NewJersey Resources Corporation

Good morning, thank you for attending today's New Jersey Resources second quarter fiscal 2022 conference call. My name is Amber and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad at any time. I now have the pleasure of handing the conference over to our host, Dennis Puma, Director of Investor Relations with New Jersey Resources. Dennis. Please proceed.

Thank you, Amber. Welcome to New Jersey Resources' second quarter fiscal 22 conference call and webcast. I'm joined here today by Steve Wesson, our president and CEO, Roberto Bell, 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 the forward-looking statement section of today's earnings release, furnished on Form 8-K, and in our most recent Forms 10-K and 2 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 NFV. We believe that NFV, utility gross margin, and financial margin provide a more complete understanding of our financial performance. However, these non-GAAP financial measures are not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in item 7 of our 10th K. Our agenda for today is found on slide 2. Steve will begin with this quarter's highlights, followed by Roberto, who will give our review of financial results. Then we will open the call to your questions. The slides accompanying today's presentation are available on our website and were furnished on Form 8-K filed this morning. For those of you following along, we'll begin with an overview of the quarter on slide 3. With that said, I'll turn the call over to our President and CEO, Steve Westover.

Steve? Thank you, Dennis, and good morning, everyone. Thank you for joining us today. Our fiscal 2022 second quarter financial results exceeded our expectations, primarily driven by contributions from energy services that enabled us to increase our net financial earnings per share price for fiscal 2022 by 10 cents. We also benefited from solid performance base rates in place and grew NFV by 28%. At Clean Energy Ventures, our portfolio now includes projects across three states, New Jersey, Connecticut, and Rhode Island. I'll discuss our growing solar project pipeline, our long-term opportunities, and some short-term challenges at CEV later in the presentation. And finally, at Storage and Transportation, our Delta Gateway project is now delivering natural gas to its south zone, serving the Philadelphia metro area. Philadelphia is on track to be fully operational by the end of this year. Moving to slide four, energy services' strong and unexpected performance enabled us to increase our NFAPS guidance for fiscal 2022 to a range of $230 to $240 per share, up from our original guidance of $220 to $230 per share. Our team at Energy Services leveraged their portfolio strategically located assets to generate a higher than expected NFVPS during periods of volatility this past winter. Moving to the next slide. On the left, you can see that we've invested $144 million so far this fiscal year at New Jersey Natural Gas, with approximately 40% of that capital providing near real-time returns. New Jersey Natural Gas was the first utility in New Jersey to fully replace all cast iron pipes and nearly 100% of our system is either plastic or protected steel. We continue to make investments to support energy conservation, reduce emissions, and enhance the safety and reliability of our distribution system for the benefit of our 568,000 customers. Through the first half of fiscal 2022, we added nearly 3,600 new customers New Jersey National Gas expects these additions to contribute approximately $2.9 million of incremental utility gross margin on an annualized basis. On slide six, I want to discuss how CEV is positioning itself as a success in a market with strong long-term fundamentals, despite some short-term challenges. As you're aware, CEV was an early mover in the New Jersey solar market. We developed operational expertise and a strong network of partners that allowed us to acquire shovel-ready projects. This strategy established us as a market leader in the state, growing our portfolio to over 350 megawatts as of our annual estate in 2020. At that time, we identified CEV as a core growth business for NJR and adjusted our commercial solar strategy to support the greater level of investment driven by aggressive public policy and corporate ESG goals. We leveraged our strong network to diversify our target investment market beyond New Jersey and enhance their development capabilities to pursue projects earlier in the development cycle. This strategic shift has resulted in the largest pipeline project in our history, with 680 megawatts of projects under construction, contract, or exclusivity through fiscal 2027, thus providing a runway for sustained investment over the coming years. While solar market fundamentals remain strong in support of our long-term growth strategy, several factors are slowing CEB's ability to deploy capital in the short term. A number of regulatory transitions and features, which will broaden our solar investment opportunities and be favorable in the long run, are currently delayed. They include approval of final projects that are qualified for T-REX, a transition to a permanent incentive program for community solar, replacement of the T-Rex structure for projects of 5 megawatts or more, and the development of a dual-use pilot to allow for solar generation on farmlands. In addition, there's been well-publicized backlog of projects awaiting interconnection at PJM, resulting in delays across multiple states. As a result, our fiscal year 2022 in-service timelines will be impacted, and we're taking a conservative view of our capital deployment estimates for fiscal 2023. We believe that efforts to streamline regulatory and interconnection processes, which are temporarily disrupting normal development cycles, will ultimately strengthen the long-term viability of the solar market. Given these challenges, we thought it was important to go beyond our usual capital expenditure forecast and walk you through our project pipeline, which is on slide 7. As you can see, we have a robust pipeline that will drive significant solar investment in the coming years. In addition to the 75 megawatts under construction, we now have exclusivity and contractual rights to a portfolio of projects totaling 600 megawatts through fiscal 2027. This pipeline of regionally diversified projects, many of which have existing PJMQ positions, is capable of almost tripling the current size of CED's clean energy portfolio. Over the last quarter alone, CED secured more than 420 megawatts of exclusive project options in high-priority, policy-supported development areas. We have procured panels for most projects forecasted through fiscal 2023. Many supply chain issues we have experienced were delays from electrical components, such as inverters and racking equipment, which we have been able to mitigate. Additionally, we are closely following the recent Department which has not impacted our suppliers to date. Overall, our team has done a nice job navigating this environment while continuing to grow the project pipeline, ensuring quality and long-term investment opportunities. Moving to slide eight, the chart on the top shows CEB's second quarter revenue broken down by type, while the chart at the bottom shows capital investment projections for fiscal year 2022. Due to the reasons we discussed, it affects a lower total CEB CapEx for the year. Despite any short-term delays in our in-service timeline, we anticipate no impact to NJR's long-term NFV growth estimates, thanks to the strength of our complementary portfolio of businesses. I'll close my CEB update by highlighting two projects currently under construction. The first is an 8.9-megawatt floating solar installation in Milburn, New Jersey. Once complete, it will be the largest floating solar array in the United States, and CEB's second floating solar project. Our Milburn location will be twice the size of our Sayreville project, which is pictured on the slide and was placed in service in fiscal 2020. The second is a 25.6 megawatt facility located in Mount Olive, New Jersey. That, upon completion, will be the largest solar array on a cap landfill in the United States. It will generate enough electricity to power over 4,000 homes. On slide nine, We continue to make progress in the construction of the Adelphia Gateway, a converted oil pipeline. We recently placed into service a number of facilities, including the South Mainline, Chiltern Lateral, and Tetco Quaker Town Interconnect, and Pico metering stations. Adelphia is now flowing gas to the South Zone, which allows industrial customers in the Philadelphia metro area to utilize natural gas. This includes Kimberly Clark, which replaced a coal-fired plant Pennsylvania. The conversion will reduce the mill's greenhouse gas emissions by 50% and support Kimberly Clark's goal of cutting its carbon footprint in half by 2030. The Delta E is on track to be fully operational by the end of this year. And with that, I'll turn the call over to Roberto for a review of our financial results. Roberto?

Thank you Steve, and good morning everyone. As usual, I'll highlight a few of the operational and financial metrics for the second quarter. Slide 11 shows the main drivers of our net financial earnings, or NFE. We reported NFE of $130.2 million, or $1.36 per share, compared to $170.6 million, or $1.37 per share last year. As a reminder, the second quarter of last year included unusually high net financial earnings at energy services due to increased natural gas price volatility related to extreme cold weather in the U.S. during February of 2021. Moving to our NFE by business unit, NGNG saw an improvement of $22.2 million, primarily due to the impact of new base rates that went into effect on December 1st. CEB's NFE improved by $2.4 million, primarily due to increased revenue from the sale of SRECs and higher electricity prices in the second quarter of fiscal 2022. Service and transportation reported NFE that was largely flat compared to the second quarter of the prior year. And as mentioned before, energy services in the fee declined due to the unusual waiver activity of 2021, but still reported a strong fee of $29.9 million for the quarter, including $10.3 million in revenues from the asset management agreement entered into during fiscal 2021. On slide 12, we have highlighted the details of CEB's FEDF rate hedging program. The sale of SRECs remains a large portion of CVS revenue, and we lock in these cash flows by hedging our expected production of SRECs. As you can see, we're almost fully hedged through energy year 2024. And for energy years 2025 and 2026, we now have 51% and 29% of our expected SREC generation hedged at prices over 95% of the Solar Alternative Compliance Payment, or SACP. I will now turn to our capital plan on slide 13. As discussed in the past call, we expect capital spending at ADAG to moderate somewhat now that the et cetera is in service and the base rate case is behind us. At storage and transportation, the construction of the Adopt-A-Gateway is approaching completion and represents the largest capital expenditure for this segment. And at CBE, we have a robust and growing pipeline with strong long-term fundamentals, However, as Steve mentioned earlier, we're adjusting our capex estimates for fiscal 2022 and widening the range for fiscal 2023, mostly due to delays in a number of important regulatory programs in New Jersey and in the PJM approval process. We expect to see these capex for fiscal 2022 to be in the range of $139 million to $157 million, and we will tighten our projections for fiscal 2023 as we get more clarity around the new PGM process and see more progress around the New Jersey regulatory programs. Turning to our projected cash flows on slide 14, we're incorporating in our estimates the impact that currently elevated natural gas prices will have in our cash flow from operations if sustained through the end of fiscal 2023. The storage of higher-priced natural gas ahead of winter will be reflected as higher working capital needs particularly at energy services, and to a lesser extent, at New Jersey natural gas. As a reminder, the natural gas that energy services inject into storage is 100 percent hedged, removing the risk of a loss as a result of salient changes in prices. In addition, and as discussed in a prior call, AGMG has an extensive hedging program under which much of the price risk of our injections into storage is hedged well in advance of the actual injection season. mitigating the impact of higher national gas prices for our customers. With that, I'd like to turn it back to Steve. Thanks, Roberto.

It was a strong first half of the year with financial performance from energy services that allowed us to increase our NFEPS guidance for the year. We reported solid NFE growth from New Jersey Natural Gas. Our solar project pipeline has never been stronger, and despite some short-term challenges, CED's long-term growth opportunities remain unchanged. The Delta Gateway is flowing gas to its south zone, and we expect to complete construction by the end of 2022. And lastly, the strength of our complementary portfolio of businesses allows us to navigate CED's short-term capital deployment challenges without affecting our projected dividend and NFE growth of 79% per year. Before I open the call to questions, I'd like to close with a few thoughts on our sustainability efforts. We are focused on achieving climate and emissions reduction goals in the most affordable and reliable way for customers by leveraging our existing energy infrastructure to deliver decarbonized fuels. We are optimistic about the ongoing shift from state, federal, and international policymakers who increasingly recognize the value of existing pipeline infrastructure to meet climate goals in a faster, more affordable, and more reliable manner. Our world-class infrastructure assets puts us in a strong position to not only participate, but to play a significant role in New Jersey's clean energy transition. And with that, I'll open the call for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, that's star one. As a reminder, If you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from Richard Sunderland with JP Morgan. Richard, your line is now open.

Hi, good morning and thank you for the time today. Appreciate the clarity on the changes around solar and would like to dig in there a little bit more. What do you see as the timeline for these headwinds to ease? I guess you talked about narrowing the range of 2023 CapEx as that clarity emerges. Is this something you expect over the course of this year or maybe even into 2023? Any thoughts there would be helpful.

Hey, Richard and Steve. Thanks for the question. You know, in looking at, you know, a number of the headwinds, you know, associated with the regulatory process in New Jersey and developing the successor program, looking at, you know, PJM, And they're analyzing and trying to streamline their interconnection process as well. You know, we expect, I would imagine over the next year or so, these to figure themselves out. And ultimately, the message we'd like to leave with you guys is that, you know, these are macro issues. regulatory agencies that should really accelerate the development and make this development more, make it easier and certainly easier to forecast moving forward because they're eliminating logjams in the marketplace. So short answer, yeah, over the next year. And we're going to keep an eye on it and certainly push where we can to make sure that these issues are solved.

Understood. So I guess just thinking about kind of the risks, the high and the low end around 2023 CapEx, is that largely timing then around the easing of those issues, meaning the timing of clarity emerging, say, this year versus next year for what would drive the high or low end? Is that at least a fair summary of how you see it right now?

Yeah, it's a fair summary, and I think just to add to that, you know, we've got a large pipeline of projects, you know, that we've contracted for, you know, have commitments, some sort of commitment. So we feel pretty good about the business moving forward. It's just a matter of just eliminating these logjams. So, you know, ultimately, you know, when they are removed, you know, there should be, you know, kind of a catch-up development at some point in this process as well.

Great, that helps. And maybe just to squeeze one last one in there, to your point about a catch-up, how do you see the earnings runway versus these issues and sort of the timing factors of when the slower development pace right now eventually becomes an earnings issue? Is it, you know, is it given kind of the shape of the SREC profile you have a couple years before you need that catch-up to emerge? How do you see the outlook there?

So a few things. One, we've got a portfolio of companies. So we've got a number of levers here that give us an ability to make earnings and essentially continue to grow the company. From a 10,000-foot view, we need to deploy capital in order to grow the company so that's certainly an important portion of it. Focusing on CEB just for a moment, we changed the accounting. So remember, we've got to deploy the capital, but on a yearly basis, it makes it less important what year it comes in, but ultimately it needs to come in. That's certainly the case. So we've got a portfolio of companies. You've got growth and organic growth that has capability in all our businesses, the utility, storage and transportation, energy services has been able to contribute. We've got the large AMA. So we feel good about our forecasts moving forward, relying on the portfolio of companies. And we've got some time for these things to work themselves out because of the portfolio of companies. And ultimately, we think it will, and we should be able to achieve the numbers that we've forecast as far as guidance goes.

Perfect. Thank you for the time today. All right. Thanks, Richard.

Thank you, Richard. Our next question comes from Travis Miller with Morningstar. Travis, your line is now open.

Good morning, everyone. Thank you. One more on the solar here. Obviously, the whole industry and the market is talking about the Department of Commerce and issues there on the tariffs. Apart from what you talked about policy-wise in New Jersey and PJM, what are you seeing on that side, either in higher costs with the tariffs or just pure supply availability?

So the team, the CEV team, has done a nice job of hedging out solar panels for the CapEx that we have in our immediate future for this year and for a portion of next year, most of next year. So we don't have the same experience and insight right now into the logjam of that market. So good news for us, but we certainly acknowledge that there is something going on there, right? The Department of Commerce is doing an investigation. And we're thinking and we're hopeful that that's going to work itself out such that by the time our hedges roll, we're accustomed to. So that's how we're looking at it now relative to our, you know, business plan and our ability, you know, to deploy capital in that space.

Okay. So you're able to, in terms of hedging, you're able to get the actual panels at effectively a similar price that you, once you contracted that. Is that fair to say? Until 2024, roughly. Okay. Okay. It's close to 2023, so. Yep. Okay. The second question is with everything globally and move toward energy security and gas markets, etc., LNG, what's your appetite for more midstream investments, whether it's pipelines or like your Leaf River type of facility?

You know, Travis, this is the same story. We're executing on the plan that we've had and we rolled out in our November investor day and getting, you know, the Delta gateway up and running, which, you know, you saw on today's that, you know, we're flowing gas in the southern portion. the rest of that into service down there so at this point we're just digesting the assets that we've had and certainly you know we'll look at some organic growth around those assets going forward nothing to announce right now but it's constructed for the market right energy security you know natural gas the long-term value these assets is is being you know proved out in a real way and certainly we we recognize that

Okay. That's all I had. I appreciate the time. Thanks, Travis.

Thank you, Travis. As a reminder, to submit a question, that's star 1 on your telephone keypad. Our next question comes from Julianne Dumoulin-Smith with Bank of America. Julianne, your line is now open.

Hey, Steven Berto. This is Cody Clark. I'm for Julian. Good morning.

Hey, Cody.

So first you mentioned mid-high single-digit returns. I'm curious if you can describe kind of what you're seeing in terms of PPA pricing and also incremental demand for commercial and distributed solar given the power backdrop. I guess related, you know, thanks for the disclosure on your pipeline. Can you talk about the growth trends that you've been seeing in that pipeline? What sort of growth have you seen over the past year or two years, and what do you see for growth going forward?

So, you know, I'll take that in its parts, right? You know, the inflationary pressures, higher gas prices have certainly, you know, driven up electric prices and have driven up, you know, the longer-term curve, which has been, you know, supportive, you know, for, you know, PPAs and, you know, I guess the cost that you're competing against. And I think that's going to continue to be constructive in this market. As far as the growth going forward, we shared this morning what we have in hand as far as the projects that we have clear line of sight on developing, and you can see how into the future. So ultimately, you know, I think that speaks for itself. You know, we feel like we've got a good, you know, line of sight on projects and development. And, you know, we feel pretty good that once some of these, you know, logjam issues and regulatory issues are cleared, that we should be able to develop, you know, at the rates and the returns that we've spoken about.

Okay, got it. And then just second, can you discuss in a little bit more detail the driver of the shift in utility capex from 22 to 23? And kind of related to that also, curious how you're viewing the inflationary backdrop as it relates to your budget and also customer bills just on the utility side.

Yeah, we had we had a few projects that have taken a little bit longer to develop at the utility related to RNG, you know, specifically. So, you know, ultimately, since we were updating guidance in our CapEx with CEV, you know, we figured we'd make the full update there. You know, I wouldn't read too much into that. I feel like those projects will, you know, move forward and we'll get them completed as well. I think, you know, going to your second question on inflation, you know, We haven't really had any impacts or, you know, it'll be a minor impact. We've got a bunch of a number of pluses and minuses. You know, you spoke, you know, earlier, asked a question about or someone asked a question about the escalation of electric prices and things like that. You know, we've got certain, you know, exposures where we get pluses in this inflation. But currently, you know, even after acknowledging all those, we don't expect, we expect very, you know, minor impacts to us that we'll be able to mitigate in our longer-term plan.

And then, Cody, this is Robert. We have to complete the a question on CAPEX. When you take a look at the combined, and I'm excluding CB here, our combined CAPEX for 2022 and 2023, you see that the totals are pretty much the same. So what we had is small movements that we understand better than some of our projects.

Okay, understood. Thanks for the time. All right, thanks, Cody.

Thank you, Cody. Again, as a reminder, to submit a question, it's star 1 on your telephone keypad. Our next question comes from Robert Mosca with Mizuho Securities. Robert, your line is now open.

Hi. Good morning, everyone. So understand the trajectory of CEV. Hey, guys. So understand the trajectory may have changed for CEV. a little bit, at least in the median term. And in your opening remarks, you kind of reiterated that five-year outlook for the overall portfolio. Just wondering if you could dig a little bit more into the specifics as what you're seeing as the offsets to CEV, what some of those specific levers are. Is it better rates at Leaf River, energy services, uplift? I'm hoping to get a little bit more detail there.

Yeah, you answered some of the questions. You answered it right there pretty well. You do, as a portfolio of companies, remember the energy services group, the pretty large AMA, which we publicized some of the cash flows from that. And certainly, inflationary pressures, we talked about earlier, you've got a number of items in the income line that are going to have pressures on the upside from that. you know, incentives at the utility and certainly, you know, anywhere that you've got additional volatility even beyond the AMA, you know, energy services could contribute as well. And, you know, like we talked about before, higher electric prices is certainly going to support you know, additional solar development and PPAs, you know, also. So there's some, you know, there's a little bit of pressure to the upside, allow us to fill the gaps. It's really the, I think, the power of having, you know, a portfolio of companies and being able to utilize, you know, each and every one as you, you know, you build your forecast going forward.

Got it. That's helpful. And then, Last year, I think there was a lot of focus on coming up with solutions to decarbonize the gas stream within New Jersey natural gas. And can you talk about whether that might be de-emphasized, just given the expected increase in the commodity component of customer bills, and also more broadly, just wondering how you're managing the customer bill impacts from rising gas prices? Thanks.

So, you know, two ways to, I guess, two answers to that. You know, one is I think the decarbonization narrative and the things that we're doing are going to continue to move forward. it's going to impact people and customers, and we acknowledge that. But I think the decarbonization effort, bringing hydrogen, renewable natural gas, energy efficiency, and eventually carbon capture and storage to utilize our pipelines far into the future is going to be a walk that we're going to walk for a long time. I think just talking about short-term how gas pricing is going to impact our customers. You know, we've got a pretty well established hedging program at the gas company. And, you know, one of the numbers I was looking at last night, we've got 31 BCF of gas in storage at a price of about The NYMEX is where current market pricing is now. So largely our customers will be insulated as much as our price will be slightly higher than last year. They're going to be insulated from the market realities of right now. And for what we're talking, that gas that's in storage right now is going into next winter, and that's winter 22 and 23. So we've got quite a bit of time to be able to have prices normalized and market to work out some of its issues. And prices to come down so our customers don't feel those impacts. So I think, you know, currently, you know, we're in a pretty good place, you know, far below where the market is a little bit higher than last year, but largely insulated from some of the price moves that you're seeing currently.

Great, that's awesome, Tyler. Maybe just one last one. Just hoping you could maybe discuss the next milestones for Gelfi. You mentioned that it should be fully in service by the end of the year, but wondering if there's any specific milestones you would call out from now to then.

So I've got Amy Craddock is here. She's the Chief Operating Officer over our non-utility companies and has been over that project for some time. And I'd ask her to take that question. Amy?

Yeah, we really have just a couple more facilities to bring into service over the next several months before the end of the year. We really have mitigated any supply chain issues and we just have to get it done from a construction perspective. But, you know, good regulatory support and, you know, again, just a few more facilities left. So it's been moving very well through the process.

Great. Thanks, everyone. Looking forward to catching up at AGI.

Agreed. Thank you.

Thank you, Robert. That concludes today's Q&A session. I'll now pass the conference back over to Dennis Puma for any closing remarks.

Okay. Thank you, Amber. I'd like to thank everyone for joining us this morning. As a reminder, a recording of this call is available on our website for replay. We also look forward to seeing many of you in person at this year's ADA conference or on next quarter's call. As always, we want to thank you for your interest and investment in New Jersey Resources. Goodbye.

That concludes today's New Jersey Resources second quarter fiscal 2022 conference call. Thank you for your participation. You may now disconnect your line.