Earnings Call Transcript - NJR Q3 2022

Operator, Operator

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. I'm now going to hand over to Dennis Puma to begin. Please go ahead.

Dennis Puma, President & CEO

Thank you, operator. Good morning, everyone. Welcome to New Jersey Resources Third Quarter Fiscal '22 Conference Call and Webcast. I'm joined here today by Stephen Westhoven, our President and CEO; Roberto Bel, 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 1. 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. The 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 3. With that said, I'll turn the call over to our President and CEO, Steve Westhoven.

Stephen Westhoven, President & CEO

Thanks, Dennis, and good morning, everyone. Thank you for joining us today. We're pleased to report that our complementary portfolio of business continues to perform ahead of expectations. As a result, we are increasing our previously announced guidance for fiscal 2022 by $0.10. 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 8-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, Adelphia is now servicing 75% of its contractual commitments, and we expect to reach 100% by the start of the heating season. Moving to Slide 4. We're increasing our fiscal 2022 NFEPS guidance to $2.40 to $2.50 a share compared to our previous range of $2.30 to $2.40 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 adding from Clean Energy Ventures. Our performance at Energy Services is worth noting. In line with our strategy to derisk 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 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 time frame. Moving to Clean Energy Ventures on Slide 6. We have a healthy pipeline of projects positioned to drive significant solar investment in the coming years. CEV 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 CEV 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 CEV's clean energy portfolio. Moving to Slide 7. We recently placed an 8-megawatt facility in Howell Township, New Jersey, which will be eligible for TRECs 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 could benefit from repurposing land that would otherwise be difficult to produce renewable energy. On Slide 8, I'll briefly discuss the latest developments for the Adelphia Gateway, which is part of our Storage & Transportation business. We're in the final stages of construction at Adelphia, a converted oil pipeline. We recently completed construction at Marcus Hook and Quakertown 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 creditworthy counterparties. Our excellent track record, along with the market conditions, bode well for the long-term value of the asset. I had a chance to visit our team in Mississippi recently and cannot say enough good things about the work that they're doing. With that, I'll turn the call over to Roberto for a review of the financial results.

Roberto Bel, Senior Vice President & CFO

Thank you, Steve, and good morning, everyone. As usual, I'll highlight a few 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 $0.04 per share compared with a net financial loss of $14.1 million or $0.15 per share last year. NJNG saw an improvement of $1.1 million, primarily due to the impact of new base rates that went into effect on December 1. CEV remained mostly flat compared to the prior year period as higher electricity sales were offset by lower SREC revenues and higher depreciation expense. As a reminder, NJR has historically sold the majority of its SREC in the fourth quarter. Energy Services reported an improvement of $7.5 million, largely driven by the contributions from Storage & Transportation, which reported an improvement of $1.1 million during the quarter, driven by increased revenues at Adelphia Gateway and Leaf River. Finally, home services improved by $1 million, mostly driven by higher installation revenues. On Slide 11, we have highlighted the details of CEV's SREC hedging program. The sale of SRECs remains a large portion of CEV'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 only hedged through early 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 NJNG to follow the rate communicated during our last quarter's call. Similarly, we expect CEV'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 at Storage & 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 continued to assess the impact that elevated gas prices would have on our cash flow from operations if sustained through the end of fiscal 2024. Despite higher working capital needs at Energy Services and measures in natural gas, we remain in a strong position to execute on our growth objectives. With that, I'll turn the call to Steve.

Stephen Westhoven, President & CEO

Thanks, Roberto. We are pleased to report strong financial performance ahead of our financial targets and raised 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. 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 that are not mutually exclusive. Stability at our regulated utility and the complementary investment opportunities provided by our other business segments provide a 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 NFEPS expected growth rate of 7% to 9%. We appreciate that you took the time to join us today. 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 Investor Relations, Dennis Puma, 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. 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.

Richard Sunderland, Analyst

Maybe starting with the Inflation Reduction Act and potential benefits or impacts on your business. Could you speak to what you're seeing at this point, both in terms of impact on existing opportunities and if there are any expansion opportunities from some of the new tax credits considered in the legislation?

Stephen Westhoven, President & CEO

Richard, it's Steve. So the way that we're thinking about right now is to roughly stay exactly what can come out of that legislation. But I'll speak to some soundbites that have been circulating around. Generally, we think it's very positive for our business. If you look at it and you talk about extending the ITC, the support for clean energy and solar battery storage, and support for hydrogen, so a number of those initiatives that come through in the legislation would be supportive for us. We'll certainly keep an eye on it, and we'll update as information becomes available. But right now, it's just too early to say anything.

Richard Sunderland, Analyst

Got it. Understood. And then sticking with the renewable 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 Q4 or into 2023?

Stephen Westhoven, President & CEO

At the last earnings call, we changed the capital plan a little bit. And I think it's reflective of some of these challenges for PJM accelerating or going to redo their process in order to accelerate the review of interactions. You know that the State of New Jersey is looking at putting in place a third successor program and moving forward. We believe all these will be constructive; we adjusted our capital plan as we were going forward. The fact I'd like to leave you with is that we've got a very large pipeline of projects going forward. So when this loan is finally released, we expect that we'll be able to develop. We feel very confident in our business going forward, and you can see that from our earnings today. The complementary portfolio of businesses supports our capital programs going forward.

Richard Sunderland, Analyst

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

Roberto Bel, Senior Vice President & CFO

Rich, this is Roberto. So now what the assumptions are, we reduced our cash flows from operations for $100 million and $40 million and $20 million for Q3. This assumes that covering gas prices remain in place until the end of 2024. And so that's definitely a related assumption. If those prices decreased significantly, you would have a positive reversal.

Gabe Moreen, Analyst

Likewise, congrats to Dennis. Maybe if I can start off with Energy Services. I just want to understand how much benefit there may be in Q4. 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 full relative to, I'd say, the traditional Energy Services earning profile of earning in the wintertime, given the volatility we're seeing now? Or could you still see the same upside in winter as usual?

Stephen Westhoven, President & CEO

Gabe, could you just ask that part of the question again? You were asking whether the Energy Services earnings are influenced by the volatility as you usually do?

Gabe Moreen, Analyst

Yes. I know we're not necessarily earnings forward here, Steve, in terms of some of the volatility you're capturing now versus kind of leaving yourself positioned for the winter as you usually do?

Stephen Westhoven, President & CEO

No. I'd say just the opposite. I mean, it's really a short-term volatility that's influenced. You can see the inflation that's raising gas prices and electricity prices. There's been a natural hedge within our portfolio of businesses where we've been able to have some offsets to some of those inflationary pressures and invest some benefits to the company because of that. You see the energy prices increase the 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 that over at CEV; the increasing electricity prices have benefited that group for the amount of electricity that we sell into the wholesale markets on a monthly basis as well. So certainly, we don't like to see the inflation, but it is nice to see that the businesses came together and are able to work in concert to create value.

Gabe Moreen, Analyst

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

Stephen Westhoven, President & CEO

It's too early to point to either end, but I say the same thing that I said before: we have reserved and purchased a number of solar panels to add to our construction schedule. We feel like we've got a good hedge in place for a period not only for the remaining part of this fiscal year but as these projects start to move into the next year's construction as well. So feeling good about that, and it will be, as I said before, we were talking to Rich; some of these loans associated with the PJM process, the state of New Jersey process, get cleared. We’re going to be able to develop, and we’ve got such a large pipeline of projects in our hands currently. It’s just a matter of working with the process to get into development and construction.

Gabe Moreen, Analyst

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 like or what the uplift might be in contract terms or tenor relative to what you've been seeing before?

Stephen Westhoven, President & CEO

Yes. The current volatility is certainly extremely supportive. Look at the aftermath of the storm Uri, which I know is in the rearview mirror now, but ultimately, it does impact you’ve got forward volatility that continues to storage and being able to balance that region, as it becomes under more and more stress, is going to be extremely important. We have seen an increase in contracting; a lot of our contracts go out for multiyear churn. So we’re confident in our revenue streams going forward. But as we come to roll over and renegotiate, yes, we’re expecting to get higher prices for that facility into the future. So it's very constructive. There’s a cabin there that’s developed, so if the market gets up to the point that there’s more capital that can be deployed, we’ll certainly look at that as well. It’s a good market to be in at this point.

Travis Miller, Analyst

Again, congratulations to Dennis; it's always been a pleasure here over the years working with you. Appreciate all the help.

Dennis Puma, President & CEO

Thank you, Travis.

Travis Miller, Analyst

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?

Stephen Westhoven, President & CEO

Speaking generally to Travis, yes, 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 likes to see those increases take place. We had submitted to the EPU increased sales to like 13%. Ultimately, you don't like to see it, but you can temper that against gas market, which is up almost 200% or 250%. It was relatively nominal. So inflation for customers for that is good. We’ll see how the market plays out; hopefully normalizes, and you get back down to a more normal gas price at least in recent history. But bottom line is customers will be largely insulated from the large increases in natural gas taking place.

Travis Miller, Analyst

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

Stephen Westhoven, President & CEO

I think I would describe the hydrogen market as evolving and certainly maturing. There's a lot of support for it. You’ve got the hydrogen shot at the federal level in developing green hydrogen, driving down prices from their current levels, then with hydrogen at around $8 on an equivalent basis. I think once those prices come down and once proven development takes place, then you’re going to be able to bring that technology and fuel to scale, and you’ll see that used in a greater way. It’s a balancing act going forward. We’ve got a very high-quality pipeline system that NJR believes 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 great clean technologies, as you come to scale, we’ll start to implement that and drive our way towards a lower carbon impact in the future. That’s the way we’re thinking about it. It’s going to come over some time, but it is moving forward, and there’s a lot of third-party effort outside our company driving down these costs, and there’s a lot of companies looking at it, which will be helpful for us and for the whole industry.

Operator, Operator

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

Dennis Puma, President & CEO

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 we've had a few laughs along the way. I also wanted to thank our entire management team, one of the best in the industry, for their support and always being available when I needed a question and answer or listening as we discuss the financial community perspective on our initiative. 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. Yes, airports. Enjoying life with family and friends, and this is new—I decided to finally forgive golf for being so unforgiving to me over the years and take another shot at it. Let me 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 in us in New Jersey Resources. Goodbye.

Operator, Operator

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