Earnings Call: Q3 2021

Aug 5, 2021

Ladies and gentlemen, good morning, good afternoon, good evening. My name is Zed, and I will be your conference operator today. At this time, I would like to welcome everyone to the NJ Resources Q3 FY 'twenty one Conference All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I now invite Doug Puma, Head of Investor Relations. You may please begin the conference, sir. Thank you, Jay. Good morning, everyone. Welcome to New Jersey Resources' 3rd quarter fiscal 'twenty one 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 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 a 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 1. These items can also be found in the forward looking statements section of today's earnings release furnished on Form 8 ks and in our most recent Forms 10 ks and Q as filed with the SEC. We do not, by including this statement, assume any obligation to review or GAAP financial measures such as net financial earnings or NFE. We will 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 ks. Our agenda for today is found on Slide 2. Steve will begin today's call with highlights from the quarter, followed by Pat who will review our financial results. We'll then open the call up for your questions. The slides accompanying today's presentation are available on our website and were furnished on our Form 8 ks filed with the SEC this morning. With that said, I'll turn the call over to our President and CEO, Steve Westhoef. Steve? Thanks, Dennis, and good morning, everyone. Thank you for joining us today. This morning, we reported a 3rd 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 $72,700,000 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 important and needed project to serve energy demands in the Northeast. The impairment we've taken reflects the ongoing uncertainty around the projects in service date and the regulatory milestones needed to achieve it. As a reminder, in November, we removed pennies 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 to $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 $315,000,000 CapEx target for fiscal years 'twenty one and '22 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 derisking 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 4, 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 0 carbon fuel sources. As promised, we began to diversify our CEV project pipeline Nearly 25% of our fiscal year 'twenty one and 'twenty two capacity target is expected to come from projects outside of New Jersey. We also took steps to reduce the volatility of CED's earnings by adopting the deferral method of accounting for ITCs. And 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 derisked future revenue streams by increasing Leaf River's long term contracted revenues with high quality customers. And as we'll discuss later, our progress continues in the Delta 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% to 10%. Turning to Slide 5, I'll provide an update on our rate case. Last month, we adjusted our filing to include 9 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 $164,000,000 The rate case is progressing as scheduled and we hope that BPU's review will be completed before the end of 2021. We will continue to work with them toward a resolution that balances the interest of our customers and the company. Turning to the business unit results on Slide 6, New Jersey Natural Gas has invested $365,000,000 so far this year with about 25% of the CapEx providing a near real time return. And despite the pandemic, we added over 5,400 customers so far this fiscal year. Turning to Slide 7. 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 and will enable the blending of hydrogen into our distribution system. Will create awareness with our regulators and policymakers to build expertise to allow us to scale as the market continues to develop. Using electricity source from 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. And once completed, we'll be the 1st 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. And on Slide 8, you see that we are working toward a broader sustainability strategy focused on carbonizing of our core infrastructure. In addition to our hydrogen project, we're 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 de carbonization for both New Jersey and ratepayers. Our team is focused on putting our strategy into action through new investments and we'll provide updates as we progress. Turning to CEV on Slide 9. Through the 1st 9 months of the fiscal year, we added 8.4 megawatts of incremental capacity, which is lower than originally anticipated. The in service dates of several of our commercial projects have shifted to fiscal 2022 due to pandemic related permitting and interconnection issues. And 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 $315,000,000 for fiscal years 'twenty one and '22. And 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. And in addition, CED continues to diversify and grow its project pipeline through expansion efforts outside of New Jersey. Turning to Slide 11, on July 28, the BPU approved the initial phase of the New Jersey Solar Successor Program, announcing incentives for landfill to net metered solar projects under 5 megawatts in size. The second phase of the successor program will be based on a competitive bid process for projects greater than 5 megawatts. Both phases will be independent of the SREC and TREC programs. Current TREC program will close to new applications on August 27 and the new program SREC II will open to new applications on August 28. We are pleased to report that more than half of our fiscal 2021 2022 New Jersey projects have been secured under the TREC program and that percentage may increase based on pending applications. New Jersey is committed to its solar industry targeting 7 50 megawatts per year 12 months to ensure New Jersey is on track to meet its solar targets. The successor program will provide CEB with investment opportunities that combined with out of state diversification will allow us to achieve the goal of doubling our installed capacity by 2024. Now let's talk about our storage and transportation business beginning on Slide 12. Critical federal and state approvals have been for both phases 1 and 2 of the Adelphi Gateway project. During the quarter, the project received its FERC notice to proceed for phase 2 of the construction on the South Zone, which includes key laterals and interconnects with Columbia, Transco and Pico. As you may recall, construction on Phase 1 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 and T remains on track to achieve a 4 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. And at Leaf River, we've secured $45,000,000 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, and good morning, everyone. Slide 15 shows the main drivers of our NFE for the Q3. We reported a net financial loss of 14,100,000 dollars or $0.15 per share compared to NFE of $2,700,000 or $0.03 per share in the Q3 of fiscal 2020. NJG's NFE was lower due to O and M expenses related to increased bad debt and compensation expense. CEV saw a modest increase in NFEs and lower appreciation expense, partially offset by increases in O and M expenses related to project maintenance and leasing. S and T was lower primarily due to higher expense for the Delphi Gateway and Leaf River acquisitions. All Energy Services was down $5,900,000 due to timing of certain storage hedges. Also, although excluded from NIP, we incurred a $92,000,000 or $72,700,000 after tax impairment charge on our investment in the PennEast project. Since we previously removed PennEast from our financial projections, the PennEast has no impact on our ability to achieve our long term NPPS, dividend and cash flow from operations growth earnings. On Slide 16, I'll summarize the evolution of our net EPS guidance for fiscal years 2021 2022. Fiscal 2021 is going to be a reset year with lower NFP than in fiscal 2020 due primarily to the change in the accounting method for ITCs going from flow through to 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 NF EPS guidance due to the outperformance of Energy Services resulting from Winter Storm Uri. Today, we're increasing our fiscal 'twenty one 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 NPPS guidance was originally in the range of $2.05 to $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 investment grade utility. During our Q1 earnings call, we raised our NPPS guidance for 2022 for a range of between 220230, mostly driven by the energy services AMAs. And to solve the in service dates for many of our CBB commercial projects shift to fiscal 2022. The capital related to projects placed in service for the fiscal year to date is about $17,000,000 while the total capital spend is approximately $50,000,000 We've adjusted our capital plan accordingly. For fiscal 'twenty one, we now expect to spend between $50,000,000 $60,000,000 in CEV compared to our prior forecast of approximately $66,000,000 to 88,000,000 dollars And for 2022, we now expect to spend around 280,000,000 compared to our prior estimate of 250,000,000 Turning to Slide 18, you can see the update to our cash flows and financing projections. Our cash flow from operations remained strong and we have no block equity needs for the foreseeable future. During the quarter, we cash some of the last portion of the equity quarter 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 3 energy years and now have 94% of our 2024 volumes hedged. The market fundamentals for end years 'twenty five to 'twenty six are supporting strong pricing, with FX trading at or above 85% of SACP. We're now at 37% and 11% hedged for those years respectively. I'll now hand the call back to Steve for some closing remarks. Thanks, Pat. Before I open the call to questions, I'd like to summarize the quarter. NGR continues to deliver strong results for the 1st 9 months of this year. The strength of our business led by Energy Services and New Jersey Natural Gas has allowed us to increase NFEPS guidance for the 3rd 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 CEB 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 2nd phase of the Delta Gateway and Leaf River significantly derisks 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. The first question is from the line of Gabe Moreen from Mizuho. Please go ahead. Good morning, everyone. Good morning, Gabe. Yes, 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? And then 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 just curious how you're thinking about kind of going down that RNG path? Okay. So Gabe, I'll answer the first question just broadly. So 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. So 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. And 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, but I'm going to ask Mark Carrick, who is 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 2 opportunities that we're looking at right now. One would be a direct investment in the processing plant. We believe we have the authority under what was the 2,005 reggie legislation that enabled us to invest not only in energy efficiency, but also in renewables as well. And the definition of renewables, that's why renewables is modified by the state a number of different types which incorporates renewable natural gas. So 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. So the second opportunity would be a direct purchase from another facility that whether it's food waste, anaerobic digester or another processing plant that's taking landfill gas and cleaning it up and having it ready to inject into our line and basically buying it like it's a 3rd party, buying from that 3rd party to inject directly into our system. So we believe we have authority to do all that now. But again, it's something we'll continue to work with our regulators to ensure that everybody is on the same page as we go forward with this. Thanks, Mark. Just as a reminder, from a capital planning perspective, we've only included the 1 hydrogen pilot project and the potential RNG opportunity. Those investments total between $30,000,000 $40,000,000 over the next 2 years and ultimately support the double digit rate base CAGR that we talked about in our Analyst Day. Got it. Thanks everyone. And then 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? And I'm just curious, relative to expectations, what the pricing has been on those contracts, whether you're seeing some of uplift relative to prior contract? So a number of those were in motion prior to Yuri, 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 storages like Leaf River will become even more valuable. But just a little bit of color, I think it's probably similar to slightly ahead of what our existing contracts were. So overall supporting the investment thesis that we had for making the investment in Leaf River and it's certainly very supportive of essentially the market going forward. Great. And then last one for me if I can just on the CEB 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. And 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 5 year plan? No, it doesn't. It doesn't alter it. I think what we expect is New Jersey has 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 7 50 megawatts per year. And typically, we've been installing about 300 megawatts per year over the past 10 years. So I think that that's a statement in itself. And we expect that the programs that they're rolling out that we'll be able participate, we're optimistic for the future. So we're not expecting to change any guidance that we've given in the past due to this. Thank you. Our next question is from the line of Travis Miller from Morningstar. Please go ahead. Good morning, everyone. Hey, Travis. Assuming you had a constructive outcome in the rate case and 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? So I'm going to ask Mark Carrick to answer that question. So Travis, we are taking a look at the timing of our next rate case, the next base rate case. That rose in our Investor Day. We think that somewhere out in the 2023, 2024 timeframe. That's contingent upon the completion of the BIP projects where we're spending 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 SAIF 2 program, what a successor program for that may look like. So, we do have vintage pipes that where the code is not the code existing right now, it is methodically protected. So, assessing both the timing of that assessment and the timing of that infrastructure tracker as well. Okay, great. And then 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? So, Travis, I mean, it certainly aligns itself with the Governor's Energy Master Plan and certainly decarbonizing our fuel stream and delivery to our customers. So 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. And 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. And then just real quick clarifications. Would you anticipate putting that the project that's going on right now, the power to gas, in a future rate case? Or have you already talked about a potential tracker, if you do see stuff like that? So that project is part of our filed rate case that will hopefully conclude at the end of this calendar year. Thank you very much. Our next question is from the line of Julien Smith from Guggenheim Partners. So maybe if we can go back to the solar successor program quickly. And I think previously you're assuming 0.9 factor on the TREC going forward and you had that revenue mix kind of out through 2024 of it was around 20% just from T Rex. I'm wondering how you're thinking about that going forward with this new incentive level. What are you assuming new projects? What incentive level are you assuming? And then I guess how does that revenue mix change going forward? So, Cody, Pat is going to answer the question on the details with the T. Rec factors. Yes, Cody, good morning. It's Pat Migliaccio. I think obviously there are a number of various incentives underneath the successor program. And so 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. Successor program is broadly supportive of continued investment. And at the end of the day, we're going to direct our investment towards those projects that allow us to preserve the returns of key integrated closer to that 7% and 7.5% IRR. And so that's the way that I think you're getting to a modeling question here, which is you should think about a support level to get you that 7% to 7.5% IRR. Okay. Got it. And then just on the 7 50 Megawatt goal that New Jersey is outlined versus kind of what we've been seeing historically at that 300 Megawatt level. Wondering what you've seen historically in market share of that 300 megawatts and then what you're assuming going forward? I think historically, we've been about 10% of the market share. So, 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. But as things progress, we'll certainly keep everybody informed of how we're doing. Got it. Okay. And then 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 and being able to narrow your CapEx range? And then 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? So Pat and I were just motioning one another who's going to take the question. So I'll take the second part of the question as far as inflationary. So if you look at the projects that we have in the pipeline for the next 2 years, we largely have, I guess, a majority of the materials purchased or locked up as far as it goes. So we're we've been dipping into late 'twenty two, early 'twenty three, into kind of the inflationary pressures if there are any at that point. As far as the CapEx narrowing the guidance range, Pat, would you take that? So Cody, in terms of the narrow range, it really ties back to the fact that we've got over 70% of the projects identified in the pipeline. So clear line of sight on what those projects look like, what they'll cost. And so that confidence in the pipeline allows us to narrow the range of the capital plan. 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 and investment in New Jersey Resources. Please stay safe, everyone. Goodbye. Thank you very much. Ladies and gentlemen, this concludes today's conference call.