NewJersey Resources Corporation

Good morning, everybody, and welcome to today's New Jersey Resources Fiscal 2022 Third Quarter Conference Call. My name is Drew, and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing Start followed by 1 on your telephone keypad. If you change your mind, please press Start followed by 2. I'm now going to hand over to Dennis Puma to begin. Please go ahead.

Thank you, Operator. Good morning, everyone. Welcome to New Jersey Resources Third Quarter Fiscal 2022 Conference Call and Webcast. I'm joined here today by Steve Westhoven, 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 statements section of today's earnings release, furnished on Form 8-K, and in our most recent Forms 10-K 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, net financial loss, utility gross margin, and financial margin provide a more complete understanding of our financial performance. However, these non-GAAP measures are not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in item 7 of our 10-K. Our agenda for today is found on slide 2. Steve will begin with this quarter's highlights, followed by Roberto, who will review our financial results. Then we'll open the call to your questions. Our slides accompanying today's presentation are available on our website and were furnished on Form 8-K filed this morning. We'll begin with an overview of the quarter on slide three. With that said, I'll turn the call over to our President and CEO, Steve Westover. Steve?

Thanks, Dennis, and good morning, everyone. Thank you for joining us today. We're pleased to report that our complementary portfolio of businesses continues to perform ahead of expectations. As a result, we are increasing our previously announced guidance range for fiscal 2022 by 10 cents. This marks our second guidance increase for this year. To summarize a few highlights, New Jersey Natural Gas added nearly 1,700 new customers. In July, Clean Energy Ventures placed an eight megawatt project into service. Energy Services reported significant improvement in NFE in the third quarter as a result of our asset management agreement. And finally, Adelphi is now servicing 75% of its contractual commitments, and we expect to reach 100% by the start of the heating season. Moving to slide four, we're increasing our fiscal 2022 NFEPS guidance range to 240 to 250 a share compared to our previous range of 230 to 240 per share. This increase is due to a combination of factors, including strong performance at New Jersey Natural Gas, greater than anticipated financial margin from energy services long option strategy, and increased electricity revenue at Clean Energy Ventures. Our performance at energy services is worth noting. In line with our strategy to de-risk that business, we executed an asset management agreement in December of 2020. This transaction provides energy services with fixed payments over the next 10 years, while still maintaining the ability to capture value in times of volatility from the remaining portfolio of assets, which is what we're experiencing this summer. Moving to the next slide, I'll take a few moments to discuss the quarterly achievements at each of our business units, starting with New Jersey Natural Gas. On the left, you can see that New Jersey Natural Gas is in a solid position with strong capital deployment across a variety of programs. Year to date, we've invested $231 million with over 40% of that capital providing near real-time returns. 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 nearly 570,000 customers. Thus far in 2022, we've added over 5,200 new customers through a combination of new construction and conversions. And finally, we remain on track to file our next rate case in the 23-24 timeframe. Moving to clean energy ventures on slide six, we have a healthy pipeline of projects positioned to drive significant solar investment in the coming years. CED has been able to develop a portfolio of over 380 megawatts of operational assets. and we believe the long-term fundamentals of the renewable sector are sound. The efforts to streamline regulatory and interconnection processes in the energy markets around the country are resulting in delayed development cycles, yet we believe the outcome will be improved efficiency that will ultimately strengthen and provide greater predictability for investing in renewable projects. The team at CED has exclusivity and contractual rights on 608 megawatts of capital deployment options through fiscal 2027. in addition to another 67 megawatts of projects currently under construction. This pipeline of regionally diverse projects would nearly triple the size of CEB's clean energy portfolio. Moving to slide 7, we recently placed into service an 8 megawatt facility in Holland Township, New Jersey, which will be eligible for T-REX under the BPU's Transition Incentive Program. This site was built on the location of a former paper mill. and required environmental remediation prior to construction. This is an excellent example of how New Jersey can benefit from repurposing land that would otherwise be vacant to produce renewable energy. On slide eight, I'll briefly discuss the latest developments at Adelphia Gateway, which is part of our storage and transportation business. We're in the final stages of construction at Adelphia, a converted oil pipeline. We recently completed construction at Marcus Hook in Quaker Town Compressor Stations, which keeps us on track to be fully operational by the end of the calendar year. At Leaf River Energy Center, we continue to benefit from a steady stream of contracted revenue with credit-worthy counterparties. Our excellent track record, along with tightening market conditions, bow well for long-term value of the asset. I had a chance to visit our team at Mississippi recently and cannot say enough good things about the work that they are doing. With that, I'll turn the call over to Roberto for a review of the financial results. Thank you, Steve, and good morning, everyone.

As usual, I'll highlight a few of the operational and financial metrics for the third quarter. Slide 10 shows the main drivers of our net financial earnings, or NFE. We reported a net financial loss of $3.6 million, or 4 cents per share, compared with a net financial loss of $14.1 million, or 15 cents per share last year. NJMG saw an improvement of $1.1 million, primarily due to the impact of new base rates that went into effect on December 1st. CBE remained mostly flat compared to the prior year period, as higher electricity sales were offset by lower SREG revenues and a higher depreciation expense. As a reminder, NJR has historically sold the majority of its SREGs in the fourth quarter. Energy services reported an improvement of $7.5 million, largely driven by the contributions of the AMA. Storage and transportation reported an improvement of $1.1 million during the quarter, driven by increased revenues at the Delta Gateway and Lee River. Finally, home services improved by $1 million, mostly driven by higher installation revenues. On slide 11, we have highlighted the details of CDE's SREC hedging program. The sale of SRECs remains a large portion of CDE's revenue, and we lock in these cash flows by hedging our expected production of SRECs. As you can see, our expected SREC generation is almost fully hedged through energy year 2025, and 29% hedged for energy year 2026. I will now turn to our capital plan on slide 12. For the current fiscal year, we expect capital spending at NG&G to fall in the range communicated during our last quarter's goal. Similarly, we expect CEB's capex for fiscal 2022 to remain unchanged from last quarter's communication. We'll continue to tighten our projection for fiscal 2023 as we see more progress around the New Jersey regulatory programs. And as storage and transportation, the construction of Adelphia Gateway is approaching completion and represents the largest capital expenditure for this segment. Turning to our projected cash flows, on slide 13, as we mentioned last quarter, we continue to assess the impact that elevated gas prices would have in our cash flow from operations if sustained through the end of fiscal 2024. Despite higher working capital needs at energy services and New Jersey National Gas, we remain in a strong position to execute on our growth objectives. With that, I'll turn the call to Steve.

Thanks, Roberto. We are pleased to report strong financial performance ahead of our financial targets and raise our guidance range for the second time this fiscal year. These results reflect the great work of our team and the combined strength of our businesses. We're working to grow our existing assets through organic growth initiatives while positioning our portfolio of businesses to take advantage of the clean energy future. And as existing infrastructure becomes more valuable, our assets will continue to deliver earnings growth as well as help achieve our decarbonization goals. We see these as parallel paths and are not mutually exclusive. Stability at our regulated utility and the complementary investment opportunities provided by our other business segments provide strong profile for growth and benefit to our shareholders. NJR currently offers investors an attractive 10% to 12% expected total return based on our dividend yield of about 3.2% and our long-term NFVPS expected growth rate of 7% to 9%. We appreciate that you took the time to join us today. And before I turn the call over to questions, I want to take a moment and highlight that after 38 years of service to our company, our director of IR, Dennis Buma, has decided to call it a career. We recently celebrated the 40th anniversary of our New York Stock Exchange listing with a bell ringing at the exchange. And for much of that time, Dennis has led our IR efforts with exceptional professionalism and personal care. Dennis, I'd like to thank you, and I know I speak for everyone here, in wishing you well. And with that, I'll open the call for questions.

Thank you. We will now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. And when preparing to ask your question, we ask that you please unmute your phone locally. Our next question comes from Richard Sunderland from J.P. Morgan. Your line is now open, Richard.

Hi, good morning. Thanks for taking my question today. Maybe starting with the Inflation Reduction Act and potential benefits there, impacts to your business, could you speak to what you're seeing at this point, both in terms of impacts to your existing opportunities and if there are any expansion opportunities off some of the new tax credits considered in the legislation?

Hey, Richard, Steve. The way that we're thinking about it right now, it's just too early to say exactly what's going to come out of that legislation. But I'll speak to some of the sound bites that have been circulating around. Generally, we think it's very positive for our business. If you look at it, they talk about extending the ITC. There's support for clean energy and solar battery storage, support for hydrogen.

would be supported for us so we're going to keep an eye on it and we'll certainly uh you know update as information becomes available but right now just too early to say anything just got it understood and then sticking with the renewables theme have there been any changes in terms of your timing expectations either on the pjm front or the bpu front and How are you thinking about line of sight to 2023 capital, I guess, either over 4Q or into 2023?

The last earnings call, we changed the capital plan a little bit. And I think reflective of some of these challenges going forward, PJM accelerating or going to redo their process in order to accelerate the review of interconnections. And you know that the state of New Jersey is looking at putting in place what would be their third successor program and moving forward. So we believe all these to be constructive. We adjusted our capital plan because there were some delays going forward. And I'd say that the facts that I want to leave you with is that we've got a very large pipeline of projects going forward. So when this logjam is finally released, we expect that we'll be able to develop. We feel you know, we feel confident in our business going forward. And you can tell from, you know, our earnings raised today, you know, that the complimentary portfolio of businesses, you know, supports, you know, our capital programs going forward.

Got it. Got it. That's a helpful color. And then maybe one last one on my end. The cash flow revision, you know, the impact from higher gas prices, given that it's brought down both 2022 and 2023, you know, Does that mean you expect some normalization or I guess even reversion in 24? Or could you speak to the timing of both normalizing recovery and reverting some of the near-term impacts?

Eric, it's Roberto. So now what the assumptions are, and you're right, so we reduced our cash flows from operation for 2022 at $14 million and $20 million for 2023. But this is assuming that current gas prices remain in place until the end of 2024. So that's definitely an assumption. If gas prices decrease significantly, you would have a positive reversal.

Okay, okay, understood. I'll leave it there. Thank you again for the time today, and Dennis, best of luck.

Thank you. Thank you so much. Thanks, Richard.

Our next question comes from Gabe Maureen from Mizuho. Your line is now open.

Likewise, Monica. Congrats to Dennis. Maybe if I can start off with energy services and just want to understand how much benefit there may be in 4Q. Clearly, there's been a lot of volatility. I also want to confirm, is there any expectation that energy services earnings here are being drawn a little bit forward relative to I'd say the traditional energy services earning profile of earning in the wintertime, given the volatility we're seeing now, or, you know, you could still see the same upside in winter as usual.

Hey, Gabe, the last part of that question, could you just ask that again? You were asking whether the energy... Yeah, yeah.

In other words, we're not necessarily pulling earnings forward here, Steve, in terms of some of the volatility you're capturing now in the market versus kind of leaving yourself positioned for the winter, as you usually do.

No, I'd say it's just the opposite. I mean, it's really a short-term volatility that's influencing. And, you know, you can see it, you know, the inflationary pressures, raising gas prices, electricity prices. There's been a natural hedge within our portfolio of businesses where we've been able to have some offsets. and some benefit to the company because of that. You see that in the energy prices, the increase in volatility. And I think what you're seeing here is that the portfolio of assets outside of the AMA continue to perform and provide value for NJR. We're also seeing it over at CEV where an increase in electric prices has benefited that group for the amount of electricity that we sell into the wholesale. well. So, you know, certainly we don't like to see the inflation, but it is nice to see that the businesses that come together are able to work in concert and create value.

Great. And then maybe if I can ask kind of again on the CEV CapEx visibility, I'm just curious kind of what your, I guess, ordering strategy is around components that you'll need for your future projects, maybe how that has changed and how that you know, that wide CapEx range you have for 23, so whether you could point to the low end or the higher end at this point in time?

It's too early to point to either end, but, you know, we'll say the same things that we said before, that, you know, we have, you know, reserved and purchased a number of solar panels ahead of our construction schedule, so we feel like we've got a pretty good hedge in place, you know, for, you know, the period of not only for the remaining part of this fiscal year, but Feeling good about that, and ultimately, we think, as we said before when we were talking to Rich, some of these logjams that are associated with the PJM process, state of New Jersey process, get cleared, we're going to be able to develop. We've got such a large pipeline of projects that are in our hands currently, it's just a matter of just working through the process to get them to development and final construction.

Got it. And Steve, you mentioned you took a visit to Leaf River. I'm wondering if you can give a little more color on contracting there, what the profile looks are, what the uplift might be in contract terms or tenor relative to what you've been seeing before.

You know, the current volatility is certainly extremely supportive, right? You know, you look after the aftermath of Storm Uri, which I know is in the rearview mirror now, but ultimately it does impact, and you've got forward volatility that continues and increases in contracting. A lot of our contracts go out for a multi-year term, so we're confident in our revenue streams going forward, but as those come to roll over and renegotiate, we're expecting to get higher prices they look at that as well. So it's a good market to be in at this point.

Great. Thank you.

Just to remind everyone, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. Our next question comes from Travis Miller from Morningstar. Your line is now open, Travis.

Good morning, everyone. Now, again, Echo, congratulations there to Dennis. It's always been a pleasure here over the years working with you. Appreciate all the help.

Thank you, Fred. Thank you, Fred.

Yeah, sure. In terms of customer bills, I wonder if you could talk a little bit about the trajectory you see going into the winter. Obviously, you had the gas prices peak here earlier this year, and then going into the winter, maybe coming down, you have the kind of hedging program through New Jersey's system. What are customer bills looking like going into the winter months, do you think?

I mean, just speaking generally to it, Travis, we've got a pretty robust hedging program that's been in place for a very long time, and the majority of the gas supplies are purchased well ahead of the winter, so we've been able to largely insulate the customers. As much as we had a customer bill increase that no one we had to submit it to the DPU, increase bills, so like 13%, what was it, 16? So, ultimately, you know, you don't like to see it, but if you compare that against, you know, the wholesale gas market, which is up almost, you know, 200 or, you know, 250 percent, it was relatively nominal. So, you know, inflating customers from that is good, and certainly, you know, we'll see, you know, how the market plays out. Hopefully, it normalizes and you can get back down to a more insulated from the large increases in natural gas that are taking place.

Okay. Okay. So I figured. Okay. And then second, more high level, what do you see right now, even in the market in general, not even necessarily for yourselves, but the constraints on green hydrogen? Where in the system are you seeing those constraints? Is it production level? People just aren't producing enough green hydrogen? Is it midstream? Or is it something technical within...

your system or even at the distribution level in general where is that constraint right now i think i would describe the hydrogen market as you know it's evolving right it is certainly maturing you know there's a lot of support for it if you've got the hydrogen shot at the federal level or you know developing green hydrogen driving down prices you know from their current levels down to like a dollar per kilogram which is around you know eight dollars per decadent on an equivalent basis And I think once those prices come down and once further development takes place, then you're going to be able to bring that technology, that fuel to scale, and you'll see that used in a greater So I think it's a balancing act going forward. We've got a very high quality pipeline system at NJR. We believe we can deliver decarbonized fuels in the future. It's just a matter for these technologies to come to scale. And over time, like any of the green and clean technologies, as they come to scale, we'll start to implement them and drive our way towards a lower carbon impact future. So that There's a lot of, you know, I'll say third-party effort outside our company driving down these costs, and there's a lot of companies that are looking at it, which is going to be, you know, helpful, you know, for us and for the whole industry.

Sure. Okay. Great. That's all I had. Thanks. Thanks, Travis.

Thank you. That does conclude today's Q&A session. I will now hand you back to Dennis Puma for closing remarks.

Okay, thank you, operator. I want to thank you for joining us today. As a reminder, a recording of this call is available on our website. As Steve said, I'll be retiring in September, so this will be my last call, and I wanted to take a few minutes to say a few words. To my friends and colleagues in the financial community, I want to thank you for the opportunity to work with you, learn from you, and get to know you over the past years. It's been an amazing journey, and there's no denying we've had a few laughs along the way. Also wanted to thank my entire management team, one of the best in the industry, for their support and always being available when I needed a question answered or listening as we discussed the financial community perspective on an issue. Finally, I want to thank my family for their unending support and patience over the years. Guys, I can assure you that the only thing I'll be doing for the November call is listening. As I transition into retirement, my wife and I will be doing some traveling, perhaps back to some of those places where I've only seen conference rooms and airports, enjoying life with family and friends. And this is news. I've decided to finally forgive golf for being so unforgiving to me over the years and take another shot at it. I'll let you know how that goes. So thanks for the memories, everyone. I hope our paths will cross again in the future. But until then, and as always, I appreciate, we appreciate your interest and investment in New Jersey resources. Goodbye.

That does conclude today's call. You may now disconnect your line.