Good day and welcome to the New Jersey Resources year-end fiscal 2019 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions].

Please note, this event is being recorded.I would now like to turn the conference over to Dennis Puma, Director of Investor Relations. Please go ahead..

Thank you Sarah, and good morning everyone. Welcome to New Jersey Resources year-end fiscal 2019 conference call and webcast.

I am joined here today by Steve Westhoven, 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, 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 be found in the forward-looking statements section of today's earnings release furnished on Form 8-K and in our most recent forms 10-K and Q as filed with the SEC.

We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statements referenced herein in light of future events.We will also be referring to certain non-GAAP measures such as net financial earnings, or NFE. We believe that NFE provides a more complete understanding of our financial performance.

However, NFE is not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in Item 7 of our 10-K.Turning to slide two, our agenda can be found. Steve will begin today's call with highlights from the year and outlook for fiscal 2020, followed by Pat with a review of our financial results.

We will then open the call up to your questions.I would also like to point out that there are slides accompanying today's presentation, which are available on our website and were also furnished on Form 8-K filed this morning.With that said, I would like to turn the call over to our CEO, Steve Westhoven.

Steve?.

Thanks Dennis, and good morning everyone. I would like to begin on slide four. We reported net financial earnings of $1.96 per share for fiscal 2019 compared to $2.74 per share the prior year. There are two main reasons for the difference. First, the one-time positive effects of tax reform in 2018.

And second, the contrast between energy services performance in 2019 compared to its outstanding performance in 2018. If we compare our 2019 results against those from 2016, our NFE increased at a compounded annual growth rate of 6.8% meeting our 6% to 8% long term expected growth rate.

Highlighting our commitment to shareholders, we increased our dividend for the 24th consecutive year.Turning to slide five. I will walk you through the accomplishments from New Jersey Natural Gas.

First, we reached settlement with the New Jersey Board of Public Utilities on our rate case with a $62.2 million increase to rates that went into effect on November 15. We appreciate the productive relationship we have with our regulators and the continued commitment to investing in our energy infrastructure.

Second, we met our annual customer growth target of 1.8% in fiscal 2019. The current demographics and fuel pricing dynamics in our service territory will continue to drive new residential construction and conversions. Third, the Southern Reliability Link received its last remaining permits for the final phase of construction.

We currently expect an in-service date of 2021. Recovery for SRL will come in a future rate case proceeding. We also replaced 72 miles of bare steel main through SAFE and continued the hardening and reinforcement of our system through NJ RISE. And finally, during 2019, we filed with the BPU for our new infrastructure investment program.

We expect to conclude the regulatory process during 2020.On slide six, I will update you on several New Jersey Natural Gas' growth drivers. Our utility earnings growth is primarily driven by its ability to expand its rate base and customers.

As you can see in the upper left, we expect continued customer growth driven by new construction and conversions. On the top right, we expect rate-based growth to exceed 10% per year through 2022, given our future capital investments. On the bottom left, you see the breakdown of our capital projects.

In 2019, our capital investment increased by more than 40%, mostly be driven by SRL. In 2020, we expect our capital spending to increase 28% as we upgrade our system, construct SRL, and invest in necessary technology improvements.

And finally, as shown in the bottom right, 35% of our expected capital spend in 2020 will earn near-immediate returns through customer growth in annual recovery mechanisms.Moving to slide seven. I would like to highlight our environmental record. We have the lowest number of leaks per mile of any natural gas utility in New Jersey.

And in fact, we have reduced methane emissions by more than 900 metric tons since 2015. In 2019, we were the first company in New Jersey to join ONE Future, an organization dedicated to voluntarily achieving meaningful reductions in methane emissions.

We were also the first utility in the country to purchase a portion of our natural gas supply through the TrustWell Responsible Program, which evaluates and verifies responsibly sourced natural gas for customers. We remain committed to meeting our customers' expectations for safety and reliability in an environmentally responsible way.

This will always be a top priority for our company.Moving to slide eight. The strategy for NJR Midstream is to invest in pipeline and storage facilities that benefit from our extensive experience in the natural gas marketplace with long-term objective to generated stable earnings and cash flows.

We target investments in natural gas storage and the transportation that serve constrained or growing markets. Let me walk you through the highlights.First, we acquired the Leaf River Energy Center.

I will provide more details in the next slide, but we are excited about the opportunities that holds for NJR.Second, in 2019, Steckman Ridge, our storage asset in Marcellus Shale contributed $0.09 per share of NFE.Moving to our pipeline assets, although PennEast has experienced some recent challenges, we remain committed to the project, and it's an important role in our energy future.

PennEast is currently pursuing its appellate rights and continues to evaluate development options to proceed with construction. In 2019, PennEast contributed $0.04 of NFE per share in AFUDC and we expect a similar minimal contribution in 2020.For Adelphia Gateway, we are still waiting FERC Certificate of Public Convenience and Necessity.

Once we receive the approval, we expect to assume operations immediately and begin the conversion of the southern end of the pipeline.Moving to slide nine. Our acquisition of Leaf River is significant for several reasons.

First, since 1995, our energy services business unit has cultivated strong customer relationships and effectively managed the portfolio of natural gas storage assets across the U.S., including regions served by Leaf River. This experience and our relationships will help drive future opportunities for this investment.

Second, Leaf River, which is connected to six interstate pipelines, is located near the Gulf Coast, the fastest growing market for natural gas in the United States. Forces driving this demand include the expansion of industrial activity in the region, the growth of LNG exports, and an increase in natural gas fired generation.

Over 80% of Leaf River's revenues is contracted with creditworthy counterparties with an average contract life of approximately five years, and Leaf River has the potential for expansion.

Its three storage caverns are among the newest in North America and the facility was designed to accommodate a possible fourth cavern.Turning to slide 10 for an update on clean energy ventures. At the top of the slide, you will note that we placed seven commercial solar projects into service in 2019, adding about 52 megawatts.

In 2020, capital expenditures will range from $130 million to $140 million, adding between 47 to 52 megawatts of capacity and generating $38 million to $42 million in ITCs.

Finally, at the bottom right, you can see that the solar portfolio is expected to generate between $79 million and $81 million in SREC revenues in 2020.On slide 11 are the results for energy services. Over the past two years, we have experienced a broad range of performance.

In 2018, we saw what can happen when weather conditions, pricing spreads, and volatility are working in our favor. To contrast that, in 2019 we experienced milder weather, narrower pricing spreads, and decreased volatility. Despite these factors, energy service continued to generate positive NFE which supports our long option strategy.

Given our past history, we expect energy services results to be within 5% to 15% NFE guidance range.Moving to slide 12. This morning, we announced fiscal 2020 NFE per share guidance of $2.05 to $2.15 per share, which represents 7.1% annual growth from fiscal 2019 results from the midpoint of the 2020 range.

Pat will take you through the drivers of our NFE growth but it's important to note that 65% to 75% of our NFE will come from our regulated businesses, with New Jersey Natural Gas accounting for 55% to 60%.I will now turn the call over to Pat for more details on our financial performance and outlook.

Pat?.

Thanks Steve. Good morning everyone. Slide 14 shows the main drivers of how the NFE changes from fiscal 2018 to fiscal 2019. For 2019, we reported NFE of $175 million or $1.96 per share compared to $240.5 million or $2.74 per share in 2018.

Excluding the $60 million, NJR's consolidated NFE in 2019 declined by $5.9 million with approximately $ 4 million of decline coming from our unregulated businesses and roughly $2 million coming from our regulated businesses.On the regulated side, NJNG's total gross margin increased in 2019 but was primarily offset by a higher O&M expenses and reduced contributions from BGSS incentives.

Partially offsetting this decline into our midstream, we saw a decrease in O&M expenses.Turning to our unregulated businesses, CEV performed exceptionally well in 2019 reporting a $63 million NFE improvement due to higher SREC sales and an increase in investment tax credits.

As a reminder, in 2018 most of our solar projects were financed through sale leaseback transactions, which was not the case in 2019.

Offsetting CEV's positive NFE contributions, energy services had a challenging year when compared to its outstanding 2018 performance.Turning to slide 15 and as Steve mentioned, we reached a settlement with the New Jersey Board of Public Utilities on NJNG's rate case.

The BPU approved a $62 million rate increase that become effective on November 15 and equates to an annualized NFE increase of approximately $37 million.

Under the terms of the settlement, our overall allowed rate of return is 6.95% which includes return on equity of 9.6% with a 54% equity layer.Our depreciation rate increased to 2.78% compared to the prior rate of 2.4%. Importantly, the approved rate base is $1.8 billion.

We expect it to grow at an annualized rate of approximately 10% over the next three years. Clean Energy Ventures generates a significant portion of its revenue from the sale of SRECs and hedges part of its expected production of SRECs through futures contracts.The status of our current SREC hedging program is highlighted on Slide 16.

For energy years 2020 and 2021, we are 91% and 86% hedged. At these ratios, our SREC revenues would be largely unaffected by future changes in SREC prices.

For energy year 2022, we have 50% of SREC revenues hedged and we will continue to monitor the markets to add to our hedge position.In addition, I would like to take this opportunity to discuss the solar market in New Jersey.

As many of you know, the state of New Jersey has tasked the BPU of closing the existing solar market imbalance and creating successor programs in 2020 to support industry growth through the next decade. NJR is working closely with the BPU to help with a successful transition. While this is ongoing, market fundamentals remain strong.

For energy year 2020 and 2021, SRECs are trading at $225 to $235 range or 89% of the SACP. And energy year 2022 SRECs are priced at about $200 or 84% of SACP.On slide 17, I will take you through some of the characteristics underpinning the strength of our balance sheet.

From the top left, you can see that as of September 30, 2019, we had over $640 million of available liquidity. Both NJR and engineered NJNG's credit facilities were almost fully available.On the top right, we show our long term debt maturity schedule. You can see it is well-balanced and with no more than $150 million maturing in any fiscal year.

Note that the Leaf River bridge facility is not reflected in this schedule. We have until October of 2020 to repay it.On the bottom left, we show that our debt-to-total capitalization ratio was 51% at the end of 2019 and is expected to reach 54% at the end of 2020.

The increase mostly reflects the investments we expect to make in SRL and Adelphia Gateway.Finally, at the bottom right, you can see that we maintained strong investment-grade credit ratings that reflects the strength of our balance sheet.Slide 18 outlines our capital plans for fiscal 2020 and for the three-year period through 2022.

In general, our capital expenditures are expected to peak in 2020, mainly driven by our Adelphia Gateway project and SRL. For the three-year period between 2020 and 2022, we expect to allocate more than 80% of our total CapEx to our regulated businesses with 54% dedicated to NJNG.

The details of our capital plan can be found on page 32 in the appendix.Moving to slide 19, you can see an update on our cash flows and financing projections. Shortly after the end of fiscal 2019, we acquired Leaf River for $367.5 million which was financed through a bridge facility.

During the remainder of 2020, we will access the debt and equity markets to fund the repayment of the facility. This equity issuance will satisfy our currently planned equity needs for fiscal 2020 and 2021.

Importantly, we expect to achieve our long term NFE growth rate of 6% to 8% after taking into account any dilution associated with the planned equity issuance.On slide 20, I would like to point out the driving factors that made assumptions behind our guidance. We expect our regulated businesses to contribute between 65% to 75% of total NFE.

New Jersey Natural Gas will gas contribute 55% to 60% of NFE with the recent rate case settlement adding approximately $0.34 per share when compared to 2019. For midstream, we are assuming there will be no contribution from Adelphia and a minimal AFUDC contribution for PennEast, nearly identical to that of 2019.

We expect our unregulated businesses to contribute between 25% and 42% of total NFE. Energy services is expected to return to its normal 5% to 50% [SIC 15%] contribution which will provide about $0.10 per share uplift in fiscal 2020. We expect CEV to contribute 20% to 25% of total NFE.

This will be a reduction compared to 2019 due to lower ITCs, partially offsetting the NFE improvements we are seeing in the other segments.With that, I will turn it over to Steve for his closing remarks..

Thanks Pat. We expect NJR to continue delivering long term value for its shareholders, anchored by our regulated utility and the infrastructure investment opportunities provided by our other business segments.

To summarize, we offer investors an attractive 8% to 11% expected total return based on our dividend yield of 2% to 3% and our long-term NFEPS growth of 6% to 8%.We appreciate that you took the time today to join us and I would like to recognize and thank our employees for all their hard work and dedication that drives our performance.

I would like now to open the call for questions..

[Operator Instructions]. Our first question comes from Travis Miller with Morningstar. Please go ahead..

Good morning. Thank you..

Good morning Travis..

Good morning..

Just questions on Leaf River here. You mentioned accretive.

Is there any way that you can give kind of a range that's embedded in your guidance for that?.

Hi Travis. This is Pat Migliaccio. We have indicated, it's nominally accretive in fiscal year 2020 after taking into consideration the dilutive impacts of our equity issuance. I think, if you think about this from a long-term perspective, the guidance we have provided is, I think about this in terms of a double-digit ROE, but on the lower side..

Okay.

And then when we think about strategically, was this just an opportunity that you saw come up at a good price, good growth potential, good return? Or is this something that you see as more strategic for the non-regulated segment, perhaps expanding more projects down there in the Gulf Coast or other LNG-type related infrastructure?.

Hi Travis. This is Steve. I think we have shared with you before that we have been in this market for quite some time looking at midstream assets, especially in certain areas that provide for growth and where we think there is some significant future opportunity. Leaf River fit that on all counts.

So, we were able to make the investment, able to meet it at a price that we thought we think is good for us and our shareholders, and we are going to continue to pursue these types of assets in the market.

It's just a matter of, it's hard to predict on when we will be able to achieve the next acquisition or when the next one will come in, but certainly we are going to pursue this in the future..

Sure. Okay. And then just one real other quick one here.

The contracts you mentioned, that 80% contract, what's within those contracts just in terms of variability? Is their price exposure or volume exposure? And what's kind of the sensitivity around those contracts? And then also on the uncontracted part?.

Travis. They are traditional contracts where majority of the dollars coming in are fixed demand charges. And then the portion that isn't contracted are taken to the shorter-term market. So, I would imagine one year, maybe less type timeframe, park and loan type transactions.

I think it's a typical mix for storage facility, but really the attractive part of this are a majority of the revenues are fixed demand charges coming from customers in a longer contracted period..

Got it. Thanks so much..

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

Hi. Good morning guys..

Good morning Shar..

Good morning Shar..

So just one question. The incremental equity that you guys announced for 2020, I think some of it was shifted from 2021.

Have you provided any kind of -- is there any sort of question if we get PennEast gets further delayed? So as we sort of think about your projected balance sheet metrics like FFO-to-debt, has the incremental equity raised provided some sort of a cushion? Should we get any sort of potential cash flow implications from further delays? So I guess where do we stand around your balance sheet capacity?.

Shar. This is Pat Migliaccio. So I think it's fair to say that the equity issuance contemplates PennEast in it, and should that result in a delay, that would provide us a little bit of cushion in the future..

Okay.

Just what I want to confirm is the equity was not solely attributed to the Leaf acquisition? A part of it is building a cushion, if there was a PennEast delay?.

Yes. So, if you think about this from the purchase price, Leaf River purchase price was $367 million. If you looked at roughly at 50-50 debt equity mix, break that down, it's $140 million.

And so, the balance would be, what I will call, regular way equity needs that would satisfy capital expenditures for PennEast and/or Adelphia Gateway and other items that we have in our capital plan..

Can I just ask.

Pat, what's the level of cushion, right? So, can you just give me a little bit of a sensitivity towards sort of what your balance sheet capacity is, especially when you look at your credit metrics, FFO-to-debt, assuming that, let's say, the PennEast project gets a further delay? So, like I guess what have you accounted for as far as the delay in the project?.

Shar, as you can appreciate, there are a number of variables that go into that, not the least of which is energy services performance of any year, because that's going to impact our equity side. So, I don't know that I can provide you any more specific guidance than we already have today..

All right. Great. Thanks guys. I appreciate it. That was it..

Thanks..

Thanks Shar..

[Operator Instructions]. At this time, there are no further questions. I would like to turn the conference back over to Dennis Puma for any closing remarks..

All right. Thank you, Sarah. I want to thank everybody for joining us this morning. As a reminder, a recording of this call will be available on our website. And as always, we appreciate your interest and investment in New Jersey Resources. Goodbye..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..