Q3 2021 New Jersey Resources Corp Earnings Call
Ladies and gentlemen, good morning. Good afternoon. Good evening my name is because of it and I'll be your conference operator today.
At this time I would like to welcome everyone to the N. G of the sources Q3, FY 'twenty 1 conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
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The press Star followed by the number 1 on your telephone keypad.
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I know in White Marsh.
Head of Investor Relations.
Your of please begin the conference itself.
Thank you Chad good morning, everyone welcome to New Jersey resources third quarter of fiscal 'twenty, 1 conference call and webcast I'm joined here today by Steve West of end of our President and CEO, Pat Migliaccio, Our senior Vice President and Chief Financial Officer, as well as other members of our senior management team.
As you know certain statements in today's call contain estimates and other forward looking statements within the meaning of the securities laws.
We wish to caution listeners of this call that the current expectations and beliefs, forming the basis for our forward. Looking statements include many factors that are beyond our ability to control or estimate precisely.
This could cause results to materially differ from our expectations as explained on slide 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.
We do not by including the statement assume any obligation to review or revise any particular forward looking statements referenced herein in light of future events.
We will also be referring to certain non-GAAP financial measures such as net financial earnings for NSE, We believe that NFC or net financial loss for 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 and today's earnings release and in item 7 of our 10-K.
Our agenda for today is found on slide 2 Steve.
Steve will begin today's call with highlights from the quarter, followed by Pat who will review our for Nick who will review our financial results.
Then open the call up to your questions.
The slides accompanying today's presentation are available on our website and were furnished on our form 8-K filed with the SEC. This morning with that said I'll turn the call over to our President and CEO, Steve West of Steve.
Thanks, Dennis and good morning, everyone. Thank you for joining us today.
This morning, we reported third quarter GAAP losses of $1.16 per share and a net.
The financial loss of <unk> 15 per share during the quarter, we incurred a 1 time after tax impairment charge of $72.7 million related to our investment in the Penn East project.
Well. 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 any of this important and needed project to serve energy demands from the northeast the.
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 removed <unk> 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 and EPS guidance to a range of $2.10 to $2.20 per share. This.
This guidance increase the third 1 for this year is driven by better than expected results at energy services and Rpgs's 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.
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 $350.15 million Capex target for fiscal year, 'twenty, 1 and 'twenty, 2 either operational or under construction or under contract.
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Leaf River, our natural gas storage facility in Mississippi increase the long term commitments of new and existing customers significantly de risking our future revenues and finally adelphia gateway received of FERC notice to proceed for construction of laterals and Interconnects in the South zone of the project, we expect a place of number of it.
Delphi is project facilities into service by the end of this year.
Turning to slide 4 we wanted to provide an update on the progress made on some of the initiatives. We discussed during our analyst day last November at New Jersey Natural gas, we completed the construction of S. R. L and file the rate case. We're also excited the report that construction has begun on our first green hydrogen project. This is an important step of the de carbonization strategy.
<unk> laid out during our analyst day, it furthers our ongoing efforts to Decarbonize our business as we move towards the future that includes more low and zero carbon fuel sources as.
As promised we began to diversify our CV project pipeline nearly 25% of our fiscal year 'twenty, 1 and 'twenty 2 capacity target is expected to come from projects outside of New Jersey. We also took steps to reduce the volatility of Ceb's earnings by adopting the deferral method of accounting for Itc's, 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 de risked 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 and adelphia gateway 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 <unk> to be in service by the end of this month it will no longer be treated as a post test year adjustment.
In total we are now requesting an increase to base rates of almost $164 million.
The rate case is progressing as scheduled and we hope that the <unk> 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 million. So far this year was about 25% of the capex, providing in near real time return and despite the pandemic we added over 5400 customers. So far this fiscal year.
Turning to slide 7 as part of the de Carbonization 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. This will create awareness with our regulators and policymakers to build expertise to allow us to scale as the market continues to develop using.
Using electricity source from adjacent solar facility, what are the separated into hydrogen and oxygen and the carbon free hydrogen will be blended into our distribution system. We expect the project to being serviced this fall and once completed will be the first utility on the east coast directly injecting green hydrogen into an existing natural gas distribution system.
Green hydrogen is and the only alternative fuel opportunity of that New Jersey natural gas is pursuing and on slide 8 you see that we are working toward a broader sustainability strategy focused on decarbonising of our core infrastructure.
In addition to our hydrogen project, we're exploring investment opportunities in renewable natural gas within our service territory.
R&D and hydrogen technologies continue to scale, we expect that our existing natural gas distribution system will deliver more decarbonize 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 of practical path towards day.
Carbonization for both 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 CEB of slide 9 through the first 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 in fiscal <unk> to fiscal 2022, due to pandemic related permitting and interconnection issues and while these challenges have.
<unk> impacted project completion in fiscal 2021, we view these industry wide impacts of short term.
Moving to slide 10, you will see our commercial Capex target remains at $315 million for fiscal year, 'twenty, 1 and 'twenty 2.
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, Ceb's continues to diversify and grow its project pipeline through expansion efforts outside of New Jersey.
Turning to slide 11 on July 28, the Btu approved the initial phase of the New Jersey Solar successor program.
Announcing incentives for landfill the 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 <unk> and T. Rec programs. The current direct program will close to new applications on August 27th and the New program <unk> 2 will open to new applications on August 28.
We are pleased to report that more than half of our fiscal 'twenty..1 of 22, New Jersey projects had been secured under the <unk> program.
And that percentage may increase based on pending applications.
<unk> is committed to its solar industry targeting 750 megawatts per year of new capacity through 2030.
And as part of the New program rollout. The state is committed to access assess progress. After 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 obtained for both phases, 1 and 2 of the Adelphi Gateway project during the quarter of the project received its FERC notice to proceed for phase II of the construction on the South zone, which includes key laterals and Interconnects with Columbia, Transco and Pico as.
As you May recall construction of Phase 1 began last October we expect a number of adelphia gateway facilities to the operational by the end of this year and our expectation is the project will be fully in service by the end of 2022.
<unk> remains on track to achieve a 4 year adjusted EBIT CAGR of 20% as we discussed at our analyst day.
Slide 13 details details of the progress that we have made towards derisking storage and transportation 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 that we forever, we have secured $45 million of additional contracts through fiscal 2020 for it with new and existing credit worthy 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 NFC for the third quarter.
We reported the net financial loss of $14.1 million for <unk> 15 per share compared to NSE of $2.7 million for <unk> per share of the third quarter of fiscal 2020.
<unk> was lower due to the O&M expenses for the increased bad debt and compensation expense.
<unk> saw a modest increase in FTE, the lower depreciation expense, partially offset by increases in O&M expenses, where the project maintenance and leasing.
The T was lower primarily due to higher interest expense for the Adelphi gateway the leaf river acquisitions.
The new services was down $5.9 million to the timing of certain storage hedges.
Also although excluded from NSE, we incurred of $92 million or $72.7 million of after tax impairment charge on the investment of the Penney's project since the previously removed pennies from our financial projections impairment has no impact of our ability to achieve our long tremendous EPS dividend in cash flow from operations growth targets.
On slide 16, I'll summarize the evolution of our MSP and the EPS guidance for fiscal years 2021 of 2022.
This figure of 2020 of what was going to be a reset year with lower end of fee than in fiscal 2020, due primarily to the change the accounting method for itc's going from closer to the deferral of 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 NSE PFS guidance due to the outperformance of the energy services, resulting from winter storm Yuri.
Today, we are increasing our fiscal 'twenty, 1 guidance again due to both of expected results from <unk>. The GSS incentive program and also in new services driven.
Drew my volatility associated was slightly warmer than normal weather in the summer coupled with certain of Interstate gas pipeline constraints.
Fiscal year 2022 bps guidance was originally in the range of 2 of 5 to $2.15 per share.
Subsequent to the analyst day, we announced the energy services had entered into a number of asset management agreements with investment grade rated utility.
During the Q1 earnings call, we raised our EPS guidance for fiscal 2022 for range of between $2.20 to $2.30.
And then the services <unk> and today, we are affirming our fiscal 'twenty 2 of your guidance range of $2.20 to $2.30.
Turning to slide 17, I'll take into some highlights of our capital plan for fiscal 'twenty, 1 'twenty 2.
For <unk>, we expect our capital spend for those years to come in line with low projected during our November analyst day.
As Steve mentioned earlier, we saw the in service dates for many of our CEB commercial projects shift of fiscal 2022 the.
The capital related to the projects placed in service for the fiscal year to date is about $17 million.
While the total capital spend including construction work in progress for CEB is approximately $50 million.
We've adjusted our capital plan Accordingly for fiscal 'twenty, 1 we now expect to spend between 50, and 60 million of TV compared to our prior forecast of approximately $66 million to $88 million and.
For 2022, we now expect to spend of around $280 million compared to our prior estimate of $250 million.
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 with cash of over the last portion of the equity for that we have in place related to our December 2019 equity issues.
On slide 19, we highlight the details of our Src hedging program, we're well hedged for the next 300 years now of 94% of our 2020 for volumes hedged.
The market fundamentals for engineers 25 of 26 of our supporting strong pricing unless it's trading at or above 85% of the CCP.
37%, 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 for questions I'd like to summarize the quarter.
<unk> continues to deliver strong results for the first 9 months of this year the strength of our business led by energy services in New Jersey Natural gas has allowed us to increase <unk> <unk> EPS guidance for the third time. This year our rate case continues to progress on schedule and we look forward to a resolution later this year <unk> is now complete and we.
At the B in service later this month, our CEB project pipeline remains strong with over 70% of our targeted capex either operational or under construction or under contract. We received FERC approval and began construction of the second phase of Adelphia Gateway and leaf river significantly derisked 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 will now open the call for questions.
Thank you very much.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number 1 on your telephone keypad.
We will pause for just a moment to compile lead off still.
The first question is from the line of Gabe Moreen from Mizuho. Please go ahead.
Good morning, everyone.
Okay.
Yeah. Good morning, I was just wanted to maybe start off and ask on sort of the of the hydrogen and potential orange of your 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.
For the build additional plans on your existing sites for example.
And then as far as R&D goes can you just remind us what the latest developments are in terms of regulatory treatment of round RMG, whether its the rate basing your own investments or being able to pass through.
R&D costs or cost of gas to customers and recover those costs. So just curious how youre thinking about kind of going down that RMG path.
Okay. So Gabe I'll answer the first question just broadly so injecting hydrogen into our system, it's not a new technology theyre 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. 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 delivered to our customers and really the proved 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 R&D.
Opportunities within our service territory, but I'm going to ask Mark Harris Who's the senior Vice President head of regulatory the 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 1 would be of direct investment in the processing plant. We believe we have the authority under what was the 2005 revenue legislation that enabled us to invest not only in energy efficiency, but also in renewables as well and the definition of the renewables platform renewables and modify.
By the state the number of different times, which incorporates renewable natural gas. So we believe we have the authority will continue continue to have discussions with our regulators about that this is also pending legislation thats been introduced in the state also to encourage the GPU to new take closer look at R&D of hydrogen and ensuring that not only direct investment.
And operations of those assets, but also procurement of renewable natural gas would be under under their authority renewed.
Effectively within the state of the begin decarbonising the gas streams as well so the second opportunity would be of direct purchase from from another facility that whether it's the food waste out of.
Aerobic digester for another processing plant, that's taking the landfill gas.
Yes.
And of cleaning it up and having it ready to be of injected for align and basically buying it like it's the third party volume from the third party of inject directly into our system. So we believe we have authority to do all of that now, but again, it's something that we'll continue to work with our regulators to ensure that everybody's on the same pace as we go forward with this.
Thanks Mark.
Just as a reminder, from a capital planning perspective, we've only included the 1 of the hydrogen pilot projects for the potential of RMG opportunity.
Investments total between 30% and $40 million over the next 2 years and ultimately support the double digit rate base CAGR that we talked about at our analyst day.
Okay 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 youre seeing some sort of uplift relative to the prior contract.
So a number of those were in motion priority 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 of reliable energy mix that quick turn storage is 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 certainly.
Very supportive of essentially the market going forward.
Great and then last 1 for me if I can just on the C vs side of things if I'm hearing you correctly it doesn't sound like the shifting regulatory landscape of New Jersey.
As altering either your Capex plans in the state versus out of state and can you just speak to whether or not.
The the shifting landscape all tiers of the earnings trajectory significantly here over the next call. It 24 months over the fall of the plant.
It doesn't it doesn't altered it I think what we expect the new Jersey spin of strong supporter of solar for for quite some period of time on the <unk>.
You look at the target capacity that they want to install every year. Its about 750 megawatts per year and typically we've been starting about 300 megawatts per year over the past 10 years. So I think that that's the statement in itself and we expect that the the programs at the rolling out that we'll be able to participate and we're optimistic for the future.
<unk>.
We're not expecting to change any any guidance that we've given in the past due to this.
Great. Thanks, Steve Thanks, everyone. Thanks again, thanks kit.
Thank you.
Our next question is from the line of Travis Miller from Morningstar. Please go ahead.
Good morning, everyone.
Travis.
I'm, assuming you've had a constructive outcome in the rate case and as you look at the capital plan, What's your thought in terms of <unk>.
Medium term timing on going back to regulators for either rate relief or potentially even some kind of.
The project specific type of track or something like that.
Sure.
Okay.
So I'm going to ask Mark Harris to answer that question. So Travis.
We are taking a look at all of the timing of our next rate case. The next base rate case that was in our Investor day, We think that's somewhere out in the 'twenty 3 'twenty for timeframe.
Engine upon the completion of the projects, where we're basically expanding substantial capital on both the replacement of the work of asset management system and the customer information system.
With respect to other infrastructure trackers that we might have.
Right now assessing as we wrap up our phase II program.
What a success of program for that May look like so we do have.
The.
Average price of that where the code.
Yes.
South Dakota existing right now it is cathartic, we protected so assessing both the timing of that investment and the timing of that of that infrastructure tracker as well.
Okay, Great and then just the follow up on the previous question about the incorporation of the hydrogen system.
Do you think there's regulatory bag.
Backing or.
[noise] 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 the Travis I mean, it's certainly aligns itself with the Governor's energy Master plan.
Certainly decarbonising.
Our fuel stream the delivery to the our customers. So I think the way the way to answer that question is that we're working through the process now we've got an ongoing rate case and certainly a project that's active.
We're optimistic that due to the alignment with the administration.
That we should be able to receive some regulatory treatment of that for our customers.
Okay.
Just real quick clarification would you anticipate putting that the project is going on right now of the power to gas in the.
Future rate case or have you already talked about.
The potential tracker, if UDC stuff like that.
So that project is part of our filed rate case that will.
Hopefully conclude at the end of this calendar year.
Okay, great. Thanks, so much of that Ryan.
Right, Thanks for having the extra.
Thank you very much.
Participants if you would like to ask a question. Please press Star then the number 1 on your telephone keypad.
Our next question is from the line of Julien Smith from Guggenheim Partners. Please go ahead.
Hey, its actually Cody Clark from Bank of America here Okay.
Okay.
<unk>.
So so maybe if we can go back to the solar successive program quickly and I think previously you are assuming.
<unk> 9 the factor on the T Rex 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 the new incentive level. What are you assuming for for new projects. What insights of level are you, assuming and then I guess, how does that revenue mix change.
The change going forward.
So Cody Pat is going to answer the question on the details with the T Rex factors.
Good morning, it's Patrick Liao of trio I think obviously there.
Number of variable incentives underneath the successor program.
And so our prior assumption as of the analyst day that we baked in was it roughly 50% of our projects would of been sourced within New Jersey, 50% outside of New Jersey, as we communicated that was a planning assumption.
Ultimately what we have.
Actually seen to date is that 20% of of the projects are out of state, leaving of the majority of in state.
The success of program was 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 communicated closer to that 7% 7.5% IRR and so that's the way that.
Youre getting to a modeling question here, which is you should think about of support level that gets you to that 7% to 7.5% IRR.
Okay got it and then just on the 750 megawatts all of that New Jersey has outlined versus kind of what we've been seen historically at that 300 megawatt level.
Wondering what's 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.
Ends up playing out.
The the BP will be doing the solicitation for larger projects and will be participating in that.
But as things progress, we'll certainly.
Keep keep everybody informed how we are doing.
Got it Okay, and then sorry, the stick with the clean energy ventures theme here, but.
It looks like you've narrowed your capex estimates on the commercial solar side this quarter over quarter.
Whats driving that confidence.
And being able to narrow your capex range.
The second to that how are you seeing the kind of inflationary backdrop that we've seen the panels in freight and everything how is that playing into that.
So.
The patent that were just motion who's going to take the question. So I'll take the second part of the question as far as the inflationary. So if you look at the projects that we have in the pipeline for the next 2 years, we largely have.
I guess the majority of the materials purchased are locked up as far as it goes so where.
We'd be dipping into late 'twenty 2 early 'twenty 3.
The 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 sort of coty in terms of the or the range. It really ties back to the fact that we've got over 70% of the projects identified the pipelines. So clear line of sight on what those projects look like what the cost.
So the confidence of the pipeline allows us to narrow the range of the capital plan.
Okay understood. Thanks, so much for your time.
Thanks Scott.
Okay.
Yes.
Thank you very much.
Yeah.
Arnaud for the questions I now hand, the conference over to the <unk>.
The centers.
Please go ahead.
Okay. Thank you said.
1 of the 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.
Yeah.
Thank you very much.
Ladies and gentlemen. This concludes today's conference call you may now disconnect your lines. Thank you.