New Jersey Resources Corp

NYSE:NJR

Earnings Call Analysis

NJR Forecasts Strong Fiscal 2024

New Jersey Resources (NJR) is expected to have a strong fiscal year 2024, buoyed by its Energy Services and steady core business performance. Cash flow from operations is projected to be between $450 and $490 million for both fiscal 2024 and 2025. Proactive budgeting has fully accounted for the January weather's impact across all business lines. While no new book equity is planned, a modest increase in equity linked to the company's rate program has been noted. The long-term growth rate is confirmed, with guidance aiming for a 7-9% annual increase from initial 2022 figures. On the solar front, capital expenditures are estimated to be $140-200 million, with installation costs around $2 per watt, adjusted for slight inflationary pressures.

Commencement of Fiscal 2024 with an Augmented Earnings Outlook

The company kicked off Fiscal 2024 with a robust posture, reflecting solid performance in the initial quarter and sustained vigor in the early second quarter, largely due to the Energy Services' proficiency in leveraging January's weather volatility. Highlighting this strong start, management uplifted the Net Financial Earnings per Share (NFEPS) by $0.15, now anticipating it to be $2.85 to $3 per share.

Commitment to Sustainability and Advanced Energy Projects

Underscoring its commitment to cleaner energy, the company has made significant strides in sustainability and decarbonization, with noteworthy endeavors like SAVEGREEN and the inauguration of sizeable solar arrays, reinforcing their long-term vision for an evolution towards renewable energy.

Financial Outcomes and Strategic Investments

On the financial front, the company upheld its expectations, posting net financial earnings of $0.74 per share in the first quarter. The utility segment, specifically New Jersey Natural Gas, is actively pursuing growth through strategic investments including a base rate case filing and a new SAVEGREEN program, the largest of its kind to date, resulting in the deployment of additional 4 megawatts of solar capacity.

Robust Investment in Utility Infrastructure and Energy Efficiency

A sizeable investment of $102 million in varying utility programs illustrates the company's dedication to infrastructure enhancement and customer-centric energy efficiency solutions, such as the SAVEGREEN project. This significant capital expenditure is expected to yield timely returns while aiding customers in managing energy consumption and reducing carbon emissions.

Future Forecast: Infrastructure Upgrades and Expansion of Renewable Portfolio

With an ask for a base rate increase to support the nearly $850 million investment in infrastructure enhancements, the company envisages bolstered operating income. Concurrently, the Clean Energy Ventures arm of the company is trailblazing following an exceptional 2023, now with a burgeoning pipeline of approximately 870 megawatts slated for potential investment.

Observations on Earnings: Comparisons and Business Segment Contributions

Comparative analysis exhibits a decline in net financial earnings, from $110.3 million or $1.14 per share last year to $72.4 million or $0.74 per share this quarter. While New Jersey Natural Gas aligned with estimates, certain segments like Clean Energy Ventures experienced a downtick due to the timing of SREC revenues, and Energy Services did not match the preceding year’s extraordinary performance catalyzed by natural gas volatility related to winter storm LBO. However, the latter's robust performance in January spurred the revised NFEPS guidance for Fiscal 2024.

Capital Expenditure and Liquidity: Strong and Steady

Looking forward, the company anticipates investing between $1.2 billion and $1.5 billion across its operations, supported by strong cash flows from operations ranging between $450 million and $490 million for both fiscal 2024 and 2025. The financial structure is buttressed by predominantly fixed-rate debt with no significant maturities due and liquidity remains ample, ensuring steadfast support for growth plans.

A Promising Outlook for Fiscal 2024

In closing, the optimism for a thriving fiscal year 2024 is underpinned by expected heightened contributions from Energy Services and consistent results from core business operations, with proactive engagements in energy market opportunities further fortifying growth prospects.

Earnings Call Transcript 2024-Q1

[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, executive]

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 Bell, 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 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 buy including this statement, assume any obligation to review or revise any particular forward-looking statement 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.

[Stephen D. Westhoven, executive]

Thanks, Adam. Good morning, everyone. Fiscal 2024 is off to a good start, and 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 on 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 highlights. Last year, we invested approximately $60 million in SAVEGREEN New Jersey Natural Gas' energy efficiency program. Clean Energy Ventures continue to innovate, commissioning the largest cat 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 and 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 1 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 a 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, we 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 EPS 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 and with that, I'll turn the 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. We 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 continue 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 to 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, executive]

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 $1.14 per share last year. New Jersey Natural Gas reported NFE in line with expectations, higher utility gross margin was offset by higher depreciation and operating expenses. Clean energy ratios increasing the fee by approximately $14.1 million, largely due to the timing of SREC revenues for the period. Storage and Transportation NFE declined versus Q1 of last year as a result of higher operating revenues related to winter storm LBO 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 be volatility related to winter from LBO during December of 2022. In addition, BMA 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 Services outperformance in January 2024, which is our current fiscal 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 the EMA's total revenues later in the year with the majority being recorded during our fiscal fourth quarter.

Turning to our capital plan on Slide 14. Over the next 2 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 call. Our capital projections are anchored by strong cash flows 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 NGR's adjusted FFO to adjusted debt to be between 17% and 18% for the year. And while we have no plans to issue book equity, our existing de-reinvestent program includes the 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. We have substantial liquidity at both ER and G&G. Overall, we are in an outstanding position to fund our growth objectives.

With that, I will turn the call back to Steve.

[Stephen D. Westhoven, executive]

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 to 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.

[Operator]

[Operator Instructions] Our first question comes from the line of Richard Sunderland with JPMorgan.

[Richard Sunderland, analyst]

The $0.15 guidance range -- sorry, guidance raised, does that fully reflect the January weather benefit and not just at Energy Services, but anything at S&T or even on the BGSS incentive side to the extent realized.

[Stephen D. Westhoven, executive]

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

[Richard Sunderland, analyst]

Understood. That's helpful color. The big SREC sales number at CEV, I guess, largely a timing factor. Could you unpack that a little bit more would surprise to see that.

[Stephen D. Westhoven, executive]

Yes. You know what, as it goes as SRECs are commodities, it depends when the sales take place and we recognize that revenue impact at the time of the sale. It's really just dependent on when those transactions really occur. So don't read anything into it. It is our normal business.

[Richard Sunderland, analyst]

Understood. And then I know you put a spotlight on the AMA 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, can you provide any color around the shape to that? Meaning, do you expect it 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?

[Stephen D. Westhoven, executive]

I mean this is really the power of the portfolio of companies. We're going through a rate case cycle now that should be settled by the time we get in '25 and you've got the slight changes in percentage contribution. We've given -- we've shared with the financial community our growth rate in the company over the period as well as our segment contributions, and we expect those to be attacked. And as we said before, we expect them to normalize as we go into the future. So I hope that answers your question.

[Operator]

Your next question comes from the line of Shahriar Pourreza with Guggenheim Partners.

[Shahriar Pourreza, analyst]

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. I guess just what's driving the higher equity in plan?

[Roberto Bel, executive]

[indiscernible] Roberto. The increase in [indiscernible] a very small increase in equity by the way, it's related to our rate program. As you know, as part of our -- in equity buyback program, our -- I'm sorry, as part of our DRI program, we have the option to issue a little bit of equity and from time to time, we exercise adoption. So that's really what you're seeing there.

[Shahriar Pourreza, analyst]

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 that prepared remarks.

[Roberto Bel, executive]

Roberto again Shahriar. So as you know, is going to be the big year for the AMA in terms of our revenue contribution. From here now from here on [indiscernible] and with a little bit of a step down in terms of the early for year. And every year, they become in terms of revenues, around $15 million to $20 million.

[Shahriar Pourreza, analyst]

Okay. Got it. And let me just -- I don't know if this was asked on the prior question, but I just want to maybe hit that -- hit it a little bit more accurately. Are you with sort of the step downs that you're seeing with AMA and maybe the Energy Services business going to 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 term?

[Stephen D. Westhoven, executive]

Yes. We'll confirm our long-term growth range. It's kind of the best I can do. We'll normalize it to history. You do have a spike, and we expect some other business units did contribute more coming forward as you'd expect that as the percentage is normalized. But yes, we're confirming our long-term growth rate.

[Roberto Bel, executive]

Just to clarify, Shar, as what we see in our 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 expected earnings are going to be every year.

[Operator]

Your next question comes from the line of Chris Ellinghaus with Seaburg Williams Shank.

[Christopher Ellinghaus, analyst]

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?

[Roberto Bel, executive]

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

[Christopher Ellinghaus, analyst]

Have you got a number or some thoughts on what you're seeing for solar costs all in per watt at this point?

[Stephen D. Westhoven, executive]

Chris, nothing that deviates significantly than what we've had historically. I know there's been some inflationary pressures. 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 watt type range, give or take a few pennies. So hopefully, that helps.

[Christopher Ellinghaus, analyst]

Yes, that helps. Through the CSI process this year, have you guys gleaned anything that's valuable?

[Stephen D. Westhoven, executive]

I don't think the CSI process has been that robust. There's been some changes in 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 analyze those. So continuing to move along, but really nothing to share as far as kind of a milestone event or some sort of change or insight into what's happening next.

[Christopher Ellinghaus, analyst]

Okay. 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 sort of a traditional settlement is unlikely.

[Patrick Migliaccio, executive]

Chris, this is Pat Migliaccio. As we've talked really for quite some time now, this is a Vonella rate case. We're seeking recovery of investments in safety and reliability. So I think 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, our historical [indiscernible] been constructed. So I would not expect any deviation from that.

[Operator]

[Operator Instructions] our next question comes from the line of Roger Liddell with Clear Harbor Asset Management. Roger, go ahead.

[Roger Liddell, analyst]

I wanted to get some texture on the energy efficiency program. To me, it's it's asymmetrically 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 the seriousness, the gravamen of the efficiency offerings to me illustrates that point. So it matters. I'm looking at the, call it, disconnect between the $60 million of energy efficiency investments and the $482 million, which I believe you said is a 3-year program. So how do we get from the 60 kinds of levels to the aggregate 482? And how are you 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?

[Patrick Migliaccio, executive]

Roger, it's Pat Migliaccio. Thank you for your question, and thank you for your long ownership in NJR. Good to hear from you.

So appreciate you acknowledging the role that energy efficiency plays and greenhouse gas emissions. We believe it's 1 of the most important things we can do to help drive a reduction in over time. And because we already coupled, we are able to offer those energy efficiency programs. So that $60 million that you referred to is a significant number because it's our largest ever investment in energy efficiency. But that was under the old, I'll say, old Trianon or Q1 as we refer to it. And so that was a 3-year roughly $39 million program that, that spending is being recovered and invested under the upcoming training and 2, which is the $482 million that you 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, saving for our investors. There are also measurable goals related to energy savings that we have to hit as well as part of that approval of that program. So I hope that answers your question, Roger.

[Roger Liddell, analyst]

Yes, it does. A related question is a year or so ago the context does 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. Is there any progress to speak of? Has that number drift to the right direction?

[Stephen D. Westhoven, executive]

I mean the program is still being put together now and some of the rules associated taxes and how they're going to apply are coming through. 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 be around $1 a kilogram, which equates to about $8 an [ MMBtu ] natural gas, almost brings it in parity. So we expect it to go in that direction. But those programs are moving forward as we speak, and we'll see in time where it finally ends up.

[Roger Liddell, analyst]

Okay. Last question. You mentioned gas-fired heat pumps, and maybe it's better handled offline, but if it's useful for the call, 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.

[Patrick Migliaccio, executive]

Roger, this is Pat Migliaccio again. Yes. So gas pumps have been available at the commercial level for some time, there are a number of vendors and manufacturers that have I'll call them, early stage but commercially available residential gas e 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 of furnace today. And so do think that moving into the future, that represents an opportunity for us to continue to drive efficiency gains in natural gas heating appliances.

[Operator]

[Operator Instructions]

And our next question comes from the line of Gab Moreen with Mizuho.

[Gabriel Moreen, analyst]

Just had a question on the CEV 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 and changing in the competitive landscape to make that happen this past quarter? And also just longer term, how you envision, I guess, the breakup between New Jersey and non-New Jersey projects kind of shaking down if there's an ideal target that you're targeting?

[Stephen D. Westhoven, executive]

So we've talked for a long time, Gab, about diversifying the state New Jersey and heading towards jurisdictions that we believe have a similar risk profile. And what you see in that number is essentially just executing plan. So do we have a target on a percentage split. No, I don't think so. At this point, it's really where is the jurisdiction that's friendly towards solar and where can we make the investments and where does it fit best for the deals that we're able to put together. But we're happy to see that number growing, that project pipeline and our available investments in that space continuing to increase and support our continued investment in solar going forward.

[Gabriel Moreen, analyst]

Steve, and I think I ask you maybe every quarter, but any update on the potential Leaf River expansion. I'm also just curious with more winter weather under your belt at Adelphia, how that asset has been performing and whether there's any room to squeeze more capacity out.

[Unknown Executive]

So I'll take the first one. So we're continuing to look at Leaf River. And like I need saying, we're working on transactions. We don't have anything to update at this point in time. But certainly, the market is supportive. And yes, these rivers are dealt Gateway is doing well. point 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 a little company.

[Operator]

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

[Adam Prior, executive]

Thanks, Jessica. Thanks, everyone, for joining us this morning. As a reminder, a recording of this call is available for replay on our website. And as always, we appreciate your interest and investment in NJR. Thanks, everyone. Have a good morning.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.