Ladies and gentlemen, good morning, good afternoon, good evening. My name is Zed, I'll be your conference operator today. At this time, I would like to welcome everyone to the NJ Resources Q3 FY 2021 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, please press the pound key. Thank you. I now invite Puma, Head of Investor Relations. You may please begin the conference, sir.
Thank you, Zed. Good morning, everyone. Welcome to New Jersey Resources' Third Quarter Fiscal 2021 Conference Call and Webcast. I'm joined here today by Steve Westhoven, our President and CEO, Pat Migliaccio, 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 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 explained on slide one.
These items can also be found in the forward-looking statements section of today's earnings release, first 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'll also be referring to certain non-GAAP financial measures, such as net financial earnings, or NFE. We believe that NFE or net financial loss provide a more complete understanding of our financial performance. However, they are not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in this presentation, in today's earnings release, and in Item 7 of our 10-K. Our agenda for today is found on slide two.
Steve will begin today's call with highlights from the quarter, followed by Pat, who will review our financial results. We will then open the call up to your questions. The slides accompanying today's presentation are available on our website and were furnished on our Form 8-K filed with the SEC this morning. With that said, I will turn the call over to our President and CEO, Steve Westhoven. Steve?
Thanks, Dennis, and good morning, everyone. Thank you for joining us today. This morning, we reported a third quarter GAAP loss of $1.16 per share and a net financial loss of $0.15 per share. During the quarter, we incurred a one-time after-tax impairment charge of $72.7 million related to our investment in the PennEast project. While this is included in our net income for the quarter, it is excluded from and does not impact our net financial earnings. It remains our belief that PennEast is an important and needed project to serve energy demands in the Northeast. The impairment we've taken reflects the ongoing uncertainty around the project's in-service date and the regulatory milestones needed to achieve it. As a reminder, in November, we removed PennEast from our forecast, and the impairment has no bearing on our long-term growth targets. Moving on to the highlights of the quarter.
We are increasing our fiscal 2021 NFEPS guidance to a range of $2.10-$2.20 per share. This guidance increase, the third one for this year, is driven by better-than-expected results at Energy Services and our BGSS incentive program at New Jersey Natural Gas. We're also pleased to report that construction and final testing on the Southern Reliability Link are complete, with an expected in-service date later this month. At Clean Energy Ventures, despite delays for some of the in-service dates of some of our investments, our project pipeline remains robust. We now have more than 70% of our original $315 million CapEx target for fiscal years 2021 and 2022 either operational, under construction, or under contract. Leaf River, our natural gas storage facility in Mississippi, increased the long-term commitments of new and existing customers, significantly de-risking our future revenues.
Finally, Adelphia Gateway received a FERC notice to proceed for construction of laterals and interconnects in the south zone of the project. We expect to place a number of Adelphia's project facilities into service by the end of this year. Turning to slide four, we wanted to provide an update on the progress made on some of the initiatives we discussed during our Analyst Day last November. At New Jersey Natural Gas, we completed the construction of SRL and filed a rate case. We're also excited to report that construction has begun on our first green hydrogen project. This is an important step in the decarbonization strategy laid out during our Analyst Day. It furthers our ongoing efforts to decarbonize our business as we move toward a future that includes more low and zero-carbon fuel sources. As promised, we began to diversify our CEV project pipeline.
Nearly 25% of our fiscal year 2021 and 2022 capacity target is expected to come from projects outside of New Jersey. We also took steps to reduce the volatility of CEV's earnings by adopting the deferral method of accounting for ITCs. We're improving our cash returns by utilizing tax equity financing for our solar projects, helping to accelerate the monetization of our tax attributes. As I mentioned earlier, our Storage and Transportation business has de-risked future revenue streams by increasing Leaf River's long-term contracted revenues with high-quality customers. As we'll discuss later, our progress continues on Adelphia Gateway's construction despite some regulatory delays. Our energy services business entered into a series of Asset Management Agreements that will significantly increase the predictability of that segment's earnings while still allowing them to retain the potential upside associated with our long option strategy.
These accomplishments have led to solid financial results and strong cash flows that provide a clear pathway for achieving our long-term earnings growth target of 6%-10%. Turning to slide five, I'll provide an update on our rate case. Last month, we adjusted our filing to include nine months of actual results. Also, since we expect SRL to be in service by the end of this month, it will no longer be treated as a post-test year adjustment. In total, we are now requesting an increase to base rates of almost $164 million. The rate case is progressing as scheduled, and we hope that the BPU's review will be completed before the end of 2021. We will continue to work with them toward a resolution that balances the interests of our customers and the company.
Turning to the business unit results on slide six, New Jersey Natural Gas has invested $365 million so far this year, with about 25% of the CapEx providing a near real-time return. Despite the pandemic, we added over 5,400 customers so far this fiscal year. Turning to slide seven, as part of the decarbonization strategy outlined at our Analyst Day, we discussed the important role hydrogen will play in our energy future. Our first power-to-gas project is now under construction. It will enable the blending of hydrogen into our distribution system. This will create awareness with our regulators and policymakers to build expertise to allow us to scale as the market continues to develop. Using electricity sourced from an adjacent solar facility, water will be separated into hydrogen and oxygen, and the carbon-free hydrogen will be blended into our distribution system.
We expect the project to be in service this fall. Once completed, we'll be the first utility on the East Coast directly injecting green hydrogen into an existing natural gas distribution system. Green hydrogen isn't the only alternative fuel opportunity that New Jersey Natural Gas is pursuing. On slide eight, you see that we are working toward a broader sustainability strategy focused on decarbonizing our core infrastructure. In addition to our hydrogen project, we are exploring investment opportunities in renewable natural gas within our service territory. As RNG and hydrogen technologies continue to scale, we expect that our existing natural gas distribution system will deliver more decarbonized fuel, dramatically reducing emissions without the need for a massive build-out of costly infrastructure required for full electrification.
By maximizing the benefit of our existing infrastructure, which is best in class, we see a practical path towards decarbonization for both New Jersey and ratepayers. Our team is focused on putting our strategy into action through new investments and will provide updates as we progress. Turning to CEV on slide nine, through the first nine months of the fiscal year, we added 8.4 MW of incremental capacity, which is lower than originally anticipated. And in service states, several of our commercial projects has shifted at fiscal, to fiscal 2022 due to pandemic related permitting and interconnection issues. While these challenges have significantly impacted project completion in fiscal 2021, we view these industry-wide impacts as short-term. Moving to slide 10, you'll see our commercial CapEx target remains at $315 million for fiscal years 2021 and 2022.
As mentioned earlier, more than 70% of this CapEx target is already operational, under construction, or under contract. We will continue to monitor any potential ongoing pandemic factors as our pipeline of projects progresses. In addition, CEV continues to diversify and grow its project pipeline through expansion efforts outside of New Jersey. Turning to slide 11, on July 28th, the BPU approved the initial phase of the New Jersey Solar Successor Program, announcing incentives for landfill, the net metered solar projects under 5 MW in size. The second phase of the Successor Program will be based on a competitive bid process for projects greater than 5 MW. Both phases will be independent of the SREC and TREC programs. The current TREC program will close to new applications on August 27th, and the new program, SREC II, will open to new applications on August 28th.
We are pleased to report that more than half of our fiscal 2021 and 2022 New Jersey projects have been secured under the PREC program. That percentage may increase based on pending applications. New Jersey is committed to its solar industry, targeting 750 MW per year of new capacity through 2030. As part of the new program rollout, the state is committed to assess progress after 12 months to ensure New Jersey is on track to meet its solar targets. The Successor Program will provide CEV with investment opportunities that, combined with out-of-state diversification, will allow us to achieve the goal of doubling our installed capacity by 2024. Let's talk about our Storage and Transportation business beginning on slide 12. Critical federal and state approvals have been attained for both phases I and II of the Adelphia Gateway project.
During the quarter, the project received its FERC notice to proceed for phase II of the construction on the south zone, which includes key laterals and interconnects with Columbia Transco and PECO. As you may recall, construction on phase I began last October. We expect a number of Adelphia Gateway's facilities to be operational by the end of this year, and our expectation is the project will be fully in service by the end of 2022. S&T remains on track to achieve a four-year adjusted EBITDA CAGR of 20% as we discussed at our Analyst Day. Slide 13 details the progress that we have made towards de-risking Storage and Transportation's future revenue streams. The team has done an excellent job of increasing the percentage of long-term contracted revenue associated with our Storage and Transportation assets.
At Leaf River, we've secured $45 million of additional contracts through fiscal 2024 with new and existing creditworthy customers. I'll now turn the call over to Pat for some details on the financials. Pat?
Thanks, Steve. Good morning, everyone. Slide 15 shows the main drivers of our NFE for the third quarter. We reported a net financial loss of $14.1 million, or $0.15 per share, compared to NFE of $2.7 million or $0.03 per share in the third quarter of fiscal 2020. NJR's NFE was lower due to O&M expenses related to increased bad debt and compensation expense. CEV saw a modest increase in NFEs and lower depreciation expense, partially offset by increases in O&M expenses related to project maintenance and leasing. S&T was lower primarily due to higher interest expense related to Adelphia Gateway and Leaf River acquisitions. Energy services was down $5.9 million due to the timing of certain storage hedges. Also, although excluded from NFE, we incurred a $92 million, or $72.7 million after tax, impairment charge on our investment in the PennEast project.
Since we previously removed PennEast from our financial projections, the impairment has no impact on our ability to achieve our long-term NFEPS, dividend, and cash flow from operations growth targets. On slide 16, I'll summarize the evolution of our NFEPS guidance for fiscal years 2021 and 2022. Fiscal year 2021 is going to be a reset year with lower NFE than in fiscal 2020, due primarily to the change in the accounting method for ITCs, going from flow-through to the deferral method, and also some regulatory lag related to items we expect to recover as part of our 2021 rate case filing. In March, and then again in May, we increased our NFEPS guidance due to the outperformance of energy services resulting from Winter Storm Uri.
Today, we're increasing our fiscal 2021 guidance again due to better-than-expected results from NJNG's BGSS incentive program and also Energy Services, driven by volatility associated with slightly warmer-than-normal weather in the summer, coupled with certain interstate gas pipeline constraints. For fiscal year 2022, our NFEPS guidance was originally in the range of $2.05-$2.15 per share. Subsequent to our Analyst Day, we announced that Energy Services had entered into a number of Asset Management Agreements with an investor-grade rated utility. During our Q1 earnings call, we raised our NFEPS guidance for fiscal 2022 to a range of between $2.20 and $2.30, mostly driven by the Energy Services AMAs, and to saw the in-service dates for many of our CEV commercial projects shift to fiscal 2022.
The capital related to projects placed in service for the fiscal year to date is about $17 million, while the total capital spend is approximately $50 million. We've adjusted our capital plan accordingly. For FY 2021, we now expect to spend between $50 million and $60 million at CEV compared to our prior forecast of approximately $66 million-$88 million. For 2022, we now expect to spend around $280 million compared to our prior estimate of $250 million. Turning to slide 18, you can see the updates to our cash flows and financing projections. Our cash flow from operations remains strong, and we have no block equity needs for the foreseeable future. During the quarter, we cashed over the last portion of the equity floor that we had in place related to our December 2019 equity issuance. On slide 19, we've highlighted the details of our SREC hedging program.
We're well-hedged for the next three energy years and now have 94% of our 2024 volumes hedged. The market fundamentals for energy years 2025 and 2026 are supporting strong pricing, with SRECs trading at or above 85% of SACP. We now have 37% and 11% hedged for those years, respectively. I'm going to hand the call back to Steve for some closing remarks.
Thanks, Pat. Before I open the call up for questions, I'd like to summarize the quarter. NJR continues to deliver strong results through the first nine months of this year. The strength of our business, led by NJR Energy Services in New Jersey Natural Gas, has allowed us to increase NFEPS guidance for the third time this year. Our rate case continues to progress on schedule, and we look forward to a resolution later this year. SRL is now complete, and we expect it to be in service later this month. Our CEV project pipeline remains strong with over 70% of our targeted CapEx either operational, under construction, or under contract. We received FERC approval and began construction on the second phase of Adelphia Gateway, and Leaf River significantly de-risked its revenues going forward through long-term contracts with new and existing customers.
I want to thank all of our employees for their hard work throughout this year, and I'll now open the call for questions.
Thank you very much. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the roster. The first question is from the line of Gabe Moreen from Mizuho. Please go ahead.
Morning, everyone.
Morning, Gabe.
Yeah, good morning. I just wanted to maybe start off and ask on sort of the hydrogen and potential RNG investments. Maybe if you can, Steve, speak to kind of how you view this hydrogen investment in terms of what the next steps would be if this investment proves successful. Do you have room to potentially build additional plants on your existing sites, for example? As far as RNG goes, can you just remind us what the latest developments are in terms of regulatory treatment around RNG, whether it's rate-basing your own investments or being able to pass through RNG costs or costs of gas to customers and recover those costs? Just curious how you're thinking about kind of going down that RNG path.
Okay. I'll answer the first question just broadly. Injecting hydrogen into our system, it's not a new technology. They're doing it over Europe, and in fact, in other parts of the U.S. they're doing it. We're going to prove it out for our system, and we expect it to be successful, and then we will have the ability to scale. I mean, this is really part of the decarbonization strategy for the fuel that we deliver to our customers, and really to prove out not only that we're able to do it, but we should be able to decarbonize and do it cheaply and effectively in the future. We are pursuing a number of RNG opportunities within our service territory.
I'm going to ask Mark Kahrer, who's the Senior Vice President, Head of Regulatory, to answer the question about how that will flow through, essentially, rate case regulatory treatment.
Thanks, Steve. There are two opportunities that we're looking at right now. One would be a direct investment in a processing plant. We believe we have the authority under what was the 2005 RGGI legislation that enabled us to invest not only in energy efficiency, but also in renewables as well. The definition of renewables has been modified by the state a number of different times, which incorporates renewable natural gas. We believe we have the authority. We'll continue to have discussions with our regulators about that.
There's also pending legislation that's been introduced in the state also to encourage the BPU to take a closer look at RNG and hydrogen and ensuring that not only direct investment and operation of those assets, but also procurement of renewable natural gas would be under their authority, renewed, and done effectively within the state to begin decarbonizing the gas streams as well. The second opportunity would be a direct purchase from another facility that, whether it's a food waste anaerobic digester or another processing plant that's taking landfill gas and cleaning it up and having it ready to be injected into our line, and basically buying it like it's a third party, buying from that third party to inject directly into our system. We believe we have authority to do all that now.
Again, it's something that we'll continue to work with our regulators to ensure that everybody's on the same page as we go forward with this.
Just as a reminder, from a capital planning perspective, we've only included the one hydrogen pilot project and the potential RNG opportunity. Those investments total between $30 million and $40 million over the next two years and ultimately support the double-digit rate base CAGR that we talked about in our Analyst Day.
Got it. Thanks, everyone. Maybe if I can switch a little bit to the midstream side of things, can you just maybe talk about some of these new contracts at Leaf River? Do you think those were prompted mostly by winter storm, LNG, all of the above? I'm just curious, relative to expectations, what the pricing has been on those contracts, whether you're seeing some sort of uplift relative to prior contracts.
A number of those were in motion prior to Uri occurring, but certainly an extreme event like that doesn't hurt the contracting on a forward basis for any facilities down in that region. I think as gas becomes such an important part of making a reliable energy mix that quick turn storage like Leaf River will become even more valuable. Just a little bit of color, I think it's probably similar to slightly ahead of what our existing contracts were. Overall supporting the investment thesis that we had for making the investment in Leaf River, and it certainly very supportive of essentially the market going forward.
Great. Then last one for me, if I can, just on the CEV side of things. If I'm hearing you correctly, it doesn't sound like the shifting regulatory landscape in New Jersey is altering either your CapEx plan in the state versus out of state. Can you just speak to whether or not you think the shifting landscape alters the earnings trajectory significantly here over the next, call it 24 months, over the five-year plan?
No, it doesn't. It doesn't alter it. I think what we expect is, New Jersey's been a strong supporter of solar for quite some period of time. If you look at the target capacity that they want to install every year, it's about 750 MW per year. Typically, we've been installing about 300 MW per year over the past 10 years. I think that's a statement in itself. We expect that the programs that they're rolling out that we'll be able to participate, we're optimistic for the future. We're not expecting to change any guidance that we've given in the past due to this.
Great. Thanks, Steve. Thanks, everyone.
Thanks.
Thanks.
Thank you. Our next question is from the line of Travis Miller from Morningstar. Please go ahead.
Good morning, everyone.
Hey, Travis.
Assuming you get a constructive outcome in the rate case, as you look at the capital plan, what's your thought in terms of medium-term timing on going back to regulators for either rate relief or potentially even some kind of project-specific type of tracker, something like that?
I'm going to ask Mark Kahrer to answer that question.
Travis, we are taking a look at the timing of our next rate case, the next base rate case. That was in our investor day. We think that's somewhere out in the 2023, 2024 timeframe. That's contingent upon the completion of the DIT projects, where we're basically expending substantial capital on both the replacement of the working asset management system and the customer information system. With respect to other infrastructure trackers that we might have, we're right now assessing as we wrap up our SAFE II program, what a successor program would that a look like?
We do have vintage pipes where the code existing right now, it is cathodically protected. Assessing both the timing of that investment and the timing of that infrastructure tracker as well.
Okay, great. Just to follow up on the previous question about the incorporation of the hydrogen system, do you think there's regulatory backing or supports to put a tracker in for those type of projects? Or is that something that you foresee going through future base rate cases?
Travis, it certainly aligns itself with the Governor's Energy Master Plan and certainly decarbonizing our fuel stream and delivery to our customers. I think the way to answer that question is that we're working through the process now. We've got an ongoing rate case and certainly a project that's active. We're optimistic that due to the alignment with the administration, that we should be able to receive some regulatory treatment of that for our customers.
Okay. Then just real quick clarification. Would you anticipate putting the project that's going on right now, the power-to-gas, in a future rate case? Have you already talked about a potential tracker, a [CVC], stuff like that?
That project is part of our filed rate case that will hopefully conclude at the end of this calendar year.
Okay, great. Thanks so much. That's all I had.
All right. Thanks, Travis.
Thanks, Travis.
Thank you very much. Participants, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from the line of Julian Mitchell from Guggenheim Partners. Please go ahead.
Hey, it is actually Kody Clark from Bank of America here.
Hey. [cross talk]
Maybe if we can go back to the Solar Successor Program quickly. I think previously you were assuming 0.9 factor on the TREC going forward, and you had that revenue mix kind of out through 2024 of, I think it was around 20% just from TRECs. I'm wondering how you're thinking about that going forward with this new incentive level. What are you assuming for new projects? What incentive level are you assuming? I guess, how does that revenue mix change going forward?
Kody, Pat's going to answer the question on the details with the TREC factors.
Yeah. Kody, morning. It's Patrick Migliaccio. I think, obviously, there are a number of varied incentives underneath the Successor Program. Our prior assumption as of the Analyst Day that we baked in was that roughly 50% of our projects would have been sourced within New Jersey, 50% outside of New Jersey. As we communicated, that was a planning assumption. Ultimately, what we've actually seen to date is that 20% of the projects are out of state, leaving the majority in state. The Successor Program is broadly supportive of continued investment. At the end of the day, we're going to direct our investment towards those projects that allow us to preserve the returns we've communicated, closer to that 7%-7.5% IRR.
That's the way that I think you're getting to a modeling question here, which is you just think about a support level that gets you that 7%-7.5% IRR.
Okay, got it. Just on the 750 MW goal that New Jersey has outlined versus kind of what we've been seeing historically at that 300 MW level. Wondering what you've seen historically in market share of that 300 MW and then what you're assuming going forward?
I think historically we've been about 10% of the market share. We'll see how it ends up playing out. The BPU will be doing a solicitation for larger projects, and we'll be participating in that. As things progress, we'll certainly keep everybody informed of how we're doing.
Got it. Okay. Sorry to stick with the Clean Energy Ventures theme here, but it looks like you narrowed your CapEx estimates on the commercial solar side just quarter-over-quarter. What's driving that confidence in being able to narrow your CapEx range? Second to that, how are you seeing the kind of inflationary backdrop that we've seen with panels and freight and everything? How is that playing into that?
Pat and I were just motioning one to the other, who's going to take the question? I'll take the second part of the question as far as the inflationary. If you look at the projects that we have in the pipeline for the next two years, we largely have I guess a majority of the materials purchased or locked up as far as it goes. We'd be dipping into late 2022, early 2023 into the kind of the inflationary pressures, if there are any at that point. As far as the CapEx now and the guided range, Pat, would you take that?
Yeah. Kody, in terms of narrowing the range, it really ties back to the fact that we've got over 70% of the projects identified in the pipeline. Clear line of sight on what those projects look like, what they'll cost. That confidence in the pipeline allows us to narrow the range on the capital plan.
Okay, understood. Thanks so much for your time.
Thanks, Kody.
Thanks, Kody.
Thank you very much. As there are no further questions, I now hand the conference over to the presenters. Please go ahead.
Okay. Thank you, Zed. I want to thank everyone for joining us this morning. As a reminder, a recording of this call is available for replay on our website. As always, we appreciate your interest in investing in New Jersey Resources. Please stay safe, everyone. Goodbye.
Thank you very much. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Thank you.