Thank you, Cole. Good morning, everyone. Welcome to New Jersey Resources Second Quarter Fiscal 2020 Conference Call and Webcast. I'm 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 the call that our current expectations, assumptions and beliefs forming the basis for our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to materially differ from our expectations, as 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 Form 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 statement referenced herein in light of future events. We'll 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, it is not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in Item seven of our 10-K. Our agenda is found on slide two. Steve will begin today's call with highlights for the quarter, followed by Pat, who will review our financial results, then we'll open the call up to your questions. The slides accompanying today's presentation are available on our website and were furnished on our Form 8-K filed this morning.

With that said, I'll turn the call over to our President and CEO, Steve Westhoven. Steve?

Stephen D. Westhoven - President and Chief Executive Officer

Thanks, Dennis, and good morning, everyone. Thank you for joining us today. The devastating impact of COVID-19 has been felt around the globe, across our state and in our communities. Our thoughts are with all those who've been affected. And while this is unlike anything we've ever experienced, every day, our team rises to the occasion with professionalism and hard work. Without interruption, we've maintained our ability to deliver safe and reliable natural gas service to our customers. As we navigate these unprecedented times, one thing remains clear, the health and safety of our employees and our customers remains our top priority. In early March, we implemented our business continuity plan, and now nearly half of our team is working remotely. Our essential employees, such as our first responders, distribution mechanics, service technicians, continue to assist customers at their homes and businesses, all while following robust safety protocols. To protect employees and customers, we are limiting the potential for exposure by strictly following CDC and state guidelines, maintaining social distance and wearing appropriate personal protective equipment when entering a home or business.

We suspended disconnections to ensure customers have continued natural gas service, and we've waived late fees. And for customers who experience hardships, we're providing energy assistance in the form of grants to help them with their energy bills. We also recognize the impact of COVID-19 is having on our communities, especially the most vulnerable. That's why we've donated $125,000 to community food banks that are delivering meals to thousands of residents in need. Additionally, through the United Way, we donated funds to support first responders, victims of domestic violence as well as our local businesses. Given the critical services we provide, we have not experienced a fundamental change to our core operations. We continue to provide service to over 550,000 utility customers, and construction in our large-scale infrastructure projects are moving forward at New Jersey Natural Gas, NJR Clean Energy Ventures and NJR Midstream. To successfully execute our strategic priorities, we have focused on making sure NJR has access to capital.

In April, we entered into a new $250 million credit facility to further enhance our liquidity. While COVID-19 has created some economic uncertainty in New Jersey and across the nation, the fundamentals of our business remains strong, and we are committed to meeting the expectations of our employees, our customers, communities and shareowners. Moving to slide four. We are reaffirming our fiscal 2020 NFE guidance range of $2.05 to $2.15 per share despite the performance of NJR Energy Services. Our utility business will now account for 61% to 65% of total NFE, an increase from our previous estimate of 58% to 62%, and NJR Midstream will continue to contribute 10% to 15%. On the unregulated side, Clean Energy Ventures will now contribute 27% to 32% of total NFE, an increase from our previous estimate of 25% to 30%. We adjusted the expected contribution from Energy Services here to a range of zero to negative 5% due to continued challenging market conditions. And while we are disappointed with the current results for Energy Services, we remain committed to the business. These results were caused by a unique situation, a combination of one of the warmest winters on record and operational issues in one of our key pipelines that limited our ability to hedge our physical assets the way that we typically do. The potential disruption risks reducing the volume of physical gas we could deliver in the winter.

And consequently, Energy Services did not hedge all this capacity. Ultimately, this long capacity position and warm weather drove capacity values lower, resulting in Energy Services losing value on unhedged assets. Under normal circumstances, we don't comment on expectations for Energy Services. However, at this time, I thought it was important to share some details. We are taking actions to reduce the risk profile for Energy Services in the future. We have reduced our demand charges. We've also taken steps to reduce O&M expenses. And we continue to seek opportunities to optimize the value of certain contractual storage and transportation agreements within our portfolio. Moving to slide five. We illustrate how weather patterns have impacted Energy Service performance over the last three years. On the top of the page, we show heating degree days in the Northeast during the winter months, with 2018 reflecting consistent cold winter weather. On the bottom of the chart, we show the resulting price differentials between TETCO M3, a proxy for our main market areas, and TETCO M2, a proxy for our main production areas.

During 2018, sustained cold weather generated significant pricing differentials that Energy Services was able to capitalize on. In contrast in 2019 and especially in 2020, unusually warm weather depressed the geographic spreads, limiting market opportunities to capture value within our portfolio due to the location or timing differences. Looking to the next fiscal year, with the drop-off of demand due to COVID-19 and the glut of gas supply, we've seen a widening to the summer winter spreads that hasn't existed for some time. This is creating a constructive environment for Energy Services heading into fiscal 2021. Moving to slide six. We still expect to achieve our NFE guidance range of $2.05 to $2.15 per share. The impact of Energy Services performance compared to our prior guidance can be up to $0.14 lower per share. New Jersey Natural Gas is expected to add $0.09 of uplift, mostly related to O&M savings and OPEB. And CEV is expected to add $0.05, mostly from tax efficiencies and safe harboring of investment tax credits. These changes are expected to allow us to maintain our NFE guidance range for fiscal 2020.

Moving to slide seven, I'll cover some highlights, starting with New Jersey Natural Gas. We added over 4,300 new customers so far this year, keeping us on track to reach our targets of 1.8% annual customer growth and adding between 28,000 to 30,000 new customers over the next three years. The Southern Reliability Link continues to progress with over 70% of construction complete, and we expect the project to be placed into service in 2021. At NJR Midstream, we completed the acquisition of Adelphia Gateway this quarter, and we are actively working with the Pennsylvania DEP to obtain final permits needed to file for the FERC notice to proceed. This is required to add compression in new laterals to the southern portion. We expect the southern portion of Adelphia Gateway to be in service in 2021. And we await ruling on PennEast and remain committed to the project. The U.S. Supreme Court directed New Jersey to respond to a petition submitted by the PennEast partnership. We'll provide updates when they become available.

On slide eight, I'd like to update you on recent developments in the solar market. On April 30, New Jersey, closed the legacy SREC market and transitioned to a new TREC market. The TREC market will continue to provide opportunities to CEV as projects will now qualify for a fixed price of $152 per TREC for 15 years, eliminating price volatility. The fixed price nature of the TREC market will promote more stable solar development in New Jersey and help the state achieve its clean energy goals. We look forward to continue investment in New Jersey solar market. Turning to slide nine. CEV had another productive quarter, adding 20 megawatts of incremental capacity, and we are on track to place eight commercial solar projects into service this year. The Sunlight Advantage, our residential solar program, added 156 new customers in fiscal 2020.

I'd like now to turn the call over to Pat for some more detailed look at the financials.

Patrick Migliaccio - Senior Vice President and Chief Financial Officer

Thanks, Steve. Good morning, everyone. Turning to slide 11. We've taken two significant steps to improve our liquidity profile. In April, we priced an additional $385 million of long-term debt, mainly to provide financing for the Leaf River and Adelphia Gateway acquisitions and our other infrastructure projects. We expect to receive $260 million of NJR and $125 million of NJG during fiscal year 2020, subject to customary signing and closing conditions. Also in April, we entered into a new $250 million 364-day credit facility. Once we account for the new facility and long-term financing, our liquidity position becomes even stronger. On slide 12, we show our debt maturity schedule. As you can see from the chart on the right, and assuming signing and closing of our recently priced notes, we've effectively moved most of our near-term maturities. slide 13 shows the main drivers behind our quarterly NFE changes.

During the second fiscal quarter of 2020, NJR we reported NFE of $107 million or $1.12 per share compared to $112.4 million or $1.27 per share in 2019. New Jersey Natural Gas and Home Services and Others saw NFE improvements quarter-on-quarter. NJNG increased to $17.8 million during the quarter, mainly due to higher base rates and also lower O&M expenses, while Home Services and Other increased $1.7 million due to lower O&M. Energy Services faced continuing challenge market conditions due to the unusually warm winter we experienced this fiscal year. CEV was down $5.7 million, mostly due to timing of SREC sales, which will occur in the second half of the year. Finally, our Midstream segment was essentially flat, with the operating income generated by the acquisitions of Adelphia and Leaf River offset by increased interest expense related to those acquisitions. slide 14 outlines our capital spending for the first six months of fiscal 2020 and the next three years. COVID-19 has not had a material impact on our projected capital spend thus far, with the exception of our Residential Solar program, which slightly decreased. Our NJNG capital program largely continues to progress as planned. Moving to slide 15, you can see an update on our cash flows and financing projections. As I mentioned before, we've taken steps to improve our liquidity.

And we also have no equity needs for fiscal 2020 and 2021 due to the equity offering we completed in the first quarter of this fiscal year. The results of our SREC hedging program are highlighted on slide 16. We've been actively hedging, and now have 91% of our asset revenues hedged for 2022, an increase from 71% when we last reported the data. For energy years 2023, we are now 22% hedged, and we'll continue to monitor the market to add to that hedge position. For energy years 2020 and 2021, we're nearly 100% hedged. At these ratios, our SREC revenues will be largely unaffected by future changes in SREC prices. On slide 17, we're providing some additional financial drivers for NJNG and CEV broken down by quarter. For NJNG, the percentage of utility gross margin earned during the year is heavily weighted to the beginning of our fiscal year, which are the winter hitting months, illustrating the seasonality of the business. Approximately 68% of utility gross margin fell in the first two quarters of this year. For CEV, we're providing a percentage of SREC revenues and ITCs that we expect to occur in each quarter for fiscal 2020. For SREC, revenue is heavily weighted to the back half of the year, in particular the fourth quarter, which is when SREC sales typically occur. Investment tax credits are also weighted towards the fourth quarter, with 54% of our ITCs occurring then, when most of our solar projects will be placed into service.

I'll now turn the call back over to Steve.

Stephen D. Westhoven - President and Chief Executive Officer

Thanks, Pat. This has been a challenging time for all of us, but even under difficult circumstances, the fundamentals of our business remain strong. We have sufficient financial liquidity across our business lines, and our team of dedicated professionals continue to drive the value of our company. Witnessing our employees bravely carry out their mission through these uncertain times has been inspirational and instills confidence that we will emerge stronger than ever.

Thank you for joining us today. And now we'll open up the call to questions.

Question & Answers

Questions and Answers:

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Operator

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

Travis Miller - Morningstar - Analyst

Good morning. Thank you.

Stephen D. Westhoven - President and Chief Executive Officer

Hey, Travis.

Patrick Migliaccio - Senior Vice President and Chief Financial Officer

Good morning, Travis.

Travis Miller - Morningstar - Analyst

Hi. So a couple of quick questions here. The weather normalization or decoupling causes, how much did that give you back in terms of the weather impacts that you had during the quarter?

Patrick Migliaccio - Senior Vice President and Chief Financial Officer

Travis, this is Pat Migliaccio. It was as you correctly said, we are decoupled and so insulated from the warmer than normal weather at the utility. The CIP mechanism, I believe, added a few million dollars this particular quarter. And more than, that for the six months ended March 31, to the tune of, I think, close to $10 million.

Travis Miller - Morningstar - Analyst

Okay. Good. And on the solar side, I was wondering if you could talk about what you're seeing on supply. Are you getting the supplies when you need it? What does the supply chain look like? Is there a difference between the larger projects and the smaller residential? Just wondering if you could talk a little bit about what you're seeing on the solar supply chain and supply.

Stephen D. Westhoven - President and Chief Executive Officer

Travis, this is Steve. So in regards to the solar market and our construction, we have purchased, I believe, all the solar panels that we need for this year, so our supply chain has been uninterrupted. So all the construction that we have, obviously, has been planned for quite a while, and we're entering into building our remaining facilities for the fiscal year as we go through the summer. That construction still continues. So from our perspective, uninterrupted and really business as usual.

Travis Miller - Morningstar - Analyst

Okay. And then one more, if I may. Did you see what's going on in the oil market, especially down in Texas? The other the oil basins and potential decline in the associated gas, potential increase in gas prices. How does that affect the Marcellus area and the spreads that you see? I think conceptually, if we get a rise in gas prices, decline in associated gas down south, how that might affect you, guys?

Stephen D. Westhoven - President and Chief Executive Officer

Well, I think as we alluded, certainly, the disruption in the oil market and what's happening to the producer community down there where production is either being halted or drilling programs are being reduced, it's just leading causing volatility in those markets. So certainly, spreads are wider. You've got a shifting of essentially gas moving from one area to another or gas production moving from one area to the other, driving value of storage to be able to balance all this out and certainly creating volatility in the marketplace. I think trying to predict exactly how this is going to fold out, it's going to be very difficult at this point in time. But I think the bottom line story of all this is that there's more volatility ahead and unpredictable future for essentially how this all plays out.

Travis Miller - Morningstar - Analyst

Okay. Great. Appreciate it. Have a good day.

Stephen D. Westhoven - President and Chief Executive Officer

Thank you, Travis.

Patrick Migliaccio - Senior Vice President and Chief Financial Officer

Thank you, Travis. Stay health.

Operator

[Operator Instructions] And our next question comes from Richard Ciciarelli with Bank of America. Please go ahead.

Richard Ciciarelli - Bank of America - Analyst

Hey, good morning. Thanks for taking my questions.

Stephen D. Westhoven - President and Chief Executive Officer

Hey, Rich.

Patrick Migliaccio - Senior Vice President and Chief Financial Officer

Hi, Rich.

Richard Ciciarelli - Bank of America - Analyst

Hey. Just had a quick one back to the solar execution. And I know most of the ITC recognition is in the back half of the year. But anything that you're seeing in terms of demand from customers or ability to execute on specific projects into 2H just given the COVID impacts and social distance and what have you?

Stephen D. Westhoven - President and Chief Executive Officer

Well, Richard, our construction crews are basically maintaining social distancing, certainly adhering to all the CDC and state guidelines for construction. And as we said before, certainly, the safety of our employees and our customers is of utmost importance. And then as far as the construction goes, the BPU reconfirm that solar is a essential service, and that construction is moving forward. So essentially, all the projects that we've had planned for quite some time are moving forward. And we're hopeful that we'll be able to complete those by the end of the fiscal year.

Patrick Migliaccio - Senior Vice President and Chief Financial Officer

And Richard, the only thing I'd add, as I mentioned in my script, we did decrease slightly our expectations for Sunlight Advantage. It's really not a reflection of construction, more a reflection of our channel partners not being able to get into some customers' homes to do the marketing associated with that, as you might imagine.

Operator

[Operator Instructions] And this will conclude our question-and-answer session. I'd like to turn the conference back over to Dennis Puma for any closing remarks.

Dennis Puma - Director, Investor Relations

Okay, Cole. Thank you very much, everyone, for joining us this morning. As a reminder, a replay of this call is available on our website. And as always, we appreciate your interest and investment in New Jersey Resources. Stay safe, everyone. Goodbye.

Operator

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Q2 2020

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