New Jersey Resources Corp (NJR) 2021 Q1 法說會逐字稿

Good morning. My name is Matt, and I will be your conference operator today. At this time I would like to welcome everyone to the NJR First Quarter Fiscal 2021 Conference Call. (Operator Instructions) Thank you.

I will turn the conference over to Dennis Puma, Director of Investor Relations. You may begin your conference.

Okay. Thank you, Matt. Good morning, everyone. Welcome to New Jersey Resources first quarter fiscal '21 conference call and webcast.

I'm joined here today by Steve Westhoven, our President and CEO; Pat Migliaccio, our 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 in Slide 1.

These items can 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 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-K.

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 to your questions.

The slides accompanying today's presentation are available on our website and were also furnished on our Form 8-K filed this morning.

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

Thanks, Dennis, and good morning, everyone. Thank you for joining us today. New Jersey Resources delivered strong performance in the first quarter. And on Slide 3, I'll take you through the highlights.

We reported NFE of $0.46 per share, driven by the performance of our core business, New Jersey Natural Gas. We are also reaffirming our NFE guidance for fiscal 2021 of $1.55 to $1.65 per share and increasing our fiscal 2022 NFE guidance to $2.20 to $2.30 per share, an increase of $0.15 per share from prior guidance.

At New Jersey Natural Gas, we completed almost 90% of the Southern Reliability Link and expect to place the project into service this year. We received approval to move forward with our infrastructure Investment Program, a 5-year, $150 million accelerated recovery program that will improve the resiliency and reliability of our natural gas infrastructure.

And we filed for SAVEGREEN 2020, a new energy efficiency program that is designed to help our customers reduce their energy consumption and save money.

At Clean Energy Ventures, we acquired the 2.9 megawatt Mt. Laurel Solar Facility, which is part of our plan to invest $165 million this year. In our Storage & Transportation business, we've begun to construct -- to convert the Southern portion of Adelphia Gateway to natural gas and expect it to be in service later this calendar year.

And just yesterday, the U.S. Supreme Court granted PennEast petition to hear its appeal. But despite this positive news, we are still excluding PennEast for our long term projections until there's more clarity on the project.

And at NJR Energy Services we entered into an asset management agreements, which will result in contracted cash proceeds of $501 million over a 10-year period. I'll take you through the transaction in more detail on the next slide.

Turning to Slide 4. Energy Services entered into a series of AMAs with an investment-grade public utility. These transactions illustrate the value of our portfolio of natural gas storage and transportation contracts that are a testament to the hard work of our talented team.

The transactions assist our counterparty in securing needed supply, while Energy Services monetizes the value of a portion of the assets it controls. Let me walk you through some of the specifics.

Beginning in November of 2021, which is our fiscal year 2022, NJRES will begin to release portions of our pipeline capacity. Under the terms of the agreements, NJRES will receive payments of $261 million (sic) [$260 million] over the first 3 years of the AMAs. After FY 2024, NJRES will receive additional payments of approximately $34 million per year through 2031.

The benefits for NJRES include, extracting value from our assets without the need for weather-related price volatility and reducing operational risks associated with the direct management of these transportation assets.

The result will be more predictable earnings and cash flows and a lower risk Energy Services business. These transactions also allow us to increase our fiscal 2022 guidance by $0.15 per share, as we'll see on the next slide. And later in the call, Pat will take you through other financial impacts of these transactions.

Turning to our NFE guidance for fiscal 2022 on Slide 5, we are increasing our overall guidance to a range of $2.20 to $2.30 per share. This reflects the impact of the AMAs and the expected cash settlement of our equity forward.

However, our long term annual growth rate of 6% to 10% remains based off our originally communicated guidance of $2.05 to $2.15 per share, which excludes the impact of the AMAs and any other contribution from Energy Services. As Pat will discuss later, the NFE benefits of AMAs will not be the same every year.

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. Looking at the top left, we invested $89 million in New Jersey Natural Gas during the first quarter, with about 1/3 of the CapEx providing near real-time returns.

Despite the ongoing COVID-19 pandemic, we added over 1,900 new customers, only slightly below the customer additions from the same period a year ago, which was pre-pandemic. This is due to the favorable growth demographics in our service territories.

Construction on the Southern Reliability Link continues to progress, and we now have almost 90% of the project complete with an in-service date expected this year. We plan to file our rate case to recover the costs associated with the project in fiscal 2021. And as I mentioned earlier, we received approval for our IIP program and filed for SAVEGREEN 2020.

On Slide 7, I'll take you through the operational highlights of our other core business, Clean Energy Ventures. We added 2.9 megawatts of capacity this quarter. And as you can see on the top right, we now have 360 megawatts of installed capacity.

We have a strong project pipeline with about $260 million worth of investments, either under contract or exclusivity that are targeted for commercial operation in fiscal 2021 and 2022. Total invested capital at CEV this quarter was $23 million with $17 million of commercial projects and $6 million at Sunlight Advantage.

The bottom right shows our expected CEV revenue for fiscal 2021, a significant portion of which is secured through our SREC hedging program.

And finally, before I turn the call over to Pat, I'd like to take a moment to talk about some of the important progress that we've made upon NJR's sustainability goals, which you can see on Slide 8.

The sustainability agenda we've outlined for our company focuses on innovation, emissions reductions, energy efficiency and transparency. But I'm pleased to report NJR has made significant progress.

Last quarter, we announced that NJR achieved our goal of reducing our New Jersey operational emissions by 50% of 2006 levels, well ahead of schedule.

And we set a new higher target of 60% reduction by 2030. This is a significant accomplishment that reflects the decades of investment in safety and environmental responsibility. It reflects our strong commitment to sustainability and the hard work of our team.

Our new target ensures our company's goals are aligned with the state's 2050 statutory goals for emissions reduction. Last month, we issued our 12th Annual Corporate Sustainability Report, which is available on our website. For the first time, this year's report includes ESG reporting and disclosures established by SASB, which is another step to increase transparency and strengthen our communications with our investors in the financial communities on these issues.

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 first quarter. As we communicated at our Analyst Day in November, this is the first quarter where we're utilizing the deferral method of accounting for CEV. And as such, we've recast our financials for the comparable periods.

Reported NFE of $44.7 million or $0.46 per share compared to NFE of $34.9 million or $0.38 per share in the first quarter of fiscal 2020. New Jersey Natural Gas saw an NFE improvement of $5.6 million due primarily to a full quarter of higher base rates from NJNG's fiscal 2020 rate case settlement as compared to a partial quarter a year ago.

CEV was down $2, primarily due to increased O&M expenses related to project maintenance costs, especially with new projects placed in service, which is partially offset by a decrease in depreciation expense.

Storage & Transportation saw a modest increase during the quarter, mostly related to increased operating income from Leaf River, and was offset by interest expense related to the acquisitions of Leaf River and Adelphia Gateway.

Energy services improved $6.6 million, primarily due to higher financial margin compared to last year, due to increased natural gas pricing spreads. Home Services and Other saw slightly lower operating revenue and slightly higher interest expense.

As Steve mentioned, we reaffirmed our NFE guidance of $1.55 to $1.65 per share for fiscal 2021. On Slide 11, you can see the segment contributions with our core businesses, NJNG and CEV, accounting for 80% of total NFE.

To help understand the distribution of our net financial earnings by quarter, let me walk you through how we expect NJNG's utility gross margin and CEV's revenues will occur. For NJNG, we expect to recognize approximately 70% of our utility gross margin in the first half of the year, in line with our historical trends.

At CEV, the majority of our revenue will come in the second half of the year, in particular the fourth quarter, when we expect to recognize the majority of our SREC revenue. We expect the net financial earnings contributions of our Storage & Transportation business to be fairly consistent throughout the year, because of the fixed price contracts.

On Slide 12, we've highlighted the details of our SREC hedging program. We continue to actively hedge to ensure SREC revenues are largely unaffected by future changes in SREC prices. Energy year 2023, we increased our hedge level to 75%. Comparing year 2024, market fundamentals and pricing remained strong with SREC trading at over 85% of SACP. And we now have 49% of our 2024 volumes hedged.

Turning to Slide 13. I'll explain some of the nuances to achieve the revenue recognition for the AMAs. Under the terms of the agreements, NJR will initially release the transportation capacity to our counterparty, and later on, will permanently release the contracts to the utility.

The accounting standard requires to allocate revenue to both the initial and permanent release. With the disproportionate amount of revenue signed to the permanent releases that occur in fiscal years 2024 and 2032. Subsequently, this allocation will generate a mismatch between revenue and cash proceeds.

This disproportion allocation of AMA revenue is why our 6% to 10% long term NFEPS growth guidance is based off of a lower base, excluding the NFE impact from NJRES and the AMAs.

Finally, I will note that while the revenue provides some general indication of the NFE, it does not reflect the impact of taxes, demand charges and other items. Importantly, though, the cash proceeds provides us with additional benefits that I'll detail shortly.

As you can see on Slide 14, we now expect our cash flows from operations to grow the CAGR of approximately 25% from fiscal 2020 to 2024 compared to our previous estimate of 20%. And as you can see from the chart on the right, the strength of our cash flows implies that our dividends are expected to become a smaller percentage, supporting our long term dividend growth rate of 6% to 10%.

Another benefit from the AMAs is the improvement to our credit metrics, which you can see on Slide 15. As we reported at our Analyst Day, our FFO to adjusted debt ratio is rising from fiscal 2022 to 2024. And when you have the positive impact of the AMAs, our metrics are expected to increase to the high teens in fiscal 2022, and reach about 20% by fiscal 2024.

And because of these strong credit metrics, we will cash settle the equity forward we put in place during our December 2019 equity issuance. At that time, we issued 5.3 million shares, and we entered into an equity forward to issue an additional 1.2 million shares at a later date, which we no longer need to do.

Also, as we mentioned during our Analyst Day, we have no block equity needs in foreseeable future.

I'll now turn the call back over to Steve for some closing remarks.

Thanks, Pat. Before I open the call to questions, I'd like to summarize the quarter. NJR is off to a good start for fiscal 2021 and on track to meet our NFEPS guidance for this fiscal year. We increased our fiscal 2022 NFEPS guidance by $0.15 per share, and we expect strong cash flow to support our dividend growth.

Our key infrastructure projects, SRL and Adelphia Gateway, continue to make progress, and we expect both to be in service this calendar year. Our improved credit metrics allow us to cash settle our equity forward.

And as we said in our Investor Day, we have no need for further block equity issuances. And we've made substantial progress in our commitment to de-risk the Energy Services business by providing more stable fee based revenue.

I want to thank all of our employees for their hard work throughout this past quarter. And now I'll open the call for questions.

(Operator Instructions) Your first question comes from the line of Gabe Moreen with Mizuho.

Just had a question on sort of the AMAs as well as I think the recent extension of the ITC credit and how that plays kind of into the 6% to 10% growth rate over the next couple of years. Is that a 6% to 10% growth that you think you'll be updating at some point for the AMA impact?

And, I guess, looking out to '23 and beyond, is there any reason to think -- and I read there's puts and takes on the tax rate and things like that. Is there any reason at least over that, call it, 1 to 4-year time frame, that sort of the $0.13 per share EPS impact that will be markedly different in those couple of years on the AMA impact? A couple of questions in there sorry about that.

Questions in there. But no, so I think the way to think about the AMA and our long term growth rate, as we said, we're anchoring our long term growth rate of 6% to 10% off our core businesses, and that's New Jersey Natural Gas and CEV, our infrastructure businesses.

And as Pat said a fair amount of time today, talking about the AMA and how it's adding positive benefits not only to Energy Services itself by de-risking the business and bringing in essentially fee-based revenue and earnings, but also the financial impacts are positive throughout the company.

So when you think about the long term growth rates, still think about it off our core infrastructure businesses. But certainly, quite a bit of enhancement by the AMA for the cash that's coming in and helping out our overall company and the balance sheet. So I think, thinking about it that way is the right way to go.

And then maybe if I could follow-up just in terms of some of the cash proceeds from the AMA, and also maybe in the context of the decision to cash settle the equity forward. How did you weigh that and weigh the additional cash coming in versus, let's call it, accelerating potentially investments at CEV or elsewhere? I'm just wondering kind of what that lets you do potentially in terms of investing maybe more than you would expect it to?

It certainly gives us options. It's nice to have the financial flexibility. But I think as we rolled out in our Investor Day, we've got what I think is -- it could be characterized as gradual ramp-up of investment in CEV. So we're making investments -- the investments that we're making in '21 and '22, not unprecedented things we've done in the past. And then we've got a ramp-up that's going into '23 and '24.

So we certainly have the option to accelerate should we see something, but we've got nothing to announce at this time. And really, our intention is to stick to our plan. And as we rolled out at the Investor Day and make the investments in CEV as we stated. But certainly, it gives us options, and it's nice to have that flexibility.

And just last one for me. Maybe you can just kind of update us on what COVID impacts have been sort of at the utility and sort of where you see that? What impacted the quarter and where you see that going?

We talked about it a little bit during the call, a little bit of a slowdown in customer growth, most likely due to just the tightening up in COVID restrictions. But still, we're not that far from where we were last year pre-pandemic if you compare to fourth quarter. A little bit of bad debt at the utility. But I think there's -- for the most part, we've identified our COVID impacts. Thank you.

(Operator Instructions) Your next question comes from the line of Richard Ciciarelli with Bank of America.

I just following up on Gabe's question on the long term growth rate, I understand you're doing it off the core business here. But just with Energy Services de-risk, any reason why you didn't elect to narrow the growth rate relative to the wider range of 6% to 10%?

So I think the Energy Services transactions that we alluded to during the call, a little bit chunky in how they're coming in and the payments that are being made. And really, we want to concentrate on our core infrastructure businesses and those businesses that are going to be growing and we can build upon as a company.

So the way we're thinking about Energy Services, and you've been covering us for a long time, remember this, when we've had large outsized gains at Energy Services, we certainly reported those and there were some good financial impacts from them. But it wasn't like we grew from those points. So I think as we talked about Energy Services, this transaction de-risks the business, brings in some stable fee based revenue, a lot of positives from this transaction.

And certainly, like I was saying to Gabe, the financial benefits as Pat Migliaccio outlined, certainly are there. But right now, we're going to just stick to the guidance off of our core businesses, and you can see the benefits from Energy Services as we described today.

And then just turning over to the utility. What are the expectations on the upcoming rate case filing there? And any potential that could be pushed just given we're still been a pandemic?

So Richie, I've got Mark Kahrer, who's our Senior Vice President of Regulatory with us today. And just remember, just that as the schedule goes, we are quickly coming to completion on the SRL project, so I expect that to be done by the end of this calendar year, which is going to trigger our rate case. But to give a little flavor on that. Mark, can you --?

Yes. So what we've said all along is that we're going -- try to time the rate case settlements to the in-service date to reduce regulatory lag. We think we'll be able to get that done. So we're looking to kind of file the case in the foreseeable future -- very near future, and we'll continue to work that and time that as approximately as we can.

With respect to the impacts to customers, there's just ways we're going to able to help them mitigate it through energy efficiency and other things. And we'll kind of have that benefit as well, making sure that customers are doing everything they can to reduce their bills. But we're also trying to get the worry out of customers that have been impacted to make sure that they seek energy assistance from us. We've been actively working that for a while now.

So, again, it's -- we're really trying to help the customers as much as we can. In that sense, we think one of the reasons why we continue year-after-year to get those -- the J.D. Power awards because our customers know they can trust us and reach out those on any of this.

And then just -- with the improvement on the -- your credit metrics given the AMA contract here. Have you had any discussions with the rating agencies on -- what that could potentially mean?

Richard, this is Patrick Migliaccio. So you may recall that New Jersey Natural Gas is the only rated entity through Moody's and both Fitch. And so the improvement in the credit metrics would be NJR writ large, which is not a rated entity.

Thanks Richie.

(Operator Instructions) Your next question comes from the line of Shahriar Pourreza with Guggenheim Partners.

It's actually Kody Clark on for Shahriar.

Hey, Kody.

So just back on the AMAs. Kind of wondering what the appetite is in the market for more of these agreements, would you be interested in them to further de-risk earnings?

And then is there a chance that if you were to enter into more of these contracts that you would be in a position to add NJRES back into the long term EPS growth rate?

So certainly, Kody, if we could do more of these transactions, that would align itself with our Investor Day messaging of de-risking our business and bringing more clarity and certainty around the revenues and earnings of that group. So we certainly would pursue that. Energy Services still has capacity in the portfolio to do so. It's just a matter of finding the right counterparty. So we'd certainly pursue that.

And, again, I think the thing -- the way to think about the AMA in context of the long term growth rate, we're still concentrating on the infrastructure parts of our businesses, the ones that we could build upon year-after-year and be able to grow our earnings and support our dividend and all the other financial metrics that we need to for our investors and customers.

And Energy Services business does have some variability to its income, so it's still going to be very supportive of the rest of our businesses. But I really look at it as -- almost like 2 different paths, Energy Services will be part of it. If we can build upon it, that we feel with enough certainty and that certainly would be comparable to the utility and our other businesses that we've got and got ability to rely upon that, then that's a potential for breakdown. As our Investor Day messaging has given out to the investor, we're really just looking at CEV, utility, grow in infrastructure and de-risking this business which the financial benefits that Pat outlined today are very attractive.

And then second on PennEast, the Supreme Court's willingness to hear the case is obviously positive. But it's still well understood that there are hurdles for the project to clear. I'm wondering what steps you would have to pass to be comfortable with adding PennEast back into the plan? What's the trigger point for adding at least Phase 1 back into the plan?

So PennEast is an important project. And certainly, you've seen this whole region that there's a gas constraint, and we need new pipelines to come into the region. So we're very supportive of PennEast. We're supportive from a contractual basis.

And I think to really dive into your question, there's a few other regulatory hurdles that would have -- that would have to be met for us to put that back in the plan. And not only met from a point of being able to work their way through them, but work their way through them in a way that we know the timing with some exactness.

So I think as PennEast continues to work through the process, and again, we're very supportive of PennEast and we'd like to see it get built. As they work through the process and they de-risk the project, at some point, we have clarity, then we may be able to put that back into the plan. But at this point, there's still a few more hurdles to go over. But positive development, Supreme Court hearing the case, we're certainly hopeful for the project moving forward.

There are no further questions at this time. I would like to turn the call back to Dennis Puma, Director of Investor Relations, for closing remarks.

Okay. Thanks again, Matt . I want to thank everyone for joining us today. As a reminder, a recording of this call is available on our website for replay. And I want to, as always, appreciate your interest and investment in New Jersey Resources. Thank you. Goodbye.

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