gone up. The capital plan seems unchanged for SRO, so I'm just looking for clarification on that. Also, costs have gone up. Are you confident that you'll be able to recover during the rate case, even if the costs are higher?

Gabe, this is Patrick Migliaccio. So our estimates of costs for SRO are largely unchanged from what we reported the last quarter. and do not see any issues with recovering the costs associated with the project. Okay. Thanks, Bob. Thanks.

Our next question comes from Michael Gogler with Janie Montgomery Scott. Please go ahead.

Morning, everyone. Morning, Mike. Hey, Mike. Steve, got one for you. Given the cancellation of Atlantic Coast, just wondering what you're thinking In terms of your existing midstream assets and energy marketing, does it create any opportunities for you in the future?

A few thoughts on that, Mike. One, certainly infrastructure is becoming harder to build, which is making the infrastructure that's in place, I think, more valuable as we move forward. Natural gas, very important energy source, and we've even seen that recently with the tropical storm that's come through here, knocked out a lot of Electric Service, and there's been a lot of gas-fired generators that have been running that have been helping provide electric service. Not only important in the winter, but important in the summer, and it's critical infrastructure. When we look at the projects that we have on the board, Adelphia Gateway, you know, already in the ground. We've got some permitting still left in Pennsylvania. But minimal construction, minimal environmental impact, and serving a constrained market. So, you know, we're excited about, you know, moving forward with that project once we get the approvals. Leaf River Energy Center, the storage facility down in Mississippi, performing well. Certainly, volatile gas prices have helped there as well. And, you know, Gulf Coast, You know, LNG liquefaction, you know, has been tough, but that's been helping spreads and such down in that area and really shows the balancing needs down in Louisiana as well. Penn East, still an important project. We've got capacity constraints in the Northeast. So, you know, I think as we push forward, you know, receive the EA, we are marching forward with that project. certainly very needed. But right now, I think the opportunities that we have are to get the projects that we have on our slate developed and get them completed and running, which is what we're working pretty hard at right now.

Okay. And then you brought up Penn East. I'm just wondering, what's the target to begin construction there on Phase 1?

So phase one, I think we have a completion in 2022. And we, right now, are going through the process. We received the EA. We need to receive the FERC certificate this fall, and then some other approvals. So I think we're working through the process. And as you know, that's been an unpredictable process. So our current schedule, having that in service, I believe the end of 21, 22, currently.

Thank you, sir.

Our next question comes from Richard Cicciarelli with Bank of America. Please go ahead.

Hey, good morning. Thanks for taking my question. Good morning, Richard. Hey, Richard. Hey, I'm just curious if you guys could provide a little bit more color on what's driving your expectations for the remainder of the year. Just looking at what you've done year to date, It seems like it would imply 100% growth year-over-year for 4Q, and I realize that there's some timing considerations with ITC recognition and the SREC revenues out of your CEV segment, but just curious if you can provide a little bit more color there.

Hey, Richie, on our end, you cut out a little bit on the initial side of the question, so initial color on what specifically?

For your expectations for the remainder of the year, given that you've kept your guidance act pointing to the low end of the range, but just given what you've done year to date, it seems like it would imply 100% growth for 4Q year over year. And I realize the timing with the ICC recognition, but what else is driving your expectations for the remainder of the year?

Now, Rich, you're spot on. It really is timing. As Steve alluded to in his remarks, we've got roughly $60-plus million of SREC sales that we will deliver in the fourth quarter of this fiscal year, which you can effectively tax effect those and drop them to the bottom line because there's no incremental additional operating expenses. And the balance is income taxes, rather investment tax credits associated with clean energy ventures. So it really is strictly a timing issue, not much more than that.

Okay, got it. That's very helpful. And then just curious, I know you touched on the energy efficiency program, but also on the IIP program, what are your expectations for rider treatment there, and when's the timing for approval?

Hi, this is Mark Cara, again, Vice President of Regulatory Affairs. So we filed Back in February of 2019 on that, we answered all the discovery and submitted the cost-benefit analysis that was required earlier this year. We've begun the settlement process now, so we're hopeful that during the course of this quarter or into the early fourth quarter, first quarter of FY 2021, we'll have some resolution on that and close the issue out and get some investment underway.

and Richie, just as a reminder of that over $500 million program, approximately $280 million was related to what I describe as traditional pipe infrastructure. $220 million is related to our, what we dub Project Next, which is the replacement of our customer billing system, ERP, and work in asset management. That work is underway for our ERP. So, it actually went into service on July the 8th, so just as an FYI. Those are the two different types of spend under that program.

Okay, got it. That's very helpful. And then just last one for me here. You alluded to some of the permitting challenges at Adelphia and you shifted the spending there. I also noticed some minor spending was shifted out at CEV. What's driving that?

So, you know, I think with Adelphia Gateway, you know, getting the permits through the Pennsylvania DEP, we've been working with them extremely well, but, you know, COVID-related impacts and just slowing things down a little bit, you know, could be a reason for that. And that's just, you know, slowing the project down. But we still expect that to have in commercial operation in 2021. And you see in the numbers, we've shifted out the spending to reflect that trend.

And then Richie, on the Clean Energy Ventures side, we lowered our expectation for the sunlight advantage last quarter from $26 to $20 million. We're still targeted there. And again, that's also principally COVID-related reference on last call. First, with our channel partners not being able to get into homes to market to our customers. And then second, at the local municipality level, permits have been a little bit slower to achieve.

All right, guys. Thanks a lot for the call. That's all I had. Thanks, Richard. Have a good day, Stan.

As a reminder, if you would like to ask a question, please press star, then 1. Our next question comes from Travis Miller with Morningstar. Please go ahead.

Good morning, guys. Hey, Travis. On SRL, I was wondering if the BPU... was involved in anything in terms of investigation or looking into what happened and whether there was any kind of process of dealing with issues like what happened through the BPU rather than the DEP. I wonder if there was any involvement there.

So, Travis, we notified the BPU that this incident took place. But, you know, that's been about it. It's really been the DEP and local permitting that have been involved. And we're working with them right now, and like we said, we've submitted a risk mitigation plan with them, and we're waiting reviews so we can start up the sections. You know, construction's still continuing. Thank you for joining us.

interveners or possible interveners about rate recovery given what happened?

No, we haven't. So this would go into our next rate case. So we haven't had the opportunity to put it in a rate case at this point. We've got to get commercial operation in place first. So no, there hasn't been any reaction from an intervener.

Okay, sure. Thanks. And then I'm wondering high level your thoughts on the Berkshire Dominion deal and any chance that if the right price came along that you might look at a similar divestiture on the midstream side?

We don't comment on those types of situations, but I will say we're excited to get Adelphia Gateway up and running and get some of these assets in the market. It's a constrained market. There's definitely a big need for natural gas. Deliveries in these markets that we're in. So I think they'll provide value for our company for a very long time.

Okay. I appreciate the very elaborate non-answer. Thank you much, guys. Thanks, Travis.

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

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

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