NewJersey Resources Corporation

Good day, and thank you for standing by. Welcome to the New Jersey Resources Second Quarter Fiscal 2021 Conference Call. At this time, I'll participate on a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now like to hand the conference over to you to speak today, Dennis Puma, Director of Investor Relations. Please go ahead.

Okay, thank you, Christy, and good morning, everyone. Welcome to New Jersey Resources' second quarter Fiscal 21 Conference Forum webcast. I'm joined here today by Steve Westhoven, our President and CEO, Patrick 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 our security 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 materially different from our expectations as found on slide one. These items can also be found in the forward-looking statement section of today's earnings release furnished on Form 8-K and in our most recent Forms 10-K and 10-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'll also be referring to certain non-GAAP financial measures such as net financial earnings or NFV. We believe that NFV provides a more complete understanding of our financial performance. However, it is not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in item seven of our 10-K. Our agenda for today is found on slide two. 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 for your questions. The slides accompanying today's presentation are available on our website and were furnished on form 8K filed with the SEC this morning. With that said, I'll turn the call over to our president and CEO, Steve Westhoven.

Steve? Thanks, Dennis, and good morning, everyone. Thank you for joining us today. Midway through fiscal 2021, NJR has delivered strong performance for our shareholders. And on slide three, I'll take you through the highlights. This morning reported second quarter net financial earnings of $1.77 per share, more than doubling last year's second quarter results, primarily driven by performance at our energy services business. During the second quarter, periods of widespread cold across the U.S. led to an unusually high demand for natural gas. And as in the past, energy services strategically located in geographically diverse storage and transportation assets enabled that business to meet the needs of its customers during a time of unprecedented volatility. The outside performance of energy services illustrates the limited risk, high upside value proposition of our long option strategy. The combination of this strategy and the generation of more fee-based revenues, such as the 10-year asset management agreement we announced in December, provides for a powerful business model. Pat will provide a more detailed look at the drivers behind energy services performance later in the call. The contributions from Energy Services enabled us to increase our NFE guidance for fiscal 2021 for the second time this year to a range of $205 to $215 per share. From our original guidance of $1.55 to $1.65 per share. I'll provide more color on the next slide. At New Jersey Natural Gas, we filed a base rate case to recover almost $850 million of infrastructure investments since the settlement of our last rate case. This includes costs associated with the Southern Reliability Link, which is over 90% complete and expected to be placed in the service this fiscal year. New Jersey Natural Gas received approval for Save Green 2020, our largest ever energy efficiency program. This new program authorized $259 million in spending over three years, furthering our commitment to sustainability by helping customers lower their energy usage, save money, and reduce their carbon footprint. The rollout of the program is expected to begin this year. At Clean Energy Ventures, we placed our first commercial solar project into service, adding 2.7 megawatts of installed capacity. We continue to develop our pipeline of projects to achieve our goal of doubling our installed capacity by the end of fiscal 2024. Leaf River, our storage facility, located in Mississippi, performed well during the February weather event, meeting all of our customer commitments under very challenging circumstances. And finally, we continued construction on the Delphia Gateway South Zone. The Delphia Gateway has received all necessary Pennsylvania DEP permits and is working to obtain FERC notice to proceed for construction of laterals. We expect to place a number of the project facilities into service by the end of the year. Turning to slide four, we are increasing our fiscal 2021 NFP guidance to 205 to 215 per share, an increase of 20 cents per share compared to our March 15th update. Our initial guidance increase incorporated estimated bad debt to account for any energy services customers negatively impacted by the February weather event. Today's upwards guidance revision reflects payment by all of energy services customers apart from one due to bankruptcy. Our fiscal 2022 and long-term NFV guidance remains unchanged. As a reminder, guidance for fiscal 2022 is $220 to $230 per share. And we are maintaining our long-term annual growth rate of 6% to 10% off of our fiscal 2022 NFV, excluding energy services. Slide 5 provides additional detail on our base rate case filing. On March 30th, we requested an increase to base rates of $165.7 million, equivalent to an increase of $118 million in operating income. Since the conclusion of our last case in 2019, New Jersey Natural Gas has invested nearly $850 million to upgrade and enhance the safety and reliability of our transmission and distribution systems. This includes the installation of a southern reliability link at a cost of more than $300 million. We hope that the BP's review of our filing will be complete before the end of 2021, and we look forward to a successful conclusion that balances the interests of our customers and the company. On slide six, I'll take you through some operational highlights of New Jersey Natural Gas. Looking at the top left, we invested $198 million this fiscal year, with about 26% of the capex providing near real-time returns. We added almost 3,700 new customers over the first six months of the year, below our regular growth rate due to the ongoing pandemic. However, we still expect to add approximately 28,000 to 30,000 new customers during the three-year period for fiscal 2021 to 2023. As I mentioned earlier, construction on SRL continues to progress as well. On slide seven, I'll take you through the operational highlights of Clean Energy Ventures. During the quarter, we completed our first out-of-state project in Connecticut. This is a small but noteworthy step towards executing on the regional solar investment strategy we discussed during our November analyst day. We now have over 360 megawatts installed capacity. Total invested capital at CEV for the first six months was $38 million. We expect to see some in-service dates shift from the beginning of fiscal 2021 to the beginning of fiscal 2022, as a result of permitting and interconnection delays related to the pandemic. However, we remain on track to meet our goal of adding an incremental 160 to 180 megawatts of capacity by the end of fiscal year 2022. The bottom right shows our expected CED revenue for fiscal 2021, the significant portion of which is secured through our SREC hedging program. While we adjusted our capital forecast for this year, most of these projects were scheduled to be in service toward the end of the fiscal year. marginally affecting expected revenue. Before I turn the call over to Pat, I want to take a moment to provide an update on our sustainability initiatives on slide eight. In January, we issued our 2020 Corporate Sustainability Report. For the first time, this year's report includes disclosures in line with SASB, the Sustainability Accounting Standards Board, and the American Gas Association's frameworks, furthering our commitment to transparency and reporting on ESG matters. and on Earth Day this past month, we launched a significant new sustainability program, NJR's Coastal Climate Initiative. This program supports local-based climate solutions that have an impact on the communities we serve. CCI's first endeavor will be to work with the New Jersey chapter of the Nature Conservancy to support the restoration of saltwater tidal wetlands in the Barnegat Bay, part of New Jersey's natural gas service territory. These areas of coastline are carbon sinks, ecosystems that remove carbon dioxide from the atmosphere, storing it in the ground soil. And they also act as natural barriers that mitigate storm surge, protecting people and property in our coastal communities. And now I'll turn the call over to Pat to go through the financials. Pat.

Thanks, Steve, and good morning, everyone. Slide 10 shows the main drivers of NFV for the second quarter. As a reminder, we're now utilizing the deferral method of accounting for investment tax credits at CEV, and as such, recapped our financials for the comparable periods. We reported an NFE of $170.6 million, or $1.77 per share, compared to an NFE of $84.3 million, or $0.88 per share, in the second quarter of fiscal 2020. NJG's NFE was lowered due to higher loan expenses partially offset by utility gross margin. The higher N was primarily due to increased compensation and technology expense. CED's energy was basically flat compared to last year. Storage and transportation saw an increase in energy during the quarter, mostly related to increased occupancy income from Leaf River related to the HUB services revenue. Energy services improved 94 million, primarily due to a higher financial margin compared to last year, the details of which I'll take you through on the next slide. Slide 11 applies to the district detail around energy services performance during the quarter. The map illustrates how temperatures departed from normal during the February weather event in the mid-continent and Gulf markets, and also the storage assets that energy services hold in these regions. During this period of colder weather, there was high demand for natural gas, which energy services were able to satisfy by using its storage assets to supply natural gas to a variety of customers. Usually high demand resulted in strong pricing, which in turn drove energy services' profitability. Turning to slide 12, I'll take you through some of the changes in our capital plan for fiscal 2021 and 2022. As Steve mentioned earlier, we're starting to see some of the in-service dates for certain CEV projects shift in fiscal 2022 due to permitting and interconnection delays related to the pandemic. We've adjusted our capital plan accordingly. For fiscal 2021, we now expect to spend between $96 and $118 million in CEV, compared to our prior forecast of approximately $165 million. However, the capital is simply shifting to fiscal 2022. We still expect to reach our goal of adding 160 to 180 million bucks capacity over the two-year period. It's also important to note that the NFV for fiscal 2021 will largely be unaffected by the shifting capital. Revenues will be minimally impacted given the majority of our projects had expected inter-estates towards the end of the fiscal year. And with the change in financing and accounting methods, the impact related to IPCs will be a fraction of what it would have been previously. On slide 13, you can see our project pipeline for fiscal 2021 and 2022 is about $255 million, which represents 80% of our targeted CapEx for the next two years. Approximately one-third of our project pipeline is currently out of state projects. And for the projects in New Jersey, we expect to earn an average TREC factor of 0.9 per kilowatt hour. Turn to slide four, you can see the update to our cash flows and financing projections. Our cash flow from operations remains strong. We have no equity needs for the foreseeable future, aside from a normal DRIP program. Demonstrating the strength of our cash flows, Fitch recently affirmed NG&G's investment grade credit rating with a state of outlawing. On slide 15, we've highlighted the details of our SRC hedging program. As you can see, we are well hedged through the next three energy years. We now have 93% of our 2024 volumes hedged. And for the first time, we've been able to hedge SRECs four and five years out, The market fundamentals for energy years 2025 and 2026 are supporting strong pricing with SX trading at or above 85% of SACP with 36 and 10% hedged for 2025 and 2026 respectively. And I have a call back to Steve for some closing remarks.

Thanks, Pat. Before I open the call to questions, I'd like to summarize the quarter. Through the first half of the year, NJR delivered strong results. The overperformance from energy services allowed us to increase our guidance for the fiscal year and provides the flexibility to reinvest in our business. We filed a rate case to recover our infrastructure investments, including the costs associated with SRL. We received approval for Save Green 2020, our largest ever energy efficiency program. CV has a strong pipeline of projects that will allow us to reach our goal of adding 160 to 180 megawatts of capacity by the end of fiscal 2022. And we've received all necessary Pennsylvania DEP permits and filed with FERC for a notice to proceed for construction of laterals for Adelphia Gateway. I want to thank all of our employees for their hard work through the first half of this year. And now I'll open the call for questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. The first question will come from the line of Gabriel Morin with Ms. Hu.

Hey, good morning, everyone. So much for the reset year. I wanted to... I wanted to ask first just on the cash flow from ops guidance. I think compared to last quarter, you raised a midpoint by $20 million, if I'm reading that right. Obviously, that's a little less than the benefit from energy services, so I just wanted you to speak to that a little bit first.

Hi Gabe, this is Pat Migliaccio. You're correct. Cash from operations increased by about $20 million, which is just a little bit less than what the ultimate guidance raised. There are a couple other minor tweaks in there, but the majority of the change is related to energy services.

Okay. Thanks, Pat. Maybe if I could also ask about some of your projects on SRL. I noticed the cost moved up a little bit. Is that something, you know, first of all, are you confident, you know, this is where your costs kind of stay with the last couple percentage you kind of have to finish up on the project? And then in terms of recoverability of those cost increases, can you speak to that too?

Yeah, Gabe, this is Steve. So the project's about 97% complete, so, you know, almost finished at this point. And, yeah, we expect to, you know, recover all those costs. You know, remember, this project's been approved by the BPU, received all necessary permits, and really was born out of, you know, Superstorm Sandy and the need for resiliency. So a lot of support for the project. You know, we'll go through the process for the rate case to receive recovery and see how it turns out. But, you know, all indications, you know, certainly point towards recovery.

Got it. Thanks, Stephen. And on Adelphia, you know, in terms of getting the permits from the FERC here to start construction and the collaterals you're expecting in service, has that timing shifted at all in terms of the project?

I think it hasn't shifted too much, maybe by a month or two. So we have adjusted our wording slightly that certain portions of the project are going to start going into service at the end of the year. But a little bit of detail associated with the contracts that will come in. We're not changing anything from a financial guidance on the project, but construction is what construction is. It has been shifting slightly, if you will.

Dick, if you probably noticed in the CapEx schedules, if you had a chance to take a look at them, we did shift a modest amount of capital, $25, $26 million on the Delta Gateway project from fiscal 21 to fiscal 2022, just reflecting that minor change in some of those components of the project.

That's helpful. Thanks, guys. Just last one on me is maybe just an update on Leaf River. You know, it clearly sounds like they actually performed well during the winter storm. I know it's mostly contracted, but What are you seeing from customers there as far as, I guess, interest in either an expansion or, I guess, you know, contract values at the asset?

Yeah, you know, the asset performed very well. You know, everybody knows that an extreme weather event, you know, took place down in that region in February. So we were pretty pleased with it. You know, some bumps up of, you know, some earnings, you know, due to some, you know, short-term services they were able to provide there. As you look forward, you would expect that need for reliability in that market would drive some higher asset values. We don't have anything to report yet, but I would expect that certainly all the utilities and real users, fiscal users down in that area are looking to bring more reliability into their book going forward.

Thanks, Steve.

Your next question comes on the line of Travis Miller with Morningstar.

Good morning, everyone. Thank you. You've talked in the past here recently about de-risking energy services. And I guess two questions on that line. One, have you already de-risked it such that your gains would have been even larger had you not gone through the de-risking process or started it? And then two, Is this kind of delta, I guess, over a normal level what we would expect in future extreme events, right, even on their de-risking type of scenario as you've laid out?

Thank you for joining us. Thank you for joining us. So all the assets are in the book, so kind of a full portfolio from that perspective. But going forward, we've got a number of assets that we're going to see that are going to be utilized in the future. And storage was the largest component contributor this year to the P&L in the book. And remember that the asset management agreement is really centered around transport assets.

Okay, so you do still have the optionality even under your de-risking strategy. You would want to keep that optionality.

There's still going to be a significant portfolio that needs to be managed in the future, yes.

Okay. And then on the clean energy ventures, how are you thinking about financing that as it becomes a larger and larger share of your CapEx program? Is the project that or do you plan on taking that on your balance sheet?

Morning Travis, this is Patrick Migliaccio. So our plan that we laid out at the end of this day is to finance all of our commercial solar projects with tax equity, sale-leaseback, and that is still considered on balance sheet, although it does receive what I'll describe as favorable treatment from Fitch in terms of how we tackle the methodology. Once you get out to a number of years out, 25, 26, we might have some more optionality in terms of how we think about that financing, but for now it's all going to be selling stock financing, tax equity structures for commercial. And then residential will be financed through the private place market as we have our other non-regulated investments.

Okay. Very good. That's all I have. Thank you. Thanks, Travis.

There are no further questions at this time. Are there any closing remarks?

Yes. Thank you, Christy. And I want to thank everyone for joining us this morning. As a reminder, a recording of this call is available on our website. Also, I want to thank you for your interest in investment in New Jersey Resources. Thank you. Goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.