New Jersey Resources Corp (NJR) 2022 Q1 法說會逐字稿

Good day. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources First Quarter Fiscal 2022 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Dennis Puma. Please begin.

Thank you. Good morning, everyone. Welcome to New Jersey Resources First Quarter Fiscal '22 Conference Call and Webcast. I'm joined here today by Steve 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 line 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 today's call 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.

With that said, I'll turn the call over to our President and CEO, Steve Westhoven. Steve?

Thanks, Dennis, and good morning, everyone. Before we get into the quarterly results, I'd like to begin with our update on our sustainability efforts in decarbonization goals on Slide 3.

Last week, we issued our fiscal 2021 corporate sustainability report, our 13th consecutive report going back to 2008. The report details our goals, progress, accomplishments and sustainability in other ESG-related areas.

Let me talk about a few of the highlights. First, as you know, last quarter, we announced a goal of net zero greenhouse gas emissions by 2050 for our New Jersey operations. As we detailed in this year's report, we have already made significant progress towards this goal as NJR has already reduced these emissions by over 50% from 2006 levels.

Second, we've made our commitment to transparency even stronger this year by adopting disclosure based on the recommendations of the task force for climate-related financial disclosure or TCFD. Importantly, the report reinforces our fundamental beliefs around decarbonization and our broader sustainability strategy, which focuses on achieving climate and emissions reduction goals in the most affordable and reliable way for customers.

It does this by leveraging our existing already paid for energy infrastructure to deliver decarbonization fuels like RNG and hydrogen and by furthering our energy efficiency efforts and advancing our already robust clean energy portfolio through additional investments in solar. This approach and our company's ongoing leadership in the clean energy transition are clearly articulated in this year's report, which is available on our website. I hope you all have an opportunity to review it.

Turning to Slide 4, our fiscal 2022 is off to a good start, and we delivered a strong performance in the first quarter. We executed on our business strategy and delivered net financial earnings of $0.69 per share, a 50% increase from the same period a year ago. New Jersey Natural Gas saw improved results driven primarily by the settlement of its base rate case that Clean Energy Ventures we placed the project into service and are actively constructing $150 million of additional projects that we expect to be operational by the end of the fiscal year.

In our Storage and Transportation business, construction continues to progress on our Adelphia Gateway project, which I'll discuss further in a moment. At Energy Services, we received our first payment of $87 million from our asset management agreements announced in December of 2020, delivering on our commitment to generate more stable fee-based revenue at that business unit. These results reflect the strength of our complementary portfolio of businesses and are consistent with our overall strategy to de-risk results and provide more predictable net financial earnings.

Turning to Slide 5. This morning, we reaffirmed our fiscal 2022 NFEPS guidance range of $2.20 to $2.30 per share. We expect that most of our net financial earnings will come from our utility business. Also, as we've said in the past, our fiscal 2022 Energy Services segment guidance only includes margin contributions from its fee-based revenue streams. And importantly, we are maintaining our expected long-term NFEPS growth range of 7% to 9%.

As I mentioned in my opening remarks, New Jersey Natural Gas had a strong quarter. And on Slide 6, I'll take you through some of the operational highlights. At the top left, we invested $73 million in New Jersey Natural Gas during the first quarter with over 40% of that CapEx providing near real-time returns. Despite the ongoing pandemic, we added over 1,700 new customers in the first quarter and are focused on achieving our pre-pandemic customer growth rate of 1.7%.

Going forward, you should expect New Jersey Natural Gas to further its decarbonization efforts with an emphasis on energy efficiency and decarbonized fuels. On the energy efficiency front, our largest ever SAVEGREEN program furthers our commitment to sustainability by helping customers lower their energy usage, save money and reduce their carbon footprint.

In terms of expanding our use of decarbonized fuels, we are currently assessing future hydrogen and RNG opportunities that are expected to add additional low and zero carbon fuels to our system. We will update our capital plans as we get more visibility into the potential projects.

Slide 7 provides operational highlights in our other core business, Clean Energy Ventures. The top left shows our Q1 revenue broken down by revenue type, along with total expected revenue for fiscal 2022. As a reminder, substantially all of our SREC revenues for the year are secured through our SREC hedging program. Total invested capital at CEV this quarter was $32 million with $30 million spent on commercial projects and $2 million through our residential program.

As indicated on the chart to the right, we have $150 million of projects currently under construction. In addition, almost $30 million of $104 million currently under contract have moved into late-stage development with construction anticipated to commence shortly while CEV continues to advance its project pipeline, the in-service dates of projects currently under contract and under evaluation to move beyond this fiscal year as a result of potential supply chain constraints or the timing impacts of the regulatory approval process.

It's important to remember that we have dramatically reduced our dependence on investment tax credits to achieve our earnings guidance. This means that even if these risks materialize, we do not expect a negative impact to our fiscal 2022 NFE guidance.

Turning to Slide 8. I'm pleased to announce that we have achieved another milestone in our ongoing derisking strategy as Adelphia placed 2 projects into service. One of these facilities, the delivery points serving new customers in Adelphia's northern zone represents our first organic expansion of existing pipeline, generating additional fee-based revenues for the project.

Construction on this project is about 85% complete and we expect full commercial operation by the end of the year. Finally, this marks our first quarterly conference call since the announcement of a series of executive and senior leadership promotions on December 8, which include Pat Migliaccio being named Senior Vice President and Chief Operating Officer of New Jersey Natural Gas; and Roberto Bel being promoted to Senior Vice President and Chief Financial Officer at NJR. I'd like to congratulate Roberto on his promotion to CFO.

And now, I'll turn the call over to him for a financial review. Roberto?

Thank you, Steve. Good morning, everyone. Slide 10 shows the main drivers of our NFE for the first quarter of fiscal 2022. We reported NFE of $65.8 million or $0.69 per share compared with $44.7 million or $0.46 per share last year. NJNG saw an improvement of $1.6 million due primarily to the impact of new base rates that went into effect on December 1 and a deferral of $10.7 million of pandemic-related costs as a regulatory asset, partially offset by higher depreciation expense, higher income taxes and by lower [ESG-related] equity. CEV's NFE improved by $3.5 million, primarily due to increased revenue from the sale of hedged rate and higher electricity prices in the first quarter of fiscal 2022.

Storage and transportation was mildly down during the quarter due primarily to lower earnings from Adelphia Gateway. Energy Services improved $16.1 million, primarily due to the recognition of revenues from the asset management agreement that we entered into during fiscal 2021.

On Slide 11, we have highlighted the details of our SREC hedging program. The sale of SREC remains a large portion of CEV's revenue. We derisked this cash flow by hedging our expected production of SREC. As you can see, we're almost fully hedged through energy year 2024. And for energy years 2025 and 2026, we now have 49% and 27% of our expected extra generation hedged at prices at or above 87% of the Solar Alternative Compliance Payment or SACP.

Turning to our capital plan on Slide 12. I'll take you through some highlights, starting with NJNG. With this revenue service and the base rate pay behind us, our capital spending at NJNG is projected to moderate somewhat over the next 2 years and may change as we continue to assess new potential investments in hydrogen and RNG. At CEV, our estimated spend has not changed from last quarter. We have a large in service solar CapEx target for this year and as Steve noted, the timing of this spend could be affected by future supply chain constraints or regulatory delays.

Moving to Storage and Transportation. The construction of Adelphia Gateway continues to move forward and represents the largest capital expenditure for this segment.

Turning to our cash flows on Slide 13. You can see that we continue to project very strong cash flow from operations for fiscal year 2022 and 2023. Finally, as a reminder, last year we resumed our anti-dilution share repurchases under our existing program. Therefore, for the full year, we expect to roughly offset all acquisitions generated by our dividend reinvestment plan.

With that said, I'll turn it back to Steve for some closing remarks.

Thanks, Roberto. Before I open the call to questions, I'd like to close with a few thoughts. We are on track to meet our NFEPS guidance for this fiscal year due to the strength in contributions from our diversified complementary portfolio of businesses. And more broadly, I'd like to note the tremendous progress NJR has made executing the strategy we outlined just 14 months ago. The updates we've provided on today's call are a clear illustration of that.

At New Jersey Natural Gas, our base rate case filing was successfully settled and new rates are in effect. Moving forward, we are focused on achieving our goals for customer growth and continuing the path towards decarbonization with strategic investments like our current Howell Green Hydrogen facility. CEV continues to grow its asset base within our home state as well as outside of New Jersey.

While we are closely tracking macroeconomic factors in backing solar, we have a number of significant projects going into service this year and a growing pipeline of new potential investments. Our strategy at Energy Services continues to deliver results. With the AMA in place, we have significantly increased our fee-based revenues, while our long option strategy continues to offer potential upside.

And the progress we've noted on Adelphia Gateway, we are moving closer to bringing that project fully into service. We expect these efforts will drive our NFE guidance and produce strong cash flows that will support our dividend growth of 7% to 9% per year.

And finally, I want to thank all of our employees for their hard work over the last quarter, especially through the latest challenges brought on by the pandemic.

And with that, I'll now open the call for questions.

(Operator Instructions) Our first question comes from Richard Sunderland from JPMorgan.

Maybe just starting on the solar side. Steve, if you could speak to the recent development activity and how it's tracking your 2022 expectations. I know you mentioned potential supply chain constraints and regulatory delays. Also curious here if this is consistent across both New Jersey and non-New Jersey activity.

Hi, Richard. This is Steve. Yes, our projects at the solar group, you saw the numbers. We've got $150 million under construction, and we've got $104 million I believe under contract. So those are all -- moving forward, certainly, some regulatory and permitting needs to happen to make those second tranche of projects come to place.

But I think the key takeaway is that we've got a robust pipeline for these projects. And certainly, our ability to see some -- where our development is going forward is pretty clear. So we're optimistic we should be able to execute. It may slip a little bit. But because we've changed the accounting for how we book our income and revenue from these assets, less critically important, but that's not to say that we're not focused on it, making sure that we execute and are able to bring these projects into service on as much as a timely basis as possible.

Understood. And then pivoting to Energy Services, can you speak a little bit to the recent weather and just the overall segment positioning to capture upside with the AMAs in place? Any way to think about the magnitude of the earnings benefit that you noted as in the guidance?

So we reaffirmed guidance this morning. So we're certainly not going to change that at this time. And the AMA did take a tranche capacity out of that book, approximately about like 90,000 dekatherms. They still have a significant book in existence. So certainly, as you guys all know, volatility is good for that business. And certainly, January has been volatile. We've got this storm that's moving across the U.S. now that's bringing some volatility, especially in Mid-Continent and south. So that's good for the business as well. But I want to reaffirm, we're sticking to our guidance and we'll wait to see how these recent weather events play out as we get deeper into the winter.

And just a brief follow-up there. Some of the quarterly assumptions around the margin contributions move from 4Q to this quarter. Speaking again just to Energy Services, what are the drivers there, anything against that backdrop with changes?

So certainly, we see the large tranche of cash on the first phase of that AMA. But I'm going to ask Roberto to talk to the specifics on essentially the way that, that mortgage will be recognized and how you should look at this.

Yes. Hey Rich, this is Roberto. So in terms of revenue for the AMA, you should expect and you have that in that presentation towards the end that we're going to recognize for the year about $52 million in revenues of which we have recognized already $22 million and the difference is going to recognize is going to be recognized pro rata over the next 3 quarters. So that's roughly how you should think about it for this year.

(Operator Instructions) Our next question comes from Gabe Moreen from Mizuho.

Steve, based on your comments on kind of the RNG -- additional RNG investments you're looking at, it seems like you're mostly sticking potentially to getting stuff into your regulated system. Can you talk about where you're headed a little bit more with RNG and kind of the size of the things you're looking at and whether in rate base, out of rate base, et cetera?

So I think the way we're looking at it, putting decarbonized steel into our system is really important to us, and it's a way that we can get to our clean energy future. We've got a hydrogen plant that's been up in operation now for a few months, proof of concept there that, that works and we're able to do that with minimal impact on our customers and the technology works.

Renewable natural gas, certainly very low carbon profile as well, pursuing essentially systems and sources that are within our -- in our footprint is certainly the top priority of how we're moving forward. And I expect that -- we don't have anything to announce yet. Certainly, there's some of that in our capital plan. But we're looking at it as a way to essentially deliver decarbonized fuel to our customers. So it's an important path forward.

Certainly, we're going to bring all stakeholders involved as we connect these sources into our system. Our regulators, customers, we're going to be sensitive to price, the administration. So certainly going to do so in a very thoughtful way. But the way that we're looking at RNG and hydrogen is to generally increase that decarbonized fuel delivery to our customers so we can be part of the clean energy future and really prove out the long-term value of our assets.

So is it fair to say that in terms of additional steps and these deliberations and discussions, it sounds like the back half of the year for more concrete steps and announcements?

Yes, like I said, we don't have a deal to announce, but you know that we're really working on.

Okay. And then second question for me is I think Roberto talked to give a little bit of an update on the deferred costs for COVID. I was wondering if you can just walk through that again and to what extent you are or not still recognizing extraordinary costs for COVID and the recovery process there potentially?

Yes, hey, this is Roberto. So as we announced this morning, we deferred $10.7 million related to COVID expenses and so if the question is, are we going to defer any more, we and all major utilities have the ability to defer more excess COVID expenses until the end of this calendar year, that's per the BPU order. We're not planning on that. But having said that, we don't know what this pandemic has in.

(Operator Instructions) Our next question comes from Matt Davis from Coann Capital.

I just wanted to get a little clarification on the AMA timing. I know you talked about for the rest of the year, but I was just curious if you can walk through what the change was since the fourth quarter given that I think that there is an expectation for more of the revenue to come in, in the first quarter of this year versus over the balance of the year?

Yes. Hey Matt, this is Roberto again. And you're right. It is. So just to be clear, the AMA became effective this first quarter, right? And if you remember our prior remarks, the cash recognition for the year all came in -- all the cash came in, in Q1. It came in -- early in the quarter about $87 million, and that's how we got all that.

In terms of the revenue recognition, you're right, in the revenue recognition it's broken into 2 pieces. Whenever we have a permanent release or capacity that recognizes usually higher value. We had a little bit of that in Q1. That's why we recognized about $22 million in Q1. And whenever you have temporary releases, the value of that is a little less, and that's what we're going to have in the remainder of the year. So that's why for every quarter going forward, we'll recognize about $10 million. So your initial assumption was correct.

There are no further questions at this time. Mr. Dennis Puma, I turn the call back over to you.

Okay. Thank you, everyone. I'd like to thank everybody 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. Goodbye.

This concludes today's conference call. You may now disconnect.