New Jersey Resources - Q3 2024

Transcript

Operator (participant)

Hello, my name is Ellie, and I will be your operator for today. I would like to welcome everyone to New Jersey Resources Fiscal 2024 third quarter conference call. For those of you listening on the live call, all participants will be on listen mode only. After today's participation and presentation, there will be an opportunity to ask for questions. If you'd like to ask a question during that time, please press star one. Thank you. I'd now like to hand over to Adam Pryor, Head of Investor Relations. You may now begin.

Adam Pryor (Head of Investor Relations)

Thank you. Welcome to New Jersey Resources fiscal 2024 third quarter 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. 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 of 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 one.

These items can also be found in the forward-looking statement section of today's earnings release, furnished on Form 8-K, and in our most recent forms 10-K and 10-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 earnings, utility gross margin, financial margin, adjusted funds from operations, and adjusted debt provide a more complete understanding of our financial performance. However, these non-GAAP financial 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.

The slides accompanying today's presentation are available on our website and were furnished on our Form 8-K filed this morning. Our agenda for today is found on slide four. Steve will begin with this year's highlights, followed by Roberto, who will review our financial results. Then we will open up for your questions. With that said, I will turn the call over to our President and Chief Executive Officer, Steve Westhoven. Please go ahead, Steve.

Stephen Westhoven (President and CEO)

Thanks, Adam, and good morning, everyone. We had a solid quarter at NJR as our complementary portfolio of businesses performed in line with our expectations, and we remain on track to achieve our fiscal 2024 NFEPS guidance of $2.85-$3 per share. I'll take you through the highlights, as shown on slide 5. At New Jersey Natural Gas, our rate case is proceeding as expected, and we anticipate a resolution before the end of 2024. Clean Energy Ventures reported a solid year-over-year revenue growth while continuing to expand our robust project pipeline. This provides a long runway of investment options that deliver a minimum of high single-digit unlevered returns for each project, along with upside potential from increases in power demand. This quarter, we also saw solid contributions from S&T and performance from Energy Services that was in line with expectations. Moving to slide six.

In November, we provided an initial NFEPS guidance range of $2.70-$2.85 per share. In February, due to our outperformance at Energy Services, we increased this guidance by $0.15 per share to $2.85-$3.00 per share. As discussed in prior calls, we expect our fiscal 2024 to exceed our long-term growth rate of 7%-9%. Slide seven outlines the expected NFEPS percentage contribution by business segment for fiscal 2024 and beyond. This year, Energy Services will represent a higher percentage than prior years due to the AMAs and recent out performance. However, in future years, we expect to return to a more normalized segment breakout, with over 60% of our NFEPS coming from our utility business. Now let's discuss our business units, starting with New Jersey Natural Gas on slide eight.

We have invested $345 million year to date at New Jersey Natural Gas in fiscal 2024, with 43% of that CapEx providing near real-time returns. This includes the Save Green Program, which helps customers lower their energy usage. In June, Save Green reached a milestone, serving our 100,000th customer since its inception in 2009. Over the lifetime of this program, participating customers have significantly cut their energy bills and reduced their carbon emissions by over 312 million pounds, equal to the energy use of over 18,000 homes. Congrats to the entire Save Green team on this accomplishment. Customer growth has remained steady all year, driven by a combination of both new construction and conversions.

We also see unique business opportunities that should help drive growth well into the future, such as the redevelopment project in Monmouth County to transform a mall into multifamily units, along with retail, commercial, and medical spaces. Turning to slide nine, our base rate case is progressing as planned. In May, we adjusted our filing to include nine months of actual results and aim to reach a resolution that balances our customers' and company's interests by the end of 2024. Moving to slide 10. Clean Energy Ventures continued to add new solar capacity during this fiscal year. We are also growing our solar pipeline, which now includes over 870 megawatts of potential investment options, with an additional 51 megawatts under construction. Finally, on slide 11, our S&T business met expectations this period.

Last quarter, we announced the start of a capital investment project at Leaf River to expand working capacity within our caverns. We completed an open season and contracted a portion of that capacity at terms that will pay back the full cost of that investment in less than four years.... And with that, I'll turn the call over to Roberto to review our financial results. Roberto?

Roberto Bel (Senior VP and CFO)

Thank you, Steve, and good morning, everyone. Slide 13 highlights the main drivers of our NFE for fiscal 2024 third quarter and year to date. We reported a net financial loss of $8.9 million, or $0.09 per share, compared with NFE of $9.7 million, or $0.10 per share last year. The quarterly results of our business segments were consistent with our expectations, with steady margin contribution at NJNG and Energy Services, and higher revenues at CEV and S&T compared to the prior period, offset by increased depreciation and interest expenses. Clean Energy Ventures reported a net financial loss for the period of $6.7 million. The difference from the prior year period was due to a resolution of an income tax valuation allowance last year that did not reoccur.

Looking ahead, we expect a significant year-over-year increase in NFE for the upcoming fourth quarter, as Energy Services will recognize a substantial portion of the asset management agreement's total revenue during the period. Turning to our capital plan in slide 14. Over the next two years, we expect to invest between $1.2 billion and $1.5 billion across the company. For fiscal 2024, we have tightened our overall CapEx range with slight increases at NJNG and S&T, offset by a reduction in the top end at CEV. For NJR as a whole, the midpoint of our total CapEx remain largely the same for the year. In November, we'll update our CapEx expectations for fiscal year 2025 and provide fiscal 2026. Our capital projections are anchored by strong cash flow from operations.

On slide 15, we expect cash flow from operations to range between $420 million and $450 million in fiscal 2024. Slide 16 displays NJR's credit metrics. We project NJR's adjusted FFO to adjusted debt to be between 17%-18% this year. And while we have no plans to issue block equity, our existing Dividend Reinvestment Program includes a waiver discount feature that allows us to raise equity on an opportunistic basis. Slide 17 provides a breakout of our long-term debt, which is fixed rate with no significant maturities in any particular year. We don't have any debt maturities for the rest of fiscal 2024 and maintain substantial liquidity at both NJR and NJNG. With that, I'll turn it back to Steve for concluding remarks on slide 18.

Stephen Westhoven (President and CEO)

Thanks, Roberto. In conclusion, NJR continues to deliver long-term value for its shareholders, anchored by our regulated utility and the infrastructure investment opportunities provided by the other business segments. Our rate case is progressing on schedule, and we look forward to a resolution later this year. To summarize, we offer investors an attractive 11%-13% expected total return based on our long-term NFEPS growth rate of 7%-9% and a current dividend yield of approximately 4%. We expect to grow our dividend to our shareholders in line with our earnings, as NJR has raised the dividend every year for the last 28 years. Our next dividend announcement will come in September. We appreciate that you took the time to join us today, and I'd like to recognize and thank our employees for all their hard work and dedication that drives our performance.

Let's now open up the call for questions.

Operator (participant)

Thank you so much. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star one. Our first question comes from Richard Sunderland from J.P. Morgan. Your line is now open.

Richard Sunderland (Senior Analyst)

Hi, good morning. Thank you for the time today.

Stephen Westhoven (President and CEO)

Hey, Rich.

Richard Sunderland (Senior Analyst)

Starting with the rate case, is everything still progressing as expected towards a settlement? I'm just looking at the slide language here on settlement discussions and curious if we should expect an announcement, I guess, either this month or next under that timeline?

Stephen Westhoven (President and CEO)

Hey, Rich, this is Steve. I'm going to ask Pat Migliaccio to take that question.

Patrick Migliaccio (Senior VP and COO)

Hey, Rich. You know, just as a reminder, this is a base rate case, investments around safety, reliability, and some IT investments. With the filing of our 10-Q today, that will pave the way for us to file a 12 and 0 with the Board of Public Utilities in the next couple of days. But as far as some of the discussions, they're progressing as we would expect them to, and no change to our previously communicated timing guidance, which is we expect to finalize the rate case with rates effective sometime in our first fiscal quarter of 2025.

Richard Sunderland (Senior Analyst)

Got it. Thank you for that. And then turning to CEV, can you quantify your open megawatts, and if power prices could be a tailwind to 4Q or even put 2025 earnings above the 7%-9% outlook range?

Stephen Westhoven (President and CEO)

So we've got a little bit of this fiscal year left and a little bit of, I guess, megawatt pricing to do for the rest of the season. You can, I guess, look to years past to determine, you know, how that could impact our earnings going forward. But, you know, I would expect to characterize it, you know, should be relatively, you know, minor contribution, you know, for this year, depending on where power prices go.

Richard Sunderland (Senior Analyst)

Great. Thank you for the color there. I'll leave it there. Thank you.

Stephen Westhoven (President and CEO)

All right. Thanks, Rich.

Operator (participant)

Before we move on to our next question, again, if you'd like to ask a question to our presenters, please press star one. Again, that's star one on your telephone keypad. Our next question comes from Travis Miller from Morningstar. Your line is now open.

Travis Miller (Senior Equity Analyst)

Good morning, everyone. Thank you.

Stephen Westhoven (President and CEO)

Good morning, Travis.

Travis Miller (Senior Equity Analyst)

I guess I was gonna ask Richard's question, but I'll ask it kind of a different way or clarify if I didn't hear you correctly. The open megawatts and then the high level, what are you seeing in terms of pricing? Is it stronger, weaker than you expected? Not necessarily for earnings, but just in general in the market, how are you seeing solar pricing?

Stephen Westhoven (President and CEO)

So I mean, you know, you can see the pricing as well as we can. If you look at PJM daily liquidation, you know, where pricing is occurring on a daily basis. I can't say that it's been, you know, remarkable, you know, for this summer in comparison to previous summers. But like I just said to Rich, if you're looking at an indication on, you know, how it may impact us, you can look at years past. But I think all in all, you know, not much of the fiscal year left, you know, for us, and you'd have to see some extreme pricing to make significant change in our earnings for this year.

Travis Miller (Senior Equity Analyst)

Okay. And about how much do you still have to price?

Stephen Westhoven (President and CEO)

You know what? I don't have that number off the top of my head. But if you look at our portfolio and our irradiance, I'm sure you can calculate it out on, on how much that we price on a, on a daily basis, especially, you know, considering, you know, big portions of our portfolio are grid connected.

Travis Miller (Senior Equity Analyst)

Okay. Okay, very good. And then staying on that subject cost side, what are you seeing in terms of your growth? Not necessarily CapEx, but just growth in solar costs. What are you seeing on the cost side for your new projects?

Stephen Westhoven (President and CEO)

You know, I think they've been pretty steady, characterized. If you're talking about our costs and, you know, cost of development, just our normal, you know, construction. I think things have been steady, you know, for, you know, for the, I guess, recent past. Nothing remarkable there, you know, either. The only thing I'd add there is that, you know, the states are still have a pretty robust in support of the Renewable Portfolio Standard. So we're still able to make investments, and you can see the size of our portfolio continues to grow as well.

Travis Miller (Senior Equity Analyst)

Okay, perfect. And then different subjects, high level, everybody's asking the electric utilities about data centers. From your perspective, I've understood that a lot of gas utilities are seeing demand or have had demand for a while from data centers in terms of either, primary or backup generation. What does it look like in your service territory? Have you had data center customers for a while? Are you seeing demand for that, either backup or primary on-site gas generation or service?

Stephen Westhoven (President and CEO)

So we don't have-- I don't believe we have any data centers within our service territory at this point. But I'd add to that, that, you know, the increase in, you know, electric use, the increase in need for reliability, you know, matches up nicely with our portfolio across really all of our, our companies. That reliability, the need for, you know, constant electricity in order to run those facilities, you know, whether it's, our utility and the infrastructure there, you know, our S&T assets, you know, supportive of, you know, power prices or, you know, our CEV portfolio, you know, volatility that gets introduced for our energy services segment. You know, all those business units, you know, should participate in this market as it becomes tighter and there's a greater demand for power and reliability.

Travis Miller (Senior Equity Analyst)

Okay. Sure thing. Yep, appreciate it. That's all I had.

Stephen Westhoven (President and CEO)

Thanks, Travis.

Operator (participant)

Our next question comes from Michael Gaugler from Janney Montgomery Scott. Your line is now open.

Michael Gaugler (Managing Director and Senior Research Analyst)

Good morning, everyone.

Stephen Westhoven (President and CEO)

Hey, Mike.

Michael Gaugler (Managing Director and Senior Research Analyst)

Steve, I got one more power price question for you. So as you're looking forward, future planning for CapEx, you know, does it make you want to invest more in the sector, given where power prices are going, given what you're seeing, you know, particularly in the—like you referenced, the high prices we're seeing in PJM?

Stephen Westhoven (President and CEO)

Yeah, you know, I think, you know, like I just said to Travis, you know, it supports all our infrastructure, infrastructure investment. It, it really supports our general strategy in growing that infrastructure, going forward. You saw the recent PJM capacity auction, that was 10 times where it was previous year. You know, that's a real market signal that's been put out there, and certainly there's a lot of anecdotal market signals that have been supportive as well. So, you know, I, I'd answer yes. You know, it certainly supports, you know, our business and really the strategy that we've been talking about for quite some time.

Michael Gaugler (Managing Director and Senior Research Analyst)

Does it make sense to look at projects that are actually already operating?

Stephen Westhoven (President and CEO)

Yeah, I mean, you know, we've done that as a course of business in the past, you know, whether that's a portfolio at CEV or, you know, an operating asset at S&T. We've looked at those in the past, so, yeah, I'd say yes to that.

Michael Gaugler (Managing Director and Senior Research Analyst)

Okay, and then one last one. For the S&T segment, you know, beyond what you're doing at Leaf River, to expanding capacity, where are you focused on in terms of future expansion of that business?

Stephen Westhoven (President and CEO)

You know, anywhere that we can get, you know, a contract that's long-term that can support the expansion, whether it's Delphi Gateway, or whether it's at Leaf River, and, you know, we can essentially grow organically. You know, making it easy to get permits, you're, you know, connecting to an existing asset. You know, anything that's supportive, you know, we'll look at. You know, we don't have anything to announce beyond what we've talked about already in terms of organic expansion. But, you know, know that we are, you know, pursuing that.

Michael Gaugler (Managing Director and Senior Research Analyst)

All right. That's all I have, gentlemen. Thank you.

Stephen Westhoven (President and CEO)

All right. Thanks, Mike.

Operator (participant)

Our next question comes from Robert Mosca from Mizuho Securities. Your line is now open.

Robert Mosca (Stock Analyst)

Hey, good morning, everyone.

Stephen Westhoven (President and CEO)

Hey, Robert.

Robert Mosca (Stock Analyst)

Just wondering if you guys could talk about some of the business opportunities you referenced in your customer growth commentary. Just wondering how significant that is, and is this something that's already captured in your 7%-9% growth outlook?

Stephen Westhoven (President and CEO)

Hey, hey, Rob, I'm gonna ask Pat Migliaccio to take that question.

Patrick Migliaccio (Senior VP and COO)

Hey, Rob. So look, as we think about the customer growth, we're still in that, you know, 1.7% marker. Really included that just to illustrate that as you think about New Jersey strategically, but more specifically our service territory, this is a growing and vibrant service territory. So we've got a lot of tailwinds both from the new construction market, cause you continue to see people coming into the Monmouth, Ocean counties specifically. But then also a very healthy conversion market, because there are a number of customers who are still on oil, propane, and the like, converting over. So, I would characterize it as something that's generally supportive of the utilities growth rate.

Robert Mosca (Stock Analyst)

Appreciate it, Pat. And maybe turning to Leaf River, looking at that request for, for authorization to use, some of those leaching facilities for hydrogen storage. Just wondering what the latest on that is, and, and how does that, what's that interplay with this working capacity expansion, that you seem to have ID'd on the gas side?

Stephen Westhoven (President and CEO)

So, you know, we're keeping all our options open, you know, data at Leaf River and certainly exploring, you know, like I said to Mike before, you know, every option that was available to us in order to expand, you know, our S&T assets. There's been a lot of, you know, market, you know, pull in that area. You've seen that in the contracts that have been executed out there, you know, certainly elevating in price. So I think the view on that, at this point, is a, is a marker that basically preserves our position in order to expand in that fashion. You know, we don't really have anything to announce just yet, but you can see how we're thinking about that asset and the many uses that it might be able to be applied to this market.

Robert Mosca (Stock Analyst)

Got it. That's helpful. And maybe just a quick last one for me, on the subject of power. Just wondering, did electricity sales become more of a factor in where you decide to locate some of these solar projects, or are the economics still really gonna be focused on, you know, what the solar credits look like in the space that you do construct?

Stephen Westhoven (President and CEO)

Yeah, I think, you know, you know, power prices and, you know, power moves so quickly, it, you know, it's pretty fungible. I know there's certain areas that you've got, you know, constraints, and you can have some price pops. But for the most part, you know, there's a hierarchy of areas that we need to clear in order to build a solar project. You know, having the land, having the interconnectability, you know, having the right, you know, transaction with the developer, so on and so forth. I think those would take more of a precedent. I believe that, you know, power, for the most part, as it increases, you know, will increase, maybe not uniformly, but, you know, generally speaking, you know, that rising tide will lift all boats in that way.

Roberto Bel (Senior VP and CFO)

I mean, maybe just one thing to add there, Rob, to Roberto, is that just keep in mind when you look at our assets, right? That this type of revenues, the piece that comes from power is very minor, right? On a regular year, it's about 10%-15% only. So we look at it in, you know, in that lens.

Robert Mosca (Stock Analyst)

Understood. No, that's helpful, and... All right, have a great day, everyone.

Stephen Westhoven (President and CEO)

All right. Thanks, Rob.

Operator (participant)

Again, if you'd like to ask a question, please press star one. That is star one. Thank you. So far, we don't have any pending questions. I'd now like to hand it back over to Adam Pryor for further remarks.

Adam Pryor (Head of Investor Relations)

Thank you, Ellie. I'd like to thank everyone on the call here today for joining us, and as always, we appreciate your interest and investment in NJR. Thank you so much, and have a good rest of your morning.

Operator (participant)

Thank you, everyone, for attending today's call. You may now disconnect. Have a wonderful day.