Q1 2024 New Jersey Resources Corp Earnings Call

Participants

Adam Prior; Director - Investor Relations; New Jersey Resources Corp

Steve Westhoven; President & CEO; New Jersey Resources Corp

Roberto Bel; Chief Financial Officer, Senior Vice President; New Jersey Resources Corp

Richard Sunderland; Analyst; JPMorgan Chase & Co.

Shar Pourreza; Analyst; Guggenheim Partners LLC

Chris Ellinghaus; Analyst; Siebert Williams Shank & Co LLC

Roger Liddell; Analyst; Clear Harbor Asset Management LLC

Gabe Moreen; Analyst; Mizuho Securities USA LLC

Presentation

Operator

Thank you for standing by. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources fiscal 2024 first quarter conference call. (Operator Instructions)
I would now like to turn the call over to Adam Prior, Director of Investor Relations. Please go ahead.

Adam Prior

Thank you. Welcome to New Jersey Resources' fiscal 2024 first 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, which 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 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 statements referenced herein in light of future events.
We'll also be referring to certain non-GAAP financial measures, such as net financial earnings or NFE. We believe that NFE, net financial loss, 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 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 Form 8-K filed this morning. Our agenda for today is found on slide 4. Steve will begin with this quarter's highlights, followed by Roberto, who will review our financial results. Then we will open the call for your questions.
With that, I will turn the call over to our President and CEO, Steve Westhoven. Please go ahead, Steve.

Steve Westhoven

Thanks, Adam. Good morning, everyone.
Fiscal 2024 is off to a good start. We delivered strong performance in the first quarter. Positive momentum continued in the start of the second quarter as, energy services outperformed in January, capitalizing off weather volatility. As a result, we are announcing a $0.15 increase in our NFEPS guidance to $2.85 to $3 per share.
Before we discuss our quarterly results and forecast more fully, I'll begin with an update on our sustainability and decarbonization efforts on slide 5. Last month, we issued NJR's fiscal 2023 corporate sustainability report, our 15th consecutive report, dating back to 2008. This report is an important part of our commitment to transparency with all of our stakeholders in the evolving energy landscape. It details our leadership and accomplishments in emissions reduction and renewable energy, as well as our long-term vision for the role of existing pipeline infrastructure in a lower-carbon future. Just as important, this year's report also shows how the strong culture of innovation in our organization is having a positive impact on how we execute strategies, engage in dynamic partnerships, and deploy cutting-edge technology in new ways.
I'd like to cover just a few of the report's highlights. Last year, we invested approximately $60 million in SAVEGREEN, New Jersey Natural Gas's energy efficiency program. Clean Energy Ventures continued to innovate, commissioning the largest cap landfill and floating solar arrays in North America. We advanced cutting-edge lower-carbon energy solutions, including the installation of localized carbon capture technology at our Wall, New Jersey headquarters and high-efficiency gas heat pumps at other facilities in the state. And as I mentioned, we engaged in new partnerships with a number of well-known academic and research entities to support our innovation efforts. Finally, NJR was recognized by Newsweek as one of America's Most Responsible Companies for the fifth consecutive year. We hope that you've all had an opportunity to review the report.
Moving to the first quarter and year-to-date operating highlights on slide 6. We executed our business strategy and delivered net financial earnings of $0.74 per share in the first quarter, which was in line with our expectations. At New Jersey Natural Gas, we filed the base rate case to recover capital investments of approximately $850 million since the settlement of our last rate case in 2021. In addition, New Jersey Natural Gas filed for a new SAVEGREEN program of approximately $482 million, which is the largest energy efficiency filing in our history. At Clean Energy Ventures, we placed another 4 megawatts into service, and continue to grow and diversify our project pipeline. And finally, reported solid contributions from S&T and energy services, in line with expectations.
Moving to slide 7. In November, we provided NFEPS initial guidance range of $2.70 per share to $2.85 per share. And as I mentioned earlier, we benefited from our outperformance in energy services during the January weather event that allowed us to raise our NFEPS 2024 NFEPS guidance by $0.15 to $2.85 to $3 per share. As discussed in prior calls, we expect fiscal 2024 to exceed our stated 7% to 9% long-term growth rate.
Slide 8 shows the expected NFEPS contribution by business segment for fiscal year 2024, which reflects the AMA contribution, as well as a significant portion of our net financial earnings coming from our utility business. Looking ahead, we feel comfortable with our long-term growth rate in future years. And we expect to return to a more normalized segment contribution in fiscal 2025.
With that, I'll turn to a discussion of our business units, beginning on slide 9. We invested $102 million at New Jersey Natural Gas through a variety of programs in the first quarter of fiscal 2024, with 46% of that CapEx providing near real-time returns. Within that 46% is the SAVEGREEN program, as I mentioned earlier, which helps residential and commercial customers lower their energy usage. We spent approximately $13 million in the first quarter to help our customers save money and reduce their carbon footprint. Finally, we achieved solid new customer growth during the period, adding approximately 2,100 new customers through the combination of new construction and conversions.
Slide 10 provides additional detail on our base rate case filings. On January 31, we requested an increase of base rates of $222.6 million, equivalent to an increase of approximately $159 million in operating income. Since the conclusion of our last case in 2021, New Jersey Natural Gas has invested nearly $850 million to upgrade and enhance the safety and reliability of our transmission and distribution systems, as well as our IT investments.
Moving to slide 11, our solar business Clean Energy Ventures followed an exceptional 2023 with continued momentum heading into the new year. We added 4 megawatts of new solar capacity and continued to grow our pipeline, which now includes approximately 870 megawatts of potential investment options. Over the past few years, we have continued to expand our portfolio geographically, with 51% of our pipeline now located outside of New Jersey. Our focus is on delivering solar investment opportunities that provide high single-digit unlevered returns.
With that, I'll turn the call to Roberto for a review of our financial results. Roberto?

Roberto Bel

Thank you, Steve, and good morning, everyone. Slide 13 shows the main drivers of our NFE for the first quarter of fiscal 2024. We reported NFE of $72.4 million or $0.74 per share, compared with NFE of $110.3 million or a total of $0.14 per share last year (sic - see news release, "$1.14"). New Jersey Natural Gas reported NFE in line with expectations. A higher utility gross margin were offset by higher depreciation and operating expenses. Clean Energy Ventures increased NFE by approximately $14.1 million, largely due to the timing of historic revenue for the period. Storage and transportation of NFE declined versus Q1 of last year as a result of higher operating revenues related to Winter Storm Elliott in the first quarter of fiscal 2023.
Finally, energy services reported NFE of $7.8 million compared to $52.5 million in Q1 of the prior year. As a reminder, the first quarter of last year benefited from increased natural gas price volatility related to Winter Storm Elliott during December 2022. In addition, D&A revenue recognized in the first quarter of fiscal 2024 was less than that recognized in Q1 of last year. As Steve mentioned earlier, our guidance raise for fiscal 2024 is due to energy service performance in January 2024, which is our current peak of second quarter.
As we look to the remainder of fiscal 2024, it's important to note that we expect to recognize a significant portion of D&A total revenues later in the year, with the majority being recorded during our fiscal fourth quarter.
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. We did not make any changes to our capital plan compared to our prior calls. Our capital projections are anchored by strong cash flow from operations. On Slide 15, you can see that we expect cash flow from operations to range between $450 million and $490 million in both fiscal 2024 and fiscal 2025.
Slide 16 shows our credit metrics. We continue to project NJR's adjusted FFO to adjusted debt to be between 17% and 18% for the year. And while we have no plans to issue block equity, our existing new investment program includes a waiver discount feature that allows us to raise equity on an opportunistic basis.
Finally, on slide 17, we provide a breakout of our long-term debt. As you can see, most of our debt is fixed rate in nature and we do not have significant maturities in any particular year. Our NFEPS guidance for fiscal 2024 and our long-term NFEPS growth guidance assume high interest rates for the foreseeable future. So we have substantial liquidity at both NJR and NJNG. Overall, we are in an outstanding position to fund our growth objectives.
With that, I will turn the call back to Steve.

Steve Westhoven

Thanks, Roberto. In conclusion, NJR is off to a good start. We expect fiscal 2024 to be a strong year, due to higher NFE contributions from energy services and steady performance from our core businesses. In addition, we've been able to take advantage of the opportunities in energy markets that have resulted in considerable upside for our growth targets in recent years.
And as always, I want to thank all of our employees for their hard work. And with that, I'll now open the call for your questions.

Question and Answer Session

Operator

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. And if you would like to withdraw your question, simply press star one again.
Our first question comes from the line of Richard Sunderland with JPMorgan. Please go ahead.

Richard Sunderland

Good morning. Can you hear me pretty in a low-interest great day to be the $0.15 guidance range sorry, guidance raise. Does that fully reflect the January weather benefit and not just at an energy services, but anything at S&T or even on the BGSS incentive side, to the extent realized?

Steve Westhoven

Yes, the financial team did a nice job of really going through everything in our budgets and impacts from weather. And I tried to put that all into our numbers going forward. So we believe it does fully reflect the January weather event across all the businesses.

Richard Sunderland

Understood. That's helpful color. Thanks. A big asset sale number at CV., I guess, largely a timing factor. Can you unpack that a little bit more?

Steve Westhoven

I was surprised to see that it is as it goes as extracts are commodities you have that is when the sales take place and we recognize that revenue impact at the time of the sale. So it's really just dependent on when those transactions really occur. So I'm don't read anything into it or normal.

Richard Sunderland

Understood. And then I know you've put a spotlight on the NEMA benefits this year now the weather benefits from January versus that long-term growth rate.
I guess turning to the base growth, though in 25, could you provide any color around the shape to that, meaning you expected on a base business basis to be linear? Or should there be a bigger step-up in 25 given the rate case will be coming in that year.

Steve Westhoven

If I think this is really the power of the portfolio of companies here and we're going through our rate case cycle now, and that should be settled by the time we get to 25 and you've got that. And even the slight changes in the percentage contribution we've given you, we've shared with the financial community, our growth rate in the Company over the period as well as our segment contributions. We expect those to be intact. As we said before, we expect them to normalize as we go into the future.

Richard Sunderland

So I hope that answered your question sort of a very helpful color as always, and thanks for the time today.

Steve Westhoven

Thanks, Rich.

Operator

Our next question comes from the line of Shar Pourreza with Guggenheim Partners. Please go ahead.

Shar Pourreza

Good morning.

Roberto Bel

Morning.

Shar Pourreza

So just real quick on the 24 financing plans. Obviously you guys now expect to issue slightly less debt, but then also raised your equity issuance guidance despite sort of that unexpected inflow from energy services.

Steve Westhoven

I guess just run us what's driving the higher equity plan inherited from our though on the question, and it's a very small increase in aggregate away interrelated. But our DRIP program, as you know, as part of our in equity buyback program, our I'm sorry, I thought I heard three program. We have that the option to issue a little bit of equity and from time to time we exercise that option. So that's really what you're seeing.

Shar Pourreza

That's okay. Okay. Got it. And then just I know obviously highlighted a little bit peak earnings from the asset management agreement you struck in 2020. Just I guess, remind us what the remaining years kind of look like in terms of earnings and cash contribution and sort of the cadence, especially as we're thinking about 25 and beyond just maybe just elaborate a little bit on the prepared remarks.

Steve Westhoven

Thanks. Yes. As usual, we're gaining shares. Let's say what we know is going to be the peak year for Jamie in terms of where you're going to be from here now from here on making 25 uncertain line will probably be top down in terms of the earnings from a year and every year they become in terms of revenues around $15 million to $20 million.

Shar Pourreza

Okay, got it. And then just I know this was asked from the prior question, but I just want to maybe hit that, hit it a little bit more accurately. You would sort of the step downs that you're seeing with AMA. and maybe the energy services business go into a little bit more of a recurring figure versus what you're seeing now. Are you just confident that you can hit sort of the midpoint of that guidance range at least to show linear or should we just assume some gyrations? I know that was sort of the impetus of the prior question, but I didn't get a sense on whether you still assume there's going to be linearity despite some of the step-down in earnings we should be expecting in the near?

Steve Westhoven

Yes, you will confirm our long-term growth range. That's kind of the best I can do. We normalize it to history. You have spoken we expect some other business units did contribute more going forward. You'd expect the percentage to normalize, but yes, we're confirming our long-term growth rate.

Shar Pourreza

You get to clarify, Charles, I will retain or earnings presentation. You should take our initial 2022 guidance and then basically grow that between 7% and 9% every year to find what our normalized earnings are going to be every year. Let me let me take the rest offline. I appreciate it, guys. Thank you.

Operator

Your next question comes from the line of Chris Ellinghaus with Siebert Williams. Please go ahead with.

Chris Ellinghaus

Good morning, everybody from Have you guys got any color at this point in terms of the solar CapEx range where you think you might be landing this year?

Steve Westhoven

Yes, it is indeed what we're showing in the presentation. So we're not deviating from from that. So for this year, what we expect for solar, it will be between $140 million and $200 million roughly.

Chris Ellinghaus

And Tom, have you got a number or some thoughts on what you're seeing for solar costs all in per watt at this point and nothing then the ACM significantly than what we've had historically.

Roberto Bel

You know, I know there's been some inflationary pressures and we've had some hedging in some of our solar panels as well. But we're continuing to install solar. That's probably around that $2 or what type range of give or take a few a few pennies. So hopefully that helps.

Chris Ellinghaus

Yes, that helps on through the CSI process of this year.
Have you guys gleaned anything that's valuable and opening the CSI process has been that robust.

Roberto Bel

You know, there's been some changes at the BPU and things like that. So a number of these initiatives have been drawn out a little bit. They're still working through it. I believe that the bids are all due in February and then there's going to be some time to analyses. So continuing to move along, but really nothing to share there as far as some kind of a milestone event or some sort of a game changer insight into what's happening next. Okay.

Steve Westhoven

One last thing as far as the rate case goes, is there anything that you're aware of sort of in the BPU environment ecosystem that would suggest a sort of a traditional settlement is unlikely, Chris, this is a rapidly IGO, as we've talked, really for quite some time now. This is not a rate case. We're seeking recovery of investments in safety and reliability. So the pre 70s, pipe and other as well as some minor recovery for IT investments. I think if you look across the outcomes that have occurred, right of the rate cases, they've been constructive, Argos store, routine rate cases and constructive. So I would not expect any deviation from that.

Chris Ellinghaus

Okay, great. All right. Thanks a lot. Appreciate it.

Operator

And just as just a reminder, if you'd like to ask a question, please press are one on your telephone keypad. And our next question comes from the line of Roger Liddell with Clear Harbor Asset Management Got it.

Roger Liddell

Thank you. Good morning. I have asked for another 100 morning that I wanted to do get some texture on the energy efficiency program. Is it to me, it's it's as symmetrically important because it illustrates how far this company has gone beyond the industry standard mindset of in the old days, the customer was the meter and you guys have just transformed that kind of old model and Z at the seriousness, the I'll grab them and of the efficiency offerings to me illustrates that point. So it matters. I'm looking at the recall a disconnect between the $60 million of energy efficiency investments and the $482 million, which I believe you said, is a three year program. So how do we get from the 60 kinds of levels to the aggregate for 82? And how are are measuring the outcomes of those programs? Is it simply on the investment being made? Or are there some measurables that you can take back and use for fine tuning the program?

Steve Westhoven

Hey, good morning, Roger Agnelli, our CEO. Thank you for your question and thank you for your long ownership and NGR. Good hear from you. So I appreciate you acknowledging the role that energy efficiency plays in greenhouse gas emissions. We believe it's one of the most important things we can do to help drive a reduction in GHG over time because we are a couple we are able to offer those energy efficiency programs. So that $60 million refer to is a significant number because it's our largest ever investment in energy efficiency, but that was under the old I'll say gold trading a lot or Tier one as we refer to. And so that was a three year 200 and roughly $39 million of that. That spending is being recovered invested under the upcoming training into which is the $482 million issue referred to. That includes an increase in the size of certain programs that we normally offer. What we refer to as customized energy programs for small and large commercial customers, but also new elements that are related to building decarbonization. And to your point, while we do measure the investment, certainly save it for our investors. They're also measurable goals related to energy savings that we have to hit, as well as part of that, the approval of that program. So I hope that answers your question, Roger?

Roger Liddell

Yes, it does. Thank you. And a related question is a year or so ago. The context is hydrogen. Your estimate back then at least was in the range of $8 an Mcf equivalent and the contrast with the federal objective of around $2.5, is there any progress to speak of has that number drift to the right direction for the program still being put together as some of the rules associated with the taxes and how they're going to apply are coming through.

Roberto Bel

But I think generally speaking, the amount of dollars going towards hydrogen is going to drive down that price of hydrogen with their target price would be around one kilogram, which equates to about $8 in BTU natural gas pricing parity. So we expected to go in that direction. But those programs are are moving forward as we speak, and we'll see in time where it finally ends up Okay.

Roger Liddell

Last question. You mentioned on gas-fired heat pumps and maybe it's better handled offline, but if it's useful for the coal, I I wasn't really aware that there was a critical mass of technology in the gas-fired heat pump area, could that be a meaningful opportunity or rather the study, whereas again, yes.

Steve Westhoven

So the gasoline pumps that are available at the commercial level for some time, there are a number of vendors and manufacturers that have Yes, I'll call them early stage, a commercially available residential gas heat pumps, some are being used in the European market, not broadly here yet in North America, but those heat pumps get an equivalent efficiency of north of 30%. And so they represent an improvement over a high-efficiency natural gas furnace today. And so we do think that moving into the future, that represents an opportunity for us to continue to drive efficiency gains and natural gas heating appliances.

Roger Liddell

Great. And thank you, and thank you all for the execution that you deliver again on a GAAP book.

Steve Westhoven

Thanks for the questions.

Operator

As a reminder, if you'd like to ask a question please feel free to do so now by pressing star one on your telephone keypad. And our next question comes from the line of Gabe Moreen with Mizuho. Dave, please go ahead.

Gabe Moreen

Good morning, everyone. Just had a question on I see the backlog additions. It seems like you had success in adding to the backlog and it's skewed heavily towards out of New Jersey. I'm just wondering if anything happened in changing in the competitive landscape to make that happen this past quarter? And also just longer term, how you envision, I guess the breakout between New Jersey and New Jersey projects kind of shaking down if there's an ideal target that you're targeting, so novel and 98,000 units versus buying outside of New Jersey and heading towards digitization that we have the similar risk profile.
And what you see in that number is essentially just executing that plant.
So do you have a target on a percentage split?

Steve Westhoven

I don't think so at this point, it's really where's the jurisdiction that that's friendly towards solar work. We made the investments in new and where is it best for the deals that we're able to want to put together. But we're happy to see that number growing in that project pipeline and our available investments in that space continue. And increase in support of our continued investment in solar going forward.

Gabe Moreen

Thanks, Steve. And I think you're asking maybe every quarter, but any update on a potential Leaf River expansion? I'm also just curious, winter weather under your belt at Adelphia, how that asset's been performing and whether there's any room to squeeze more capacity?

Steve Westhoven

And so I'll take the first one. So we're very continuing to look at Big River. And like I keep saying, yes, we're working on new transactions. We don't have anything to update at this point in time, but certainly the market is supportive and the drivers are on the LTE gateways doing well. I know throughput year-on-year is up by a significant percentage, and we're continuing to watch that asset and see where we can pursue organic growth opportunities just like we are across both company.

Gabe Moreen

Okay. Thanks, Steven. Thank you.

Operator

Yes, that concludes our Q&A session for today. And with that, I will pass it back over to Adam for some closing remarks.

Steve Westhoven

Thanks, Jessica, and thanks, everyone, for joining us this morning. For the reminder, recording of this call is available for replay on our website. And as always, we appreciate your interest and investment in NJR and Douglas and good morning, ladies and gentlemen, that concludes today's call.

Operator

Thank you all for joining.