NewJersey Resources Corporation

Thank you, everyone. Welcome to New Jersey Resources Fiscal 2023 First Quarter 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. 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 of 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 8K and in our most recent Forms 10K and 10Q as filed with the SEC. We do not, by including this statement, assume any obligation to review or revise any 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, 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 two. Steve will begin with this quarter's highlights, followed by Roberto, who will review our financial results. Then we will open the call for your questions. The slides accompanying today's presentation are available on our website and were furnished on our Form 8-K file this morning. With that said, I will turn the call over to our President and CEO, Steve Westhoven. Please go ahead, Steve.

Thanks, Adam, and good morning, everyone. We delivered strong results in the first quarter. This includes exceptional performance during a unique weather event over the Christmas weekend. This speaks to the resiliency of our physical infrastructure and also to the talent and determination of our people. As a result of NJR's successful operation during this event, we're raising our fiscal 2023 guidance by 20 cents to 262 to 272 per share. Before we move to the quarterly results and our forecast for the year, I'd like to begin with an update on our sustainability and decarbonization efforts on slide three. Last week, we issued NJR's fiscal 2022 corporate sustainability report, our 14th consecutive annual report dating back to 2008. The report details our goals and accomplishments in sustainability and other ESG-related areas, as well as our approach to innovation, low-carbon fuels, energy efficiency, and environmental stewardship. I'd like to cover just a few of the report's highlights with you. We believe the fastest and most cost-effective tool to reduce emissions is through energy efficiency initiatives. Last year, we invested more than $53 million in New Jersey Natural Gas's energy efficiency programs, the highest single-year investment of this type in our company's history. Growing these programs is a central element to our decarbonization strategy, and New Jersey Natural Gas has long been a leader in this area. On solar, we continue to advance our leadership at Clean Energy Ventures by placing into service two milestone projects of national significance, including one of the largest cap landfill solar arrays and the largest floating solar installation in the United States. And finally, our $20 million endowment supports our charitable foundation work. These resources enable our foundation to focus on medium and long-term partnerships that drive outcomes that make a difference for local communities and the environment. We hope that all of you have an opportunity to review the report. Turning to slide four, we reported net financial earnings of $1.14 per share in the first quarter, a 65% increase from the same period a year ago. As I noted earlier, we are especially proud of our company's performance during Winter Storm Elliott, which was a historic event that impacted the entire country. In our service territory, we saw temperatures fall as much as 50 degrees in just under 12 hours. The impact of these record low temperatures limited gas supply in certain locations in the US. At New Jersey Natural Gas, our customers were able to enjoy their holiday without curtailments. This speaks to the resiliency of our gas supply network, as well as the dedication of our team, which worked throughout the holiday weekend to ensure that we met all obligations to our customers. In our storage and transportation business, we reported exceptional operating performance from Adelphia Gateway and Leaf River throughout the winter event. At Energy Services, our long option strategy generated significant value during the volatile conditions created by the winter storm. which led to higher than expected NFE during the period. We also continued to deliver on our commitment to generate more stable fee-based revenue at that business unit, as we received a $73.5 million cash payment associated with the asset management agreements announced in December of 2020. Finally, at Clean Energy Ventures, we placed four commercial solar projects into service since the end of the fiscal year, growing our installed capacity by approximately 43 megawatts, or over 11%. Turning to slide five, as a result of this outperformance, we are raising our fiscal 2023 NFVPS guidance range by 20 cents to 262 to 272 per share. We are also maintaining our expected long-term NFVPS growth range of 79% from our original 2022 guidance, which is among the highest in our peer group. And as communicated last quarter, we expect to be at the higher end of the range for fiscal 2024. As I mentioned in my opening remarks, New Jersey Natural Gas had a strong quarter of execution, as highlighted on slide 6. We invested $91 million in New Jersey Natural Gas during the first quarter, with over 36% of that capex providing near real-time returns. We reported strong customer growth, adding over 2,100 new customers in the first quarter compared to approximately 1,700 in the first quarter last year. We still expect to file our next rate case in fiscal 2024, consistent with the completion of our major technology investments. Moving to slide seven, we continue to see positive momentum at Clean Energy Ventures. Since the end of fiscal 2022, we have placed over 43 megawatts of new solar projects into service and maintain a robust pipeline of future solar investments. We are encouraged with recent progress at PJM QReform and New Jersey Solar Policy In late November, FERC approved PJM's Q reform proposal. Although we are still navigating near-term delays, this process should create efficiencies and greater predictability for solar development. In December, the New Jersey Board of Public Utilities approved the state's solar successor program for projects over 5 megawatts. The goal of incentivizing at least 300 megawatts of annual solar capacity should help to broaden development opportunities in the state. And with that, I'll turn the call to Roberto for a review of the financial statements. Roberto?

Thank you, Steve, and good morning, everyone. Slide 9 shows the main drivers of our NFE for the first quarter of fiscal 2023. We reported NFE of $110.3 million, or $1.14 per share, compared with $65.8 million, or $0.69 per share, last year. New Jersey National Gas saw an NFE improvement of $3.6 million, primarily due to the impact of new base rates that went into effect on December 1st, 2021, a higher contribution to utility gross margin from our BGSS incentive programs and new customer growth. EBS NFE improved by $3.2 million, primarily due to higher SREC and electricity sales. Storage and transportation increased by $3.3 million, largely due to Adelphia Gateway becoming fully operational in the fourth quarter of fiscal 2022 and the excellent operational performance at both Adelphia and Leaf River during the quarter. And finally, energy services improved by $35 million due to the execution from our team during winter storm Elliott. Turning to our capital plan on slide 10, our projections for 2023 and 2024 are unchanged from the last conference call. And over the next two years, we expect to invest between $1.1 and $1.4 billion across a company. We expect to tighten our CapEx projections in future quarters, particularly in the case of CEV, as New Jersey regulatory program approvals and PGMs interconnection timelines become more clear. This capital deployment is expected to support growth throughout our business units and is consistent with our long-term NFEPS growth target of 7% to 9%. Finally, on slide 11, most of our debt is fixed, and we don't have significant maturities in any particular year. As mentioned in our prior call, our NFVPS guidance for fiscal 2023 and our long-term NFVPS growth guidance incorporate the assumption of high interest rates for the foreseeable future. With that, I'll turn the call back to Steve.

Thanks, Roberto. Overall, these results reflect the strength of our complementary portfolio of businesses and the value of our high-integrity infrastructure. We are delivering on our strategy of de-risking results, providing a more predictable base of net financial earnings with a growth rate that is the top end of our peer group. In addition, we've been able to take advantage of opportunities in energy markets that have resulted in considerable upside to our growth targets in recent years. And finally, I want to thank all of our employees for their hard work and contributions. We expect these efforts will drive our NFV and produce strong cash flows that will support our dividend growth of 7% to 9% per year. And with that, I'll now open the call for questions.

Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad now. If you'd like to cancel the question, press star followed by two. And please do also remember to unmute your microphone. Our first question is from Chris Hellinghaus from Cyber Williams Schenk. Chris, your line is now open. Please go ahead.

Hey, good morning, everybody. Thanks for the good quarter this morning. A lot of things have happened at like EPA and with the IRA. There's some very attractive markets out there in renewables. I'm thinking about landfill gas degeneration and RNG. Have any of these things changed your strategic outlook for renewable investments?

Good morning, Chris. Thanks for the question. I think, you know, we've been talking for, you know, a long time about the evolving, you know, clean energy market and the opportunities that it will present, you know, to a company like ours that has capabilities of developing infrastructure, bringing it into service, and certainly earning returns. So, you know, IRA is in support of that. And, you know, we've got a solar division. We're developing solar. It's been supportive in that, you know, part of the world. We developed a hydrogen plant, and there's certainly in the IRA significant subsidies towards hydrogen. And we're certainly looking at RNG as well, nothing to announce there. But when you put this all together, we're well positioned to take a look and see where it makes sense for us to make investments and grow in this part of the market. long-winded way of saying, yes, you know, we do see opportunities and we continue to search them out. And certainly as we become more firm in the CapEx that we'll dedicate to that, you know, we'll share that with the investors.

Okay, great. There were a couple of things in the quarter that maybe were slightly surprising beyond, you know, Elliott's impact. At CEV, you sort of noted in the press release some reduced operating costs. Can you give us a little color on that? And on the storage and transportation side, obviously Storm Elliot provides some opportunity there, but also you had Adelphia Gateway incrementally. Can you give us any color between you know, sort of the northern and southern assets for the quarter?

Yeah, you know, I think broadly it just points to, you know, the value of infrastructure. You know, we're an energy infrastructure, energy services company, and as you get more demand for energy, you know, we're able to, you know, profit from that. You know, energy services was certainly the headline in their ability to take advantage of that volatility, but, you know, you also had, you know, outsized gains and the utility in their incentive programs. You know, we saw new customers at, you know, Adelphia Gateway, you know, signing up for, you know, short-term services. You know, Leaf River as well was able to make profits from that. You know, electric prices bumped up, you know, in CEV. So, you know, certainly all, you know, contributing towards, you know, the increases that we announced today.

Can you give us any color on the higher – cev electric revenues was that more on the increased megawatt side or was that more on the commodity electric side do you think i'd say in the commodity electric side okay great thanks for the call i appreciate it all right thanks chris our next question is from richard sunderland from jp morgan richard

Your line is now open. Please go ahead.

Hey, good morning, and thanks for the time today. I know you hit this a little bit already, but I did just want to unpack the guidance phrase a little bit more. The 20 cents raised, is it the full amount of the outperformance you saw, I guess, across NJNG, storage and transportation, and energy services, or are there any either offsets to that versus your original plan or kind of cushion for the remainder of the year that you're leaving outside of guidance right now.

Roberto, how are you? So, on your question, your performance that you saw was primarily coming from energy services, but it was not only coming from energy services, right? It came also from the utility with higher BGSS incentives. and also from our source and transportation. So it was really broad-based, once again, coming from most of our businesses, but as indicated in our remarks, the biggest part came from our marketing business. Okay, okay, I understood.

And then turning to CEV here, just I guess the first part, I see the 43 megawatts placement service. I know you referenced the landmark projects there. I also think there was a 100 megawatt change, if I'm reading this correctly, on 23-24 contract and exclusivity. Is that a timing shift across the years laid out here, or are there other changes on kind of the project front in light of those PJM and New Jersey Development you referenced earlier?

So, Rich, I think the way to look at that is that, you know, when you look at, you know, slide seven and you look at the total of, you know, about one gigawatt of, you know, potential investments, you know, the way that we describe them. that that number, or at least, you know, on a yearly basis or the periods that we say, it's going to go up and down. As projects come in, they get completed. As more projects, you know, come to exclusivity or some sort of a firmer commitment that we can put them part of this chart, that these numbers will go up and down. But I think the big numbers to look at are, you know, we've got a very robust pipeline of investment at CEV, you know, for our solar investments. And then also, you know, the other big number is, yeah, 43 megawatts that we're able to put in service. So we're investing money, we're completing projects, we're putting them into service, and then we're continuing to develop the pipeline moving forward in this business unit.

Got it. That's helpful, Collar. And maybe just a quick follow-up there. So, you know, you referenced the positive progress of PJM and for New Jersey as well. You're just curious kind of milestones going forward from here or high-level timing expectations. What are you watching for at this front for, I guess, that incremental clarity into the outlooks at both the PJM level and the state level? Anything you can offer there on how that might unfold over this year or what else you're looking for from each institution?

Yeah, I'm going to ask Amy Craddock. to answer that question, and she manages our nine utility businesses in CEV, and she can speak to some of the details associated with the PJM process, and certainly the process at the state.

Yeah, I would say that the PJM Q reform and the BPU competitive solicitation, they're both very positive, but our CapEx projections, they're not fully dependent on those, so we're still waiting for other state policy and programs to roll out. I'll give you a few examples. We have TREC approvals we've spoken about in the past for some of our projects, dual use, virtual net metering. So we'll continue to watch the progress out of that, all positive, and we see additional optionality and opportunity for our pipeline.

Got it. Thank you for your time today. Thanks, Rich.

Our next question is from Gabe Maureen from Mizuho. Gabe, your line's now open. Please go ahead.

Thank you. Good morning. Can we talk about, I think, the Leaf River expansion potential? I think some midstream names out there have talked about some customer interest now, and I think the value of storage has clearly proven itself out time and again over the last, call it, 24 months. So just curious, latest thoughts on what the Leaf expansion is looking like.

So, Gabe, we have nothing to announce there, but certainly the market dynamics and with the development of LNG along the Gulf Coast, the amount of volatility and balancing that's needed down in that area is evident by the price movements that have taken place. It's certainly a very constructive and supportive market. So we're certainly looking where we can make expansion, provided that we've got a customer that can support the capital investment that's there. We've always talked about it in that fashion. But, again, nothing to announce, but it's certainly a very supportive market at this point in time.

Thanks, Steve. And maybe I can ask a little bit of a multifaceted question here on gas prices having come down so significantly. Can you just talk about impacts to the business, whether bad debt expense, less inflationary pressures, and also just, you know, the strategy on kind of hedging gas prices going forward? Because I know that you guys were fairly insulated coming into the winter anyway.

Yeah, you know, I think, you know, just to talk about the hedging strategy going forward, we've got a pretty rigid hedging strategy that aligns itself well to, you know, being able to put fixed price gas in the storage well ahead of when volatility would really impact the markets. And that's still in place now. So I would expect that that would be, you know, helpful for us. as we roll into our next hedging season, so to speak. And then, ultimately, gas goes up and down, and that volatility can be beneficial to us through prices and certainly through energy services and such. But it just shows that the market's resilient, and our customers will enjoy hopefully lower pricing if it continues in this direction. you know, going forward and certainly, you know, supportive of our overall business as a, you know, an economic way to, you know, heat your house and provide energy.

Got it. Thanks, Stephen. If I could just squeeze one more in sort of on the 1Q outperformance. Is it fair to say that, you know, if S&T outperformance kind of holds that is really in 4Q that you accrue, I guess, some O&M expense or G&A, rather, around additional comp and stuff like that, so that may be an offset to some of the 1Q outperformance here?

Yeah, so, yes, you're right. Our expenses related to labor are seasonal, and exactly as you pointed out, Q4 tends to be the highest.

Thanks, Roberto.

Thank you.

Our next question is from Sam Clow from Bank of America. Sam, your line is now open. Please go ahead.

Hey, guys. Good morning. Just a quick question on your financing projections here. Just given Q1's outperformance, is there any reason why your financing activity projections haven't really changed and also within that, you know, why you're sort of thinking more towards increasing equity issuances over debt relative to your previous update?

Yeah, so I imagine you're talking about what we're showing in terms of our projection for our cash flows. So even though we have increased our guidance, we feel we're still within the range that we showed there. So that's why we haven't changed that. So that's number one. And then on your question regarding debt versus equity, As we have stated before, we have no plans to issue any blockade within the near future, and that remains true today.

Got it. Thanks, Roberto.

As a reminder, ladies and gentlemen, if you'd like to ask a question, press star 1 on your telephone keypad. Our next question is from Char. from Guggenheim Partners. Char, your line is now open. Please go ahead.

Hi, guys. It's Jamison on for Char. Thanks for taking our questions.

Hey, Jamison.

Hey. So just wanted to thank you for the helpful responses so far and wanted to expand and clarify a bit on a couple of the prior answers you provided. First off, and I get the seasonal aspect with the fourth quarter, but again, just wanted to expand and clarify. So at the gas utility, despite the stronger customer growth and the higher earnings year over year for the first quarter, it looks like you lowered guidance for the segment on an actual EPS basis, despite the 20 cent raise for the year for the entire company. But for the segment, it looks like it's about six to eight cents lower based on the new weightings and the higher guidance. Could you just remind us of your expectations for inflationary pressures on O&M for the year or any other potential drags that you now expect versus the November original guidance and what was baked into that?

I think what you're referring is to the percent breakdown of our NFE by BU that we show in our presentation. And for the utility, you're right, that's lower, but the reason that's lower is because the whole business is so much higher, right? So on an absolute basis, we do not expect the utility to be lower.

But, okay, I just took the... 242 to 252 original and then did that by 55% and also by 60, took those numbers and then took the revised 262 to 272 and did that by the 48 and then separately by the 53 and then compared the bottom of each, the top of each, and that's where I came up with the six to eight lower. So I'm not throwing off midpoints or averages or anything. So is there a different way to look at it?

Yeah, so we can take that offline to explain that.

Sure, no problem.

If you were to look at the guidance ranges for the utility based on the original guidance range of 42 to 252 and what we're showing today, you would see that on an absolute basis, there are really no changes.

Okay, yeah, let's take it offline then. But yeah, I was just coming up with, six to eight cents lower in absolute changes from one to the next, but that's okay. So just moving on, as a follow-up, but not on the EPS side, after backing out the $20 million contribution from the AMA this quarter and the roughly $22 million contribution in the same quarter a year ago, looks like you had an almost 40 cent improvement year over year you know mostly driven by winter storm elliott and i'm specifically looking here just at energy services i get that other parts of the business also uh contributed to performance but just narrowing in there um given that you only use half of that to raise guidance by Seems like you've got a very, very nice buffer to start the year. Something that I'm sure a lot of your peers envy given a lot of inflationary pressures and other cost pressures that everyone's encountering. Could you walk us through the top couple of potential earnings drags that you had been worried about back in November when you gave guidance and that you are now less so since you presumably still have another 20 cents or so of buffer left for the year?

Yeah, so maybe the first thing to address is the buffer you're talking about, right? So the way to think about that is you have timing changes, especially coming from energy services. So you think that how their demand charges happen. They tend to happen, so for the most part, in the second part of the year, where there are lower revenues. So there is a timing change there affecting the buffer that you're discussing. And then we're just generally cautious about what would happen right now, especially with electricity prices.

Yeah, I think just to add to that, I might – to describe it as a buffer, I think there's seasonality to the number that's here. And I'm not in agreement that there's a buffer associated with our guidance or the way that you put the numbers together.

Okay, fair enough. We can follow up offline. Either way, it seems like you're in a good place and seems like a good thing to have to kick the year off with, so that's why I was asking.

We'll take it.

Yeah, absolutely. Just a final question on clean energy ventures. You mentioned in the prepared remarks that you're looking to tighten the reins and the quarters ahead. There's another question on it already, but just to hone in here as a final question, what are the gating items that you're currently waiting on? Just so we have a better sense of timing, when do you expect to have the level of visibility that you require in order to be able to narrow the range for the next fiscal year and the year thereafter?

So when Amy answered the question before, she talked about Q reform and PJM and certainly some of the programs in the state of New Jersey, but mentioned that you know, for the project pipeline that we've shown there, you know, they're not solely dependent on those, you know, being, you know, I guess resolved. So, you know, we've got a capital, you know, program that we feel confident that we'll be able to execute, and certainly it'd be positive developments to get those other, you know, programs in the Q reform completed, but again, you know, not solely dependent on at least I hope that answers your question. If not, you know, please clarify.

Gotcha. Yeah, no, just was trying to get a sense of whether it's sort of a next quarter or, you know, two quarters from now or that sort of thing. But I think that covers it. I can call it further offline.

Okay.

Thank you very much. And good luck to be here, guys. Congrats.

All right. Thank you.

Our next question is from Travis Miller from Morningstar. Travis, your line is now open. Please go ahead.

Good morning, everyone. Thank you.

Hey, Travis.

Apologize if you touched on this earlier, but I wonder if you could talk about how the AMA performed during the quarter. How much of that contributed to that energy services? Was there volatility in there like you expected or didn't expect? Just wondering on the AMAs, how that performed in the quarter.

Hey, Travis. This is Roberto. So the AMA, we said before that for the year, the expected revenues are going to be similar to those of last year. And for Q1, those revenues were $20 million. And we received all the cash corresponding to the AMA or rating Q1 that was about $73 million. So to answer your question in a nutshell, it performed exactly as we expected.

Okay. Do you have in place during the year any kind of optionality around those where you could get any kind of either the bendermint or dentermint?

On this specific AMA, as we have discussed, this is basically pretty much a fixed price contract, so no.

Okay. Yep, that's what I thought. Okay. Thank you very much. Sure. Thanks, Travis.

We currently have no further questions. I will now hand back to the management team.

Thank you. I'd like to thank all of you for joining us this morning. As a reminder, a recording of this call is available for replay on our website. And as always, we appreciate your interest and investment in NJR. Goodbye. Have a good morning.