NewJersey Resources Corporation

Thank you for standing by. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources Fiscal 2024 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Adam Pryor, Director of Investor Relations. Please go ahead.

Thank you. Welcome to New Jersey Resources Fiscal 2024 First Quarter Conference Call and Webcast. I am 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 teams. 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 statement section of today's earnings release furnished on form 8K 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 statements 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, financial margin, adjusted funds from operations, and adjusted debt 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. The slides accompanying today's presentation are available on our website and were furnished on Form 8-K filed this morning. Our agenda for today is found on Slide 4. Steve will begin with this quarter's highlights, followed by Roberta, who will review our financial results. Then we will open the call for your questions. I will turn the call over to our President and CEO, Steve Westhoughton. Please go ahead, Steve. Thanks, Adam.

Good morning, everyone. Fiscal 2024 is off to a good start, and we delivered strong performance in the first quarter. Positive momentum continued in the start of the second quarter as energy services outperformed in January, capitalizing on weather volatility. As a result, we are announcing a 15-cent increase in our NFVPS guidance to $2.85 to $3 per share. Before we discuss our quarterly results and forecast more fully, I'll begin with an update on our sustainability and decarbonization efforts on slide five. Last month, we issued NJR's fiscal 2023 corporate sustainability report, our 15th consecutive report dating back to 2008. This report is an important part of our commitment to transparency with all of our stakeholders in the evolving energy landscape. It details our leadership and accomplishments in emissions reduction and renewable energy, as well as our long-term vision for the role of existing pipeline infrastructure in a lower carbon future. Just as important, this year's report also shows how the strong culture of innovation in our organization is having a positive impact on how we execute strategies, engage in dynamic partnerships, and deploy cutting-edge technology in new ways. I'd like to cover just a few of the report's highlights. Last year, we invested approximately $60 million in Safe Green, New Jersey Natural Gas's energy efficiency program. Clean energy ventures continue to innovate, commissioning the largest cap landfill and floating solar arrays in North America. We advanced cutting-edge lower-carbon energy solutions, including the installation of localized carbon capture technology at our Wall, New Jersey headquarters and high-efficiency gas heat pumps at other facilities in the state. And as I mentioned, we engaged in new partnerships with a number of well-known academic and research entities to support our innovation efforts. Finally, NJR was recognized by Newsweek as one of America's most responsible companies for the fifth consecutive year. We hope that you've all had an opportunity to review the report. Moving to the first quarter and year-to-date operating highlights on slide six, We executed our business strategy and delivered net financial earnings of 74 cents per share in the first quarter, which was in line with our expectations. At New Jersey Natural Gas, we filed the base rate case to recover capital investments of approximately $850 million since the settlement of our last rate case in 2021. In addition, New Jersey Natural Gas filed for a new save green program of approximately $482 million, which is the largest energy efficiency filing in our history. At Clean Energy Ventures, we placed another four megawatts into service and continue to grow and diversify our project pipeline. And finally, reported solid contributions from S&T and energy services in line with expectations. Moving to slide seven, in November, we provided an NFEPS initial guidance range of $2.70 per share to $2.85 per share. And as I mentioned earlier, we benefited from our outperformance in energy services during the January weather event that allowed us to raise our NFEPS 2024 NFEPS guidance by $0.15 to $2.85 to $3 per share. As discussed in prior calls, we expect fiscal 2024 to exceed our stated 7% to 9% long-term growth rate. Slide 8 shows the expected NFEPS contribution by business segment for fiscal year 2024, which reflects the AMA contribution as well as a significant portion of our net financial earnings coming from our utility business. Looking ahead, we feel comfortable with our long-term growth rate in future years, and we expect to return to a more normalized segment contribution in fiscal 2025. With that, I'll turn to discussion of our business units, beginning on slide nine. We invested $102 million at New Jersey Natural Gas through a variety of programs in the first quarter of fiscal 2024. with 46% of that capex providing near real-time returns. Within that 46% is the Save Green program, as I mentioned earlier, which helps residential and commercial customers lower their energy usage. We spent approximately $13 million in the first quarter to help our customers save money and reduce their carbon footprint. Finally, we achieved solid new customer growth during the period, adding approximately 2,100 new customers through the combination of new construction and conversions. Slide 10 provides additional detail on our base rate case filings. On January 31st, we requested an increase of base rates of $222.6 million, equivalent to an increase of approximately $159 million in operating income. Since the conclusion of our last case in 2021, New Jersey Natural Gas has invested nearly $850 million to upgrade and enhance the safety and reliability of our transmission and distribution systems, as well as our IT investments. Moving to slide 11, our solar business, Clean Energy Ventures, followed an exceptional 2023 with continued momentum heading into the new year. We added four megawatts of new solar capacity and continue to grow our pipelines. which now includes approximately 870 megawatts of potential investment options. Over the past few years, we have continued to expand our portfolio geographically with 51% of our pipeline now located outside of New Jersey. Our focus is on delivering solar investment opportunities that provide high single-digit unlevered returns. With that, I'll turn the call to Roberto for a review of our financial results. Roberto?

Thank you, Steve, and good morning, everyone. Slide 13 shows the main drivers of our NFE for the first quarter of fiscal 2024. We reported NFE of $72.4 million, or 74 cents per share, compared with NFE of $110.3 million, or $1.14 per share last year. New Jersey Natural Gas reported NFE in line with expectations, as higher utility growth margin was offset by higher depreciation and operating expenses. Clean energy measures increasing the fee by approximately $14.1 million, largely due to the timing of SREC revenues for the period. Storage and transportation NFE declined versus Q1 of last year as a result of higher operating revenues related to winter storm Elliot in the first quarter of fiscal 2023. Finally, energy services reported NFE of $7.8 million compared to $52.5 million in Q1 of the prior year. As a reminder, the first quarter of last year benefited from increased natural gas price volatility related to winter storm Elliott during December of 2022. In addition, VMA revenue recognized in the first quarter of fiscal 2024 was less than that recognized in Q1 of last year. As Steve mentioned earlier, our guidance raise for fiscal 2024 is due to energy services self-performance in January 2024. which is our current fiscal second quarter. As we look to the remainder of fiscal 2024, it's important to note that we expect to recognize a significant portion of the AMA's total revenues later in the year, with the majority being recorded during our fiscal fourth quarter. Turning to our capital plan in slide 14, over the next two years, we expect to invest between $1.2 and $1.5 billion across the company. We did not make any changes to our capital plan compared to our prior call. Our capital projections are anchored by strong cash flows from operations. On slide 15, you can see that we expect cash flow from operations to range between $450 and $419 million in both fiscal 2024 and fiscal 2025. Pledge 16 shows our credit metrics. We continue to project 10 years adjusted FFO to adjusted debt to be between 17 and 18% for the year. And while we have no plans to issue block equity, our existing dividend reinvestment program includes a waiver discount feature that allows us to raise equity on an opportunistic basis. Finally, on slide 17, we provide a breakout of our long-term debt. As you can see, most of our debt is fixed-rate in nature, and we do not have significant maturities in any particular year. Our NFVPS guidance for fiscal 2024 and our long-term NFVPS growth guidance assume high interest rates for the foreseeable future, and we have substantial liquidity at both NER and NJNG. Overall, we are in an outstanding position to find our growth objectives. With that, I will turn the call back to Steve.

Thanks, Roberto. In conclusion, NJR is off to a good start. We expect fiscal 2024 to be a strong year due to higher NFE contributions from energy services and steady performance from our core businesses. In addition, we've been able to take advantage of the opportunities in energy markets that have resulted in considerable upside to our growth targets in recent years. And as always, I want to thank all of our employees for their hard work. And with that, I'll now open the call for your questions.

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. And if you would like to withdraw your question, simply press star one again. Our first question comes from the line of Richard Sunderland with JP Morgan. Please go ahead.

Hi, good morning. Can you hear me? We can hear you. Morning, Rich. Great. Thank you. The 15 cent guidance range, sorry, guidance raised, does that fully reflect the January weather benefit? And, you know, not just at energy services, but anything at S&T or even on the BGSS incentive side to the extent realized?

Yeah, you know, the financial team did a nice job of really going through everything in our budgets and, you know, impacts from the weather event. you know, put that all into our numbers going forward. So, we believe it does fully reflect the January weather event across all the businesses.

Understood. That's helpful, Collar. Thanks. The big SREC sale number at CEV, I guess, largely a timing factor. Could you just unpack that a little bit more? I was surprised to see that.

Yeah, you know what, as it goes, SRECs are commodities. You know, it depends when the sales take place, and we recognize, you know, that revenue impact at the time of the sale. So, you know, it's really just dependent on when those transactions, you know, really occur. So don't read anything into it. It's just our normal business.

Understood. And then... I know you put a spotlight on the AMA benefits this year, now the weather benefits from January versus that long-term growth rate. I guess turning to the base growth, though, in 25, can you provide any color around the shape to that, meaning do you expect it on a base business basis to be linear, or should there be a bigger step up in 25 given the rate case will be coming in that year?

I mean, this is really the power of the portfolio of companies. You know, we're going through, you know, a rate case cycle now that should be settled by the time we get to 25. And you've got the, you know, the slight changes in, you know, percentage contribution. You know, we've given, you know, we've shared with the financial community, you know, our growth rate in the company, you know, over the period as well as our segment contributions. We expect those to be intact. And as we said before, you know, we expect them to normalize as we go into the future. So. I hope that answers your question.

Very helpful caller, as always, and thank you for the time today.

All right, thanks, Rich.

Our next question comes from the line of Char Perreza with Guggenheim Partners. Please go ahead.

Hey, guys, good morning.

Hey, Char.

Morning, morning. So just real quick on the 24 financing plans. Obviously, you guys now expect to issue slightly less debt, but then also raised your equity issuance guidance, despite sort of that unexpected inflow from energy services. I guess, just to be honest, what's driving the higher equity in plan?

HRD, Roberto. The increasing, and it's a very small increase in equity, by the way. It's related to our DRIP program. As you know, as part of our program, in equity buyback program, I'm sorry, as part of our REIT program, we have the option to issue a little bit of equity, and from time to time, we exercise that option. So that's really what you're seeing there.

Okay, okay, got it. And then just, I know, obviously, highlighted a little bit peak earnings from the asset management agreement you struck in 2020. Just, I guess, remind us what the remaining year's kind of look like in terms of earnings and cash contribution and sort of the cadence, especially as we're thinking about 25 and beyond? Just maybe just elaborate a little bit on that prepared remarks. Thanks.

Yeah, this is Roberto again, Char. So, as you know, this is going to be the peak year for VMA in terms of our revenue contributions. From here on, between 25 and 31, we have a little bit of a step down in terms of the earnings for every year. And every year they become, in terms of revenues, around $15 to $20 million.

Okay, got it. And, Steve, let me just, I know this was asked from the prior question, but I just want to maybe hit it a little bit more accurately. Are you, with sort of the step-downs that you're seeing with AMA and maybe the energy services, you know, business going to a little bit more of a recurring figure versus what you're seeing now, Are you just confident that you can hit sort of the midpoint of that guidance range at least to show linear, or should we just assume some gyrations? I know that was sort of the impetus of the prior question, but I didn't get a sense on whether you still assume there's going to be linearity despite some of the step-down in earnings we should be expecting in the near term.

Yeah, you know, we'll confirm our long-term growth range. You know, it's kind of the best I can do. You know, we'll normalize it, you know, to history, you know,

growth rate. Just to clarify, Shara, as well we say in our earnings presentation, you should take our initial 2022 guidance and then basically grow that between 7% and 9% every year to find what our normalized expected earnings are going to be every year.

All right. Let me take the rest off on. I appreciate it, guys. Thank you.

All right. Thanks, Shara.

Your next question comes from the line of Chris Ellinghouse with Siebert Williams Schenck. Please go ahead.

Hey, good morning everybody. Have you guys got any color at this point in terms of the solar capex range where you think you might be landing this year?

Yes, it is what we're showing in the presentation, so we're not deviating from that. So for this year, what we expect for solar is to be between $140 and $200 million roughly.

Have you got a number or some thoughts on what you're seeing for solar costs, you know, all in for Watt at this point?

Chris, nothing that deviates, you know, significantly than what we've had historically. You know, I know there's been some inflationary pressures. You know, we've had some hedging in some of our solar panels as well. But, you know, we're continuing to install solar, you know, that's probably around that $2 or watt type range, you know, give or take, you know, a few pennies. So hopefully that helps. Yeah, that helps.

You know, through the CSI process, this year. Have you guys gleaned anything that's valuable?

I don't think the CSI process has been that robust. You know, there's been some changes to the BPU and things like that, so a number of these initiatives have been drawn out a little bit. They're still working through it. I believe that the bids are all due in February, and then, you know, there's going to be some time to analyze those. So continuing to move along, but really nothing to share as far as, you know, kind of a milestone event or some sort of, you know, change or insight into what's happening next.

Okay. One last thing. As far as the rate case goes, is there – Anything that you're aware of, you know, sort of in the BPU environment ecosystem that would suggest, you know, sort of a traditional settlement is unlikely.

Hey, Chris. This is Pat Bigliaccio. As we've talked really for quite some time now, this is a vanilla rate case we're seeking recovery of. investments in safety and reliability, so think pre-'70s pipe and other, as well as some minor recovery for IT investments. I think if you look across the outcomes that have occurred in a variety of the rate cases, they've been constructive. Our historical rate cases have been constructive, so I would not expect any deviation from that.

Okay, great. That's helpful. All right, thanks a lot. Appreciate it.

And just as Just a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. And our next question comes from the line of Roger Liddell with Clear Harbor Asset Management. Roger, go ahead.

Thank you. Good morning. I wanted to get some texture on the energy efficiency program. To me, it's asymmetrically important because it illustrates how far this company has gone beyond the industry standard mindset of in the old days, the customer was the meter. And you guys have just transformed that kind of old model and the seriousness, Graveman of the efficiency offerings to me illustrates that point. So it matters. I'm looking at the call it disconnect between the 60 million of energy efficiency investments and the 482 million, which I believe you said is a three-year program. So how do we get from the 60 kinds of levels to the aggregate 482, and how are you measuring the outcomes of those programs? Is it simply on the investment being made, or are there some measurables that you can take back and use for fine-tuning the program?

Hey, good morning, Roger. It's Pat Migliaccio. Thank you for your question, and thank you for your long ownership in NJR. Good to hear from you. So I appreciate you acknowledging the role that energy efficiency plays in greenhouse gas emissions. We believe it's one of the most important things we can do to help drive a reduction in GHG over time. And because we are decoupled, we are able to offer those energy efficiency programs. So that $60 million that you refer to is a significant number because it's our largest ever investment in energy efficiency. But that was under the old, I'll say old, Trinium 1 or T1 as we refer to it. And so that was a three-year, roughly $39 million program that that spending is being recovered and invested under. The upcoming Trinium 2, which is the $482 million that you referred to, That includes an increase in the size of certain programs that we normally offer, what we refer to as customized energy programs for small and large commercial customers, but also new elements that are related to building decarbonization. And to your point, while we do measure the investment, certainly saving for our investors, there are also measurable goals related to energy savings that we have to hit as well as part of that approval of that program. So I hope that answers your question, Roger.

Yes, it does. Thank you. A related question is a year or so ago, the context is hydrogen. Your estimate back then at least was in the range of $8 in MCF equivalent and the contrast with the federal objective of around $2. Is there any progress to speak of? Has that number drifted the right direction?

I mean, the program is still being put together now and some of the rules associated with the taxes and how they're going to apply are coming through. But I think generally speaking, you know, the amount of dollars going towards hydrogen is going to drive down that price of hydrogen with their target price, you know, being around $1 a kilogram, which equates to about $8 in MMVTU. natural gas, almost brings it in parity. So, we expect it to go in that direction, you know, but those programs are moving forward, you know, as we speak and, you know, we'll see in time, you know, where it finally ends up.

Okay. Last question. You mentioned gas-fired heat pumps, and maybe it's better handled offline, but if it's useful for the call, I wasn't really aware that there was a critical mass of technology in the gas-fired heat pump area. Could that be a meaningful opportunity?

Roger, this is Pat Migliacci again. Yes, so gas heat pumps have been available at the commercial level for some time. There are a number of vendors and manufacturers that have I'll call them early stage but commercially available residential gas heat pumps. Some are being used in the European market, not broadly here yet in North America. But those heat pumps get an equivalent efficiency of north of 130%. And so, they represent an improvement over a high-efficiency natural gas apprentice today. And so, we do think that, you know, moving into the future, that represents an opportunity for us to continue to drive efficiency gains in natural gas heating appliances.

Great. And thank you. And thank you all for the execution that you deliver again and again.

Thanks, Rod. Thanks for the question.

Just as a reminder, if you'd like to ask a question, please feel free to do so now by pressing star 1 on your telephone keypad. And our next question comes from the line of Gabe Marine with Mizuho. Gabe, please go ahead.

Thank you. Good morning, everyone. Just had a question on the CEV backlog additions. It seems like you had success in adding to the backlog, and it's skewed heavily towards out of New Jersey. if anything happened in changing in the competitive landscape to make that happen this past quarter and also just longer term, how you envision, I guess, the breakup between New Jersey and non-New Jersey projects kind of shaking down if there's an ideal target that you're targeting?

So, you know, we've talked for a long time, Gabe, about diversifying outside the state of New Jersey and heading towards jurisdictions that we believe have a similar risk profile. And when plan so and do we have to target you know on a percentage split no i don't think so um you know at this point it's really you know where's the jurisdiction you know that's that's friendly towards solar and where can we make the investments and you know where's it fit best you know for you know the deals that we're able to uh to put together uh but you know we're happy to see that number growing you know that project pipeline um and our available investments in that space continue and increase

Thanks, Steve. And I think I ask maybe every quarter, but any update on a potential leaf river expansion? I'm also just curious with more winter weather under your belt at Adelphia, how that asset's been performing and whether there's any room to squeeze more capacity out?

So I'll take the first one. So we're continuing to look at Leaf River. And like I keep saying, we're working on transactions. We don't have anything to update at this point in time. But certainly, the market is supportive. And yeah, Leaf River's Adelphi Gateway is doing well. I know throughput year on year is up by a significant percentage. And we're continuing to watch that asset and see where we can pursue organic growth opportunities just like we are across the whole company. Okay. Thanks, Steve.

All right. Thank you.

Thank you. That concludes our Q&A session for today. And with that, I will pass it back over to Adam for some closing remarks.

Thanks, Jessica. Thanks, everyone, 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. Thanks, everyone. Have a good morning.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Appreciate your interest and investment in NJR. Thanks, everyone. Have a good morning.