Earnings Call: Q2 2021

May 6, 2021

Good day and thank you for standing by. Welcome to the New Jersey Resources Second Quarter Fiscal 2021 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the speaker today, Dennis Puma, Director of Investor Relations. Please go ahead. Okay. Thank you, Christy, and good morning, everyone. Welcome to New Jersey Resources' Q2 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 team. As you know, certain statements in today's call contain estimates and other forward looking statements within the meaning of our security 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 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 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 provides a more complete understanding of our financial performance. However, it is not intended to be a substitute for GAAP. Our non GAAP financial measures are discussed more fully 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. Then we'll open the call up for your questions. The slides accompanying today's presentation are available on our website and were furnished on Form 8 ks filed with the SEC this morning. With that said, I'll turn the call over to our President and CEO, Steve Westover. Steve? Thanks, Dennis, and good morning, everyone. Thank you for joining us today. Midway through fiscal 2021, NJR has delivered strong performance for our shareowners. And on Slide 3, I'll take you through the highlights. This morning, we reported 2nd quarter net financial earnings of $1.77 per share, more than doubling last year's 2nd quarter results, primarily driven by performance at our Energy Services business. During the Q2, periods of widespread cold across the U. S. Led to an unusually high demand for natural gas. And as in the past, Energy Services strategically located in geographically diverse storage and transportation assets enabled that business to meet the needs of its customers during a time of unprecedented volatility. The outsized performance of Energy Services illustrates the limited risk, high upside value proposition of our long option strategy. Combination of this strategy and the generation of more fee based revenues such as the 10 year asset management agreement we announced in December provides for a powerful business model. Pat will provide a more detailed look at the drivers behind Energy Services performance later in the call. The contribution from Energy Services enabled us to increase our NFE guidance for fiscal 2021 for the 2nd time this year to a range of $2.05 to $2.15 per share from our original guidance of $1.55 to $1.65 per share. I'll provide more color on the next slide. At New Jersey Natural Gas, we filed a base rate case to recover almost $850,000,000 of infrastructure investments into settlement of our last rate case. This includes costs associated with the Southern Reliability Link, which is over 90% complete and expect to be placed into service this fiscal year. New Jersey Natural Gas received approval for Save Green 2020, our largest ever energy efficiency program. This new program authorized $259,000,000 in spending over 3 years, furthering our commitment to sustainability by helping customers lower their energy usage, save money and reduce their carbon footprint. The rollout of the program is expected to begin this year. At Clean Energy Ventures, we placed our 1st commercial solar project into service, adding 2.7 megawatts of installed capacity. We continue to develop our pipeline of projects to achieve our goal of doubling our installed capacity by the end of fiscal 2024. Leaf River, our storage facility located in Mississippi performed well during the February weather event, meeting all of our customer commitments under very challenging circumstances. And finally, we continued construction on the Delta Gateway South zone. The Delta Gateway has received all necessary Pennsylvania DEP permits and is working to obtain FERC notice to proceed for construction of laterals. We expect to place a number of the project facilities into service by the end of the year. Turning to Slide 4, we are increasing our fiscal 2021 NFP guidance to $2.05 to $2.15 per share, an increase of $0.20 per share compared to our March 15 update. Our initial guidance increase incorporates estimated bad debt to account for any Energy Services customers negatively impacted by the February weather event. Today's upwards guidance revision reflects payment by all of Energy Energy Services customers apart from 1 due to bankruptcy. Our fiscal 2022 and long term NFE guidance remains unchanged. As a reminder, guidance for fiscal 2022 is $2.20 to $2.30 per share and we are maintaining our long term annual growth rate of 6% to 10% off of our fiscal 2022 NFE, excluding Energy Services. Slide 5 provides additional detail on our base rate case filing. On March 30, we requested an increase to base rates $165,700,000 equivalent to an increase of $118,000,000 in operating income. Since the conclusion of our last case in 2019, New Jersey Natural Gas has invested nearly $850,000,000 to upgrade and enhance the safety and reliability of our transmission and distribution systems. This includes the installation of its Southern Reliability Link at a cost of more than $300,000,000 We hope that the PPE's review of our filing will be complete before the end of 2021 and we look forward to a successful conclusion that balances the interest of our customers and the company. On Slide 6, I'll take you through some operational highlights of New Jersey Natural Gas. Looking at the top left, we invested $198,000,000 this fiscal year with about 26% of the CapEx providing near real time returns. We added almost 3,700 new customers over the 1st 6 months of the year, below our regular growth rate due to the ongoing pandemic. However, we still expect to add approximately 28,000 to 30,000 new customers during the 3 year period from fiscal 2021 to 2023. As I mentioned earlier, construction on SRL continues to progress as well. On Slide 7, I'll take you through the operational highlights of Clean Energy Ventures. During the quarter, we completed our first out of state project in Connecticut. This is a small but noteworthy step towards executing on the regional solar investment strategy we discussed during our November Analyst Day. We now have over 3 60 megawatts installed capacity. Total invested capital at CEV for the 1st 6 months was $38,000,000 We expect to see some in service dates shift from the beginning of fiscal 2021 to the beginning of fiscal 2022 as a result of permitting and interconnection delays related to the pandemic. However, we remain on track to meet our goal of adding incremental 160 to 180 megawatts of capacity by the end of fiscal year 2022. The bottom right shows our expected CED revenue for fiscal 2021, a significant portion of which is secured through our SREC hedging program. While we adjusted our capital forecast for this year, most of these projects were scheduled toward the end of the fiscal year, marginally affecting expected revenue. And before I turn the call over to Pat, I want to take a moment to provide an update on our sustainability initiatives on Slide 8. In January, we issued our 2020 Corporate Sustainability Report. For the first time, this year's report includes disclosures in line with SaaS, the Sustainability Accounting Standards Board and the American Gas Association's frameworks, furthering our commitment to transparency and reporting on ESG matters. And on Earth Day this past month, we launched a significant new sustainability program, NJR's Coastal Climate Initiative. This program supports local based climate solutions that have an impact on the communities we serve. CCI's first endeavor will be to work with the New Jersey chapter of the Nature Conservancy to support the restoration of saltwater tidal wetlands in the Barnaket Bay, part of New Jersey Natural Gas Service Territory. These areas of coastline are carbon sinks, ecosystems that remove carbon dioxide from the atmosphere storing it in the ground soil. And they also act as natural barriers that mitigate storm surge, protecting people, property and our coastal communities. And now, I'll turn the call over to Pat to go through the financials. Pat? Thanks, Steve, and good morning, everyone. Slide 10 shows the main drivers of our NFE for the Q2. As a reminder, we're now utilizing the deferral method of accounting for and $70,600,000 or $1.77 per share compared to NFE of $84,300,000 or $0.88 per share in the Q2 of fiscal 2020. NJG's NFE was lower due to higher O and M expenses partially offset by utility gross margin. The higher O and M was primarily due to increased compensation and technology expense. TV's NFE was used to be flat compared to last year. Storage and transportation saw an increase in NFE during the quarter, mostly related to increased operating income from Leaf River related to hub services revenue. Energy services improved $94,000,000 primarily due to higher financial margin compared to last year, the details of which I'll take you through on the next slide. Slide 11, I'll provide some additional detail around Infinity Services performance during the quarter. The map illustrates how temperatures departed from normal during the February weather event in the mid continent and Gulf markets and also the storage assets that Energy Services hold in these regions. During this period of colder weather, there was high demand for natural gas, which Energy Services was able to satisfy by using its storage assets, despite natural gas to a variety of customers. And usually high demand resulted in strong pricing, which in turn drove Energy Services profitability. Turning to Slide 12, I'll take you through some of the changes in our capital plan for fiscal 2021 2022. As Steve mentioned earlier, we're starting to see some of the in service dates for certain CEV projects shift in fiscal 2022 due to permitting and interconnection delays related to the pandemic. We've adjusted our capital plan accordingly. For fiscal 2021, we now expect to spend between $96,000,000 $180,000,000 in CBD compared to our prior forecast of approximately $165,000,000 However, the capital is simply shifting to fiscal 2022. We still to reach our goal of adding 160 to 100 megawatts of capacity over the 2 year period. It's also important to note that the NFE for fiscal 2020 will largely unaffected by the shift in capital. Revenues will be minimally impacted given the majority of our projects had expected in service dates towards the end of the fiscal year. And with the change in financing and accounting methods, the impact related to ITCs will be a fraction of what it would have been previously. On Slide 13, you can see our product pipeline 2021 2022 was about $255,000,000 which represents 80% of our targeted CapEx for the next two years. Approximately 1 third of our project pipeline is currently out of state projects. And for the projects in New Jersey, we expect to earn an average TREC factor of 0.9 per kilowatt hour. Turn to Slide 4, you can see the update to our cash flows and financing projections. Our cash flow from operations remains strong. We have no equity needs for the foreseeable future, aside from our Noble DRIP program. Demonstrating the strength of our cash flows, Fitch recently affirmed NJNG's investment grade credit rating with a stable outlook. On Slide 15, we've highlighted the details of our SR hedging program. As you can see, we are well hedged through the next 3 energy years. We have 93% of our 2024 volumes hedged. And for the first time, we've been able to hedge SRECs 45 years out. The market fundamentals for energy years 20252026 are supporting strong pricing. Restructuring atorabove85% of SACP. We have 36% and ten percent hedged for 2025 and 2026 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. Through the first half of the year, NJR delivered strong results. The over performance from Energy Services allowed us to increase our guidance for the fiscal year and provides the flexibility to reinvest in our business. We filed the right case to recover our infrastructure investments, including the costs associated with SRL. We received approval for Save Green 2020, our largest ever energy efficiency program. CEV has a strong pipeline of projects that will allow us to reach our goal of adding 160 to 180 megawatts of capacity by the end of fiscal 2022. And we've received all necessary Pennsylvania DEP permits and filed with FERC for a notice to proceed for construction of laterals for a Delta U Gateway. I want to thank all of our employees for their hard work through the first half of this year. And now, I'll open the call for questions. The first question will come from the line of Gabriel Moren with Mizuho. Hey, good morning, everyone. So much for the reset year. I wanted to ask first just on the cash flow from ops guidance. I think compared to last quarter, you raised the midpoint by $20,000,000 if I'm reading that right. Obviously, that's a little less than you the benefit from Energy Services. So I was just wondering if you could speak to that a little bit first. Hi, Gabe. This is Pat Migliaccio. You're correct. Cash from operations increased by about $20,000,000 which is just a little bit less than what the ultimate guidance range. There are a couple other minor tweaks in there, but the majority of the change is related to Energy Services. Okay. Thanks, Pat. Maybe if I could also ask about some of your projects on SRL. I noticed the cost moved up a little bit. Is that something first of all, are you confident this is where your costs kind of stay with the last couple of percentage you kind of have to finish up on the projects? And then in terms of recoverability of those cost increases, can you speak to that too? Yes, Gabe, this is Steve. So the product is about 97% complete, so almost finished at this point. And yes, we expect to recover all those costs. Remember, this project has been approved by the PPU, received all necessary permits, and really was born out of Superstorm Sandy and the need for resiliency. So a lot of support for the project. We'll go through the process for the rate case to receive recovery and see how it turns out. But all indications certainly point towards recovery. Got it. Thanks, Steve. And then on Adelphia, in terms of getting the permits from the FERC here to start construction and the collaterals you're expecting in service, has that timing shifted at all in terms of the project? I think it hasn't shifted too much, maybe by a month or 2. So we have adjusted our wording slightly that certain portions of the projects are going to start going in service at the end of the year. But a little bit of detail associated with the contracts that will come in. We're not changing anything from a financial guidance on the project, but construction is what construction is. It has been shifting slightly, if you will. Nick, you probably noticed in the CapEx schedules, if you had a chance to take a look at that, we did shift a modest amount of capital, dollars 25,000,000 dollars on the Delta Gateway project from fiscal 2021 to fiscal 2022, just reflecting that minor change in some of those components of the project. That's helpful. Thanks, guys. And just last one on these, maybe just an update on Leaf River. Clearly, it sounds like the asset performed well during the winter storm. I know it's mostly contracted, but what are you seeing from customers there as far as, I guess, interest in either an expansion or I guess contract value at the asset? Yes. The asset performed very well. Everybody knows it was an extreme weather event took place down in that region in February. So we were pretty pleased with it, some bumps in up in some earnings due to some short term services they were able to provide. As you look forward, you would expect that need for reliability in that market would drive some higher asset values. We don't have anything to report yet, but I would expect that certainly all the utilities and real users, fiscal users down in that area are looking to bring more reliability into their book going forward. Your next question You've talked in the past here recently about derisking energy services. And I guess two questions on that line. 1, have you already derisked it such that your gains would have been even larger had you not gone through the derisking process or started it? And then 2, is this kind of delta, I guess, over a normal level, what we would expect in future extreme events, right, even under derisking type of scenario as you've laid out? I wish I could answer that question accurately as far as what would be the delta or what would be the amount that you would expect in a period of high volatility. But you can see, if you go back and look at prices down in that area, they were up in the $1,000 per MMBTU type range. We've never experienced that before. And I think if you across the U. S. Even historically, you're looking at $2.50 or something. So, it was definitely multiple times higher. So, I think trying to predict forward volatility is something that would be very, very hard to predict in the future. If you go back to the first part of your question, we had all the assets in our book. The AMA agreement doesn't start until the end of 2021, 2022 timeframe. So all the assets are in the book, so kind of a full portfolio from that perspective. But going forward, we've got a number of assets that we're going to see that are going to be utilized in the future. And storage was the largest component contributor this year to the P and L in the book. And remember that the asset management agreement is really centered around transport assets. Okay. So you do still have the optionality even under your derisking strategy, you would want to keep that optionality? There's still going to be a significant portfolio that needs to be managed in the future, yes. Okay. And then on the clean energy ventures, how are you thinking about financing that as it becomes a larger and larger share of your CapEx program? Is it project debt or do you plan on taking that on your balance sheet? Good morning, Travis. This is Pat Migliaccio. So our plan that we laid out at the Analyst Day is to finance all of our commercial solar projects with tax equity sale leaseback. That is still considered on balance sheet, although it does receive what I'll describe as favorable treatment from Fitch in terms of how to tackle the methodology. Once you get out to the number of years out, 25, 26, led us more optionality in terms of how we think about the debt financing. But for now, it's all going to be selling stock financing, tax equity structures for commercial. And then residential will be financed through the private placement market as we have our other non regulated investments. There are no further questions at this time. Are there any closing remarks? Yes. Thank you, and I want to thank everyone for joining us this morning. As a reminder, a recording of this call is available on our website. Also, I want to thank you for your interest and investment in New Jersey Resources. Thank you. Goodbye. This concludes today's conference call. Thank you for participating. You may now disconnect.