New Jersey Resources Corporation (NJR) Q4 2021 Earnings Call Transcript

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New Jersey Resources Corporation (NJR 0.60%)
Q4 2021 Earnings Call
Nov 18, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, my name is Chad and I will be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources Fiscal 2021 Earnings Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Now I would like to turn the conference call over to Dennis Puma. Sir, you may begin the conference.

Dennis Puma -- Director, Investor Relations

Okay. Thank you, Chad. Good morning, everyone, and welcome to New Jersey Resources fiscal '21 year-end 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 this call that the 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 also be found in the forward-looking statement section of today's earnings release furnished on Form 8-K and in our most recent Forms 10-K and 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 financial measures such as net financial earnings or NFE. We believe that NFE, net financial loss, utility gross margin and financial margin provide a more complete understanding of our financial performance. However, these non-GAAP items, non-GAPP measures are 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 for today is found on Slide two. Steve will begin today's call with this year's highlights, followed by Pat, who will review our financial highlights. 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 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. I'd like to begin today's discussion on Slide three, with the review of the fiscal year-end results. This morning we announced fiscal 2021 net financial earnings per share or NFEPS of $2.16, which is a 24% increase versus last year's NFEPS for $1.74. Fiscal 2021s NFE is much larger or much sharper than expected, exceeding the midpoint of our original guidance for the year by 35%.

You may recall that last year's Analyst Day, we were expecting 2021 to be a reset year. This is mainly due to the change in accounting method for investment tax credits. However, the reset was negated by better than expected results in Energy Services, as well as positive results from our BGSS Incentive Program and New Jersey Natural Gas. This allows us to raise guidance 3 times during the fiscal year.

In September, we raised our dividend to an annualized rate of $1.45 per share, a 9% increase, compared to 2021 reflecting stronger cash flows and confidence in our strategy. We have now raised our dividend every year for the last 26 years. As you can see on the Charts, our track record of growing NFEPS in the dividend speak to the ongoing strength of our business. We have produced an NFEPS CAGR of 8.3% over the last four years and with the recently announced increase to our dividend rate, our five-year dividend per share CAGR is a healthy 7.3%.

Turning to Slide four, it's been nearly year since our 2020 Investor Day. We laid out our vision for strategy and growth. At our core NJR remains an energy infrastructure company with a portfolio of complementary businesses that leverage our utility experience. Our strategy for growth is granted at three key principles: growing our regulated utility and renewable energy business; derisking and increasing the predictability of our earnings; and investing to achieve Clean Energy Future of decarbonization of our gas infrastructure.

I'd like to discuss the significant headway we made in executing that strategy in fiscal 2021. Beginning with our core operations, last March New Jersey Natural Gas filed a base rate case with the BPU and just yesterday the BPU approved the settlement of that case, resulting in a rate base of more than $2.5 billion and a rate increase of $79 million per year. We believe this is a fair interest [Phonetic] settlement, which acknowledges the long-term value of our infrastructure. We'd like to thank the BPU the division of Rate Counsel and their staffs for their work in reaching this resolution in a way that balances the interest of our customers and our company.

After years of hard work, New Jersey Natural Gas places the Southern Reliability Link into service. This 30 mile transmission main enhances the reliability and resiliency of our world-class distribution system and adds to its long-term value. In October, we completed construction on a cutting-edge Green Hydrogen Project in our service territory. And as we'll discuss later in more detail, the facility is producing 100% carbon free hydrogen through electrolysis process using renewable electricity to create zero carbon fuel. Both the SRL and hydrogen facility were included in our rate filings with cost recovery approved as part of the settlement.

This year, we also received BPU approval for two new regulatory progress that will help provide future margin growth. First is our new SAVEGREEN program, which began late in fiscal 2021. This new energy efficiency program is our large stemmer, it authorizes $250 million in spending over three years and furthers our commitment to sustainability by helping customers lower their energy usage, save money and reduce their carbon footprint.

Second is our $150 million accelerated recovery infrastructure investment program approved in October of 2020 this program follows our SAFE I and SAFE II RISE programs and includes new infrastructure replacement and improvement projects that will add to the reliability and resiliency of our distribution system. And at CEV we expanded our solar footprint outside of New Jersey by completing our first commercial solar project in Connecticut. CEV now has $150 million of projects under construction, including our 25.6 megawatt facility in Monmouth, New Jersey. The project is the America's largest cap landfills solar array and CEVs largest commercial project to-date.

Turning to Slide five, our S&T business continued to execute its organic growth strategy, while also reducing risk. Adelphia gateway commenced construction of itself and we expect to place a number of facilities into service by the end of the calendar year. At Leaf River, we increased our contracted revenue with new and existing creditworthy counterparties by $46.5 million, since November of 2020. Our Energy Services business entering into long-term asset management agreements with an investment grade utility, executing on our goal for that business deliver more predictable net financial earnings. Under the terms of the agreement Energy Services will receive over $500 million in revenues net of demand charges over the next 10 years and exchange for the release of contracted transportation in the Northeast. The AMA became effective this month.

Turning to Slide six. This morning we reaffirmed our fiscal 2022 NFEPS guidance range of $2.20to $2.30 a share. We expect that most of our net financial earnings will come from our utility business, followed by our infrastructure investments at our non-utility subsidiaries. And importantly we're only including the AMA contributions from Energy Services segment guidance. This is consistent with our commitment to secure more fee-based revenue strategy services. Given the progress we've made this past year in our efforts to derisk our businesses, we believe that our net financial earnings are more predictable than a year ago. And accordingly, we are narrowing our expected long-term NFEPS growth range to 7% and 9% from our previous range of 6% to 10%.On Slide seven, I'd like to spend a few minutes providing an update on our company's decarbonization journey with a focus on the utility. In the last 10-years, our company has made important progress toward clean energy future. New Jersey Natural Gas is a leader in energy efficiency with more than $230 million of investments in the SAVEGREEN program since inception. This program helps customers save money by reducing their energy consumption and will be critical to further reduce their carbon footprint over the coming decades.

We've also invested over $2.3 billion in safety, reliability and emissions reduction under natural gas delivery system. New Jersey Natural Gas is the first utility in New Jersey to replace all cast iron pipe, it is on track to be the first in the state through fully replaced its unprotected steel infrastructure. And by the end of the year 100% of our system will be either plastic or protected steel. These efforts of allowed NJR to build the most environmentally sound system in the state as measured by weeks per mile and reduce it's operational emissions in New Jersey by over 50%, since 2006. This puts us in a strong position to start pursuing the use of decarbonized fuels like RNG and Green Hydrogen.

And today we're announcing a goal of net zero emissions for our New Jersey operations by 2050. We will achieve this goal with actions such as transitioning our fleet of vehicles to low or no carbon fuels and continue to make investments that support the integration of RNG and hydrogen in our system over the coming decades. This will drive greater decarbonization of the energy we deliver to our customers.

Turning to Slide eight, Mew Jersey Natural Gas stands on a strong foundation to start making immediate progress down this path. Our modern infrastructure is deploying decarbonized fuels today and when paired with other carbon reducing strategies, including aggressive energy efficiency, we see viable path to eventually deliver a carbon-neutral fuel supply to our utility customers. In doing so, we will play a leading role and help New Jersey reach its climate and carbon reduction goals. And we can get there more quickly, more affordably and with greater reliability and other approaches. This will also complement the state's renewable energy ambitions.

The advantages of this strategy are clear. First, this approach can accelerate and help New Jersey's goal of achieving lower emissions. The high customer penetration of our natural gas infrastructure gives us a broad platform to begin integrating RNG and Green Hydrogen into our system immediately. Steadily decarbonizing the energy we deliver to our customers just as the electric grid has begun delivering zero carbon electrons from wind and solar.

Second, this approach can help New Jersey reach its climate goals more affordably, existing energy infrastructure New Jersey has already built paid for and in service. Over the years more than $17 billion has been spent to build and maintain more than 35,000 miles to delivery pipelines throughout the state, a massive investment by our customers. Using this vast pipeline Energy Delivery Network, as an asset will help avoid the cost of an immense build-out of new infrastructure, making the energy transition more affordable for New Jersey by potentially 10s of billions of dollars.

Third from a reliability perspective, the benefits of using existing pipeline infrastructure in New Jersey are enormous, our pipeline system is designed to operate and meet peak demand on winter's coldest days, when energy consumption is the highest. The Natural Gas network handle this energy load in does so with 70 times fewer outages in the electric system in a given year. Our states do Energy Delivery Systems one gas and one electric, complement one another by sharing different energy loads in providing energy diversity and resiliency.

If we were to migrate our states entire energy demand to one system, it would come with significant financial costs and eliminate the resiliency and reliability of having two systems. And furthermore, as the state steps up its commitment to renewable generation, resiliency and reliability challenges will only grow. New Jersey plans to install 7.5 gigawatts of offshore wind and 14 gigawatts of additional solar by 2035. At that scale, intermittency of renewables require long duration storage solutions. Not only to address out our reliability, but also provide balancing and flexibility over days, weeks and even across seasons. And this is an area where gas infrastructure offers flexibility and support.

When renewable power generation exceeds demand, a surplus can be directed to Green Hydrogen production, providing the long duration storage solution for virtually zero energy loss, that supplements the shorter duration storage capacity of batteries. This helps address the reliability challenge of renewables and maximizes the state's investment in solar and offshore wind. And it's all by utilizing our pipeline infrastructure that is built, paid for and in service.

So let's take this out of the abstract and look at how we're pursuing this on our system today. Last month, the cutting-edge Green Hydrogen Project in New Jersey Natural Gas Service territory was put into service and clean by any hydrogen is being blended into our network to serve homes and businesses right now. The small system alone will offset 180 tons of carbon emissions per year. The equivalent of eliminating 90 tons of coal or over 400,000 miles driven

And as I mentioned before, this hydrogen displaces some fossil gas from the energy we are sending out, with no action or change needed on our customers' part. This project demonstrates that this is not just a theoretical exercise. The technology works, it's available in New Jersey Natural Has is pretty introduced now.

And just as importantly, our regulators see what we are doing with this investment and recognize its importance to emissions reductions goals. This is a tremendous credit to the BPU, and we acknowledge and thank them for their support. This is the clean energy future we see, and with our hydrogen project now completed, it gives us wave line of sight into the next-generation of clean energy infrastructure investments for our company.

So with that, I'll turn the call over to Pat for his part of the presentation.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Thanks, Steve, and good morning, everyone. I'd like to begin with Slide 11, showing the main drivers behind the NFE changes from fiscal 2020 to 2021. For 2021, we reported NFE of $207.7 million or $2.16 per share, compared to $165.3 million or $1.74 per share last year. NJNG reported fiscal 2021 NFE of $107.4 million, compared to NFE of $126.9 million during fiscal 2020. The decrease is due to higher O&M expenses, primarily related to increases in bad debt.

Turning to our non-utility businesses. CEV's net financial earnings declined by $5.3 million, primarily due to lower SREC revenue, which was partially offset by lower depreciation expense. The decrease in depreciation expense was due to a change in the useful life of CEV's assets. Storage and transportation reported fiscal 2021 NFE of $13 million, compared with NFE of $18.3 million during fiscal 2020. The decrease in NFE was due primarily to lower contributions from our equity method investments. Higher compensation and depreciated expense, which was partially offset by increased operating revenues at both Leaf River and Adelphia Gateway.

Finally, Energy Services reported NFE of $71.1 million, compared with a net financial loss of $7.9 million in fiscal 2020. The increase is due primarily to the significant natural gas price volatility associated [Technical Issues] strong area in February of this past year.

Turning to Slide 12. As Steve mentioned, the BPU approved a settlement of NJNG's rate case with a $79 million annual revenue increase that will become effective on December 1st. Under the terms of the settlement, our overall allowed rate of return is 6.84%, which includes a return on equity of 9.6% with a 54% equity [Indecipherable]. Our composite depreciation rate also did not change, remaining at 2.78%. Importantly, the improved rate base of $2.5 billion, includes SRL and our Green Hydrogen Project. This represents a 43% increase on a rate basis, compared to our last settlement.

Turning to Slide 13. Given the recent increase in natural gas prices, I wanted to take a moment to discuss how NJNG manages the cost of natural gas. As a reminder, the cost of natural gas supply for NJNG's pass-through to our customers to mitigate the risk of sudden and dramatic price changes, NJNG S&T [Phonetic] program. Our policy, at least 75% of our estimated winter send-out must be hedged prior to November 1st. Since NJNG's practice to hedge most of our winter needs with natural gas and storage. We currently have approximately 90% of our estimated winter needs already in storage. The prices were hedged more than a year ago. As such, our average hedge price is significantly below current spot prices.

By securing a cost-effective supply, leveraging the BGSS Incentive, NJNGs to be able to keep the cost of natural gas low. Even after including the expected change in rates from a recent rate case settlement, NJNG's average natural cash flow has declined more than 23% in real terms, since 2008.

Turning to Slide 14. You'll see that our targets for placing commercial solar projects in service for 2021 and 2022, remains at $315 million. We currently have $150 million of projects under construction, our largest figure ever, an additional $94 million under contract. However, we are approximately $60 million worth of projects that are under valuation and our ability to place those projects in service will depend on successfully closing the transactions and our construction time lines, which could be impacted by supply chain constraints. Having said this, even these risks materialize, the potential impacts to fiscal 2022 NFEPS would be minimal.

Finally, the large majority of the projects we expect to place in service in New Jersey have qualified or expected to qualify for 2 times. CleanEnergy interest continues to generate a significant portion of its revenues from the sale of SRECs. To minimize changes in its revenue, CEV hedges part of its expected production of SRECs to future contracts. The current status of our SREC hedging program is highlighted on Slide 15.

As you can see, we're almost fully hedged through energy year 2024. And the market fundamentals for energy years '25 and '26 supports strong pricing. With SRECs trading at or above 84% of the solar alternative compliance payment or SACP. We now have 41% and 18% edge rage years 2025 and 2026, respectively.

Turning to Slide 16, I'll take you some highlights of our capital plans, starting with New Jersey Natural Gas. With this around out rates, our capital spending at NJNG is expected to moderate somewhat over the next two years, but is still supportive of the double-digit rate base growth we communicated to you at our Analyst Day. Our current capital plan only contemplates our existing RNG opportunities and does not consider any additional ramp-up in RNG or hydrogen investments. We allow that our capital plans to get more visibility at a potential projects. As discussed earlier, we have a large in service solar capex target for this year. But given the risk of the time and execution, we're widening the capex range for CEV. And finally, we expect to allocate around $100 million to our S&T segment fiscal year 2022, most of it to complete the construction of our Adelphia Gateway Project.

Turning to our cash flows on Slide 17. You can see the very strong cash flow from operations we generated in the fiscal year 2021. We're projecting that fiscal 2022 cash flows will be at around the same levels. Even when considering that our forecasted contribution from energy services is only from the fee-based asset management agreements that became effective earlier this month. And for fiscal 2023, we expect cash flow from operations to further increase, mainly driven by NJNG.

Stephen D. Westhoven -- President and Chief Executive Officer

Thanks, Pat. I'd like to finish up today with a few thoughts on what lies ahead for us in fiscal 2022. And New Jersey Natural Gas as discussed, the rate case is now behind us. SRL and our first hydrogen projects are included in those rates, which go into effect in December. And moving forward, we expect our customer growth numbers will return to pre-COVID levels of approximately 1.7% as the economy continues to recover. We are assessing sites for future hydrogen RNG projects, and we'll continue to add low and zero carbon fuels to our system.

And at CEV, we currently have $150 million of projects under construction. We continue to grow outside of New Jersey as we seek to expand our pipeline of projects. We expect that more of Adelphia will come online during fiscal 2022, and we'll continue to seek additional organic growth from that project and then energy services or NFE projections only consider contracted AMA revenues and cash flows. We will continue to seek more fee-based transactions, allowing for more predictable NFE from this segment.

To conclude, moving to Slide 19, we expect NJR to continue delivering long-term value for our shareowners, anchored by our regulated utility and the infrastructure investment opportunities provided by our other business segments. And to summarize, we offer investors an attractive 11% to 13% expected total return based on our dividend yield of about 4%, and on long-term NFEPS expected growth rate of 7% to 9%.

We appreciate that you took the time to join us here today. And I'd like to recognize and thank our employees for all of their hard work and dedication that drives our performance. So now let's open the call to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question will come from Gabe Moreen from Mizuho. Please go ahead.

Gabe Moreen -- Mizuho Securities -- Analyst

Hey, good morning, everyone.

Stephen D. Westhoven -- President and Chief Executive Officer

Hi, Gabe.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Good morning, Gabe.

Gabe Moreen -- Mizuho Securities -- Analyst

Yes, a couple of quick questions for me. Just on the guidance narrowing you mentioned more visibility, I think, to future stuff. Beyond the rate case having just settled, I guess, is there anything else that you'd, kind of, call out in terms of the upper or lower end of that range being narrowed? And then also on a related note, is it safe to assume that, I guess, the dividend growth guidance at this point is 7% to 9% as well?

Stephen D. Westhoven -- President and Chief Executive Officer

So yes, it's safe to assume. I think, there was a number of things. The rate case being settled is certainly a big one, but in that was completing SRL, which is a project that took a little while to complete. So we are happy to say that's operating. Also, Adelphia, it's under construction, and we're getting close to some commercial operations for some of those facilities. So there's been a number of large projects that are coming into commercial operation or into rates that really allowed us to narrow the range.

Gabe Moreen -- Mizuho Securities -- Analyst

Thanks, Steve. And then maybe if I could follow-up on the rate case settlement and future green investments, whether it's RNG or hydrogen, given the Howell facility and its performance so far and its cost, just curious whether in discussions with the DPU during the rate case or outside the rate case. What your appetite now is, I guess, to spend on more hydrogen facilities? How should we think about the cost of those facilities? And then maybe an update in terms of your latest -- a little more of the latest RND efforts, if you don't mind?

Stephen D. Westhoven -- President and Chief Executive Officer

So I think that's a great question. And really, the way I want to describe this or explain to investors is that we're on a path to decarbonization and that at the decarbonization, it's going to include hydrogen, it's going to include renewable natural gas. We've got energy efficiency as part of it. And then at some point in the future, you're going to see carbon capture and storage evolve as well. I think, if you're looking for next steps, most likely, and I think the next transaction we've seen and although we don't have anything to announce now is we'll have RNG being blended into our system.

But scaling up, you know, all of those things will depend on a number of evolving factors. When does hydrogen come to scale? We need to work with our regulators and administration to determine timing and development. And when will renewable resources come in and influence hydrogen production and other things. So there's just a number of factors that come into view. Also, we need to look and keep an eye on consumer costs as well. So we need to balance all these moving forward. So I think we're going to move forward, we certainly are in a path with carbonization, but there's going to be some innovation, and you'll see us taking next steps. But I think a few things have to come to clear view, certainly, scale and cost and things like that, we need to materialize.

Gabe Moreen -- Mizuho Securities -- Analyst

That's fair. And then I think last one for me would just be on energy services, I noticed that you're not providing or not including anything beyond AMAs and guidance. I know you typically hadn't really had that much contribution from energy services and guidance as a kind of normal matter of course, but I just wanted to ask is there any change to business strategy there because of that? Or are you just really leaving additional energy service upside as just that upside began?

Stephen D. Westhoven -- President and Chief Executive Officer

I mean, the short answer is yes. It's going to be additional upside will be that. I think the one thing to note is that the portfolio is a little bit smaller from the release of some of these assets and certainly just tightening up that book. So I think that could be a consideration as well in view of that business.

Gabe Moreen -- Mizuho Securities -- Analyst

Got it. Thanks so much, Steve.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Thanks, Gabe.

Stephen D. Westhoven -- President and Chief Executive Officer

Thanks, Gabe.

Operator

And your next question comes from the line of Shar Pourreza from Guggenheim. Please go ahead.

Shar Pourreza -- Guggenheim -- Analyst

Hey, and good morning, guys.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Good morning, Shar.

Stephen D. Westhoven -- President and Chief Executive Officer

Hey, Shar.

Shar Pourreza -- Guggenheim -- Analyst

Just on RNG, I know you guys have highlighted opportunities more in terms of like third-party purchases, kind of, what the potential for New Jersey Legislation to allow rate basing of RNG assets through Senate Bill 3526. How are you sort of thinking about your strategy with PPAs versus company-owned, assuming it's signed into law? And is there any status on the legislation?

Stephen D. Westhoven -- President and Chief Executive Officer

So I don't know the status of the legislation and I know we're in lame duck now. And I guess it's anybody's guess of whether -- or how quickly that could move through. But I think about RNG, for our purposes, we've got a few opportunities that are on our system, and we're certainly pursuing it and seeing how we can integrate those. It's an important part of the process, like I was just saying, where to gave [Phonetic], you know, this is all a multipronged approach to decarbonization. So we will pursue RNG in getting those lower carbon fuels on our system. And we'll wait and see how the legislation occurs. And certainly, what types of transactions will fit us and our customers, as far as cost goes and being able to decarbonize the fuel stream. I'd ask Mark Kahrer, if he has any thoughts associated with RNG and kind of the legislative side of things.

Mark G. Kahrer -- Vice President, Regulatory Affairs

Yes. I think from -- so from our standpoint, right now, with respect to our investments, we already have the authority to be able to do that over the regi legislation that was passed a number of years ago. That's an important part to understand that, again, that enabled us to make that investment in [Technical Issues] higher than planned as well. So the opportunity already exists for our investment, the aspect of the legislation we'll try to clean up a little bit more is with respect to third-party purchases and how they get done and ensuring that those going forward. We're pretty confident on working with our commission to talk through these situations and as long as we can reach reasonable accommodations on some of the transactions and working into our supply portfolio. It's aligned with where the government strategy is and where we want to be.

Shar Pourreza -- Guggenheim -- Analyst

Got it. Perfect. Thank you for that. And then just on CEV, I mean, obviously, Steve, you highlighted a lot of the growth capital has been derisked at least through '22, right? How do we sort of think about maybe prospective growth opportunities for CEV in light of, sort of, the input cost pressures? You kind of touched on a little bit on the prepared, whether it's labor or transport panels we've seen in the space. I mean, I guess, do you have some purchasing flex like larger developers to sort of avoid it? Or could we see some slowdown at CEV maybe under an assumption, these cost pressures are more long-term in nature, especially as we're thinking about post '23, right? I mean, I guess, how are the conversations going with your suppliers?

Stephen D. Westhoven -- President and Chief Executive Officer

So certainly, there's tightness as you go farther and farther out in the market. I think the group's done a -- our CEV group has done a good job of kind of looking around the curve and being able to pre contract for the projects that we currently have under construction and make sure that the supplies are available, a little bit of tightness in some of the other components that we're seeing in the marketplace. But I guess as we move forward and go farther out, a little bit less view of that. But I'm assuming this is a short-term issue, short-term being measured in maybe a year out, you know, right now, we are prepared to executive on that and not change that.

Shar Pourreza -- Guggenheim -- Analyst

Perfect. That was it. Thanks, guys.

Stephen D. Westhoven -- President and Chief Executive Officer

Alright. Thank you.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Sure.

Operator

And your next question will come from the line of Travis Miller from Morningstar. Please go ahead.

Travis Miller -- Analyst

Good morning, everyone [Technical Issues]. Thank you.

Stephen D. Westhoven -- President and Chief Executive Officer

Good morning, Travis.

Travis Miller -- Analyst

Kind of the stick on the whole RNG and hydrogen theme. And then thinking about coming into the winter here, what are you seeing in terms of as you blend? Are you displacing some of the traditional natural gas supply that you need? Is it coming at a lower cost for customers? Is there storage? I'm thinking through kind of the benefits and -- of either displacing traditional natural gas or being able to supply at a lower cost through hydrogen and RNG versus natural gas? Are those any considerations that are happening right now?

Stephen D. Westhoven -- President and Chief Executive Officer

So I think, you know, thinking about at least the hydrogen component of it, it's a proof of concept. The volume is pretty small, compared to our own system. So really, it's a minimis impact on pricing and such. And as far as looking ahead of the winter, what are we going to displace, there's not enough volume there to really make any impacts. And I think we're a few years off before we get to scale, where you see numbers, I think, where you're going and want to talk about is how this is impacting the overall supply chain for natural gas coming to the system. So I think it's too small right now to really predict or talk about the way that you're asking that question.

Shar Pourreza -- Guggenheim -- Analyst

Yes. Okay. Do you see it ultimately being able to -- I don't know if it's save is the correct word, but offset some of the extra infrastructure costs? Using hydrogen RNG...

Stephen D. Westhoven -- President and Chief Executive Officer

I mean, certainly...

Shar Pourreza -- Guggenheim -- Analyst

In addition to obviously, the environmental benefits, right? But is there a cost component there that would be beneficial?

Stephen D. Westhoven -- President and Chief Executive Officer

I mean, you're definitely, you know, for moving toward a low carbonate decarbonized product being delivered to customers. You're going to have to have energy efficiency, which is going to reduce their usage, you're going to have renewable natural gas, which is similar to natural gas in its components and being able to be consumed and then have hydrogen as part of it. So you're going to push back on natural fossil fuel, if you will. So that's definitely going to happen in the future as we continue on this journey. At what point in time does this get up to a size that you can discern that in the marketplace. I think that's yet to be determined from some of the things that I had mentioned to Gabe earlier. There's a number of things that have to come to scale. We've got to work with administration, we've got to work with the BPU, we've got to be conscious to customer costs and things like that.

So I think those questions are difficult to accurately predict right now. But key takeaway is we are starting this journey right now, we are delivering some decarbonized fuel to our customers, and we're proving that essentially our infrastructure is going to be used long into the future, and there's good reason to do so.

Shar Pourreza -- Guggenheim -- Analyst

Sure. Okay. Well, great. You answered all my other questions. I appreciate the time.

Stephen D. Westhoven -- President and Chief Executive Officer

Alright. Thanks, Shar.

Operator

[Operator Instructions] The next question will be from the line of Julien Dumoulin Smith from Bank of America. Please go ahead.

Kody Clark -- Bank of America Merrill Lynch -- Analyst

Hey, it's Kody Clark on for Julien. Good morning.

Stephen D. Westhoven -- President and Chief Executive Officer

Hey, Kody.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Good morning, Kody.

Kody Clark -- Bank of America Merrill Lynch -- Analyst

So first, on Clean Energy Ventures. How are you thinking about geographic mix and the return profile across different states going forward? Are you still seeing that 7% to 7.5% IRR, kind of, across the board? Or is there a mix between New Jersey and some of the other states that you're looking at?

Stephen D. Westhoven -- President and Chief Executive Officer

So I think the way we're looking at it strategically, I think we've said this before, we started New Jersey, we've made relationships with suppliers, with contractors, with developers, and that's been a natural progression to go into other states and certainly in the Northeast, you've got all the same suppliers and contractors and developers operated in many different states. So in thinking about it, it was a natural move for us to be able to make the investments. Each state has a slightly different construct and you've got some different risk profiles in that, whether it's a feed-in tariff in another state. Obviously, in New Jersey, you've got what's now or TREC they're certainly coming of TREC. And I think when we look at it, slightly different returns based on risk profiles. But I think, by and large, you're in the ballpark there.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

[Technical Issues] as Steve said, I think you are accurate there, and it's a mix, call it quoting, we really only have our first project up and down in Connecticut this year. We've got some others that are slated and rely on to next year. Those feature feed-in tariffs/PPA type arrangements. And as you build up a cost of capital, if you've got something that looks like a 20, 25-year PPA that's providing the revenue support with the credit quality utility, you might see the IRRs trend down a little lower on something like that. New Jersey, we're still fairly comfortable that IRR are probably at the 7% range. And -- but remember, we have some competitive advantages in the state and that we -- 10% of the market share. And so we had some volume efficiencies in the state [Technical Issues] that we don't necessarily see external to New Jersey.

Kody Clark -- Bank of America Merrill Lynch -- Analyst

Okay. Got it. And just second, wondering if you're embedding any assumptions around the solar discusser program within that New Jersey return profile. And the narrowed CAGR going forward, given some of the reductions in the subsidies that we saw earlier this summer. And some clarity still needed on projects over five megawatts.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

So Cody, it's Pat Migliaccio again. I think as we communicated at our Analyst Day, we expected that roughly half of our projects will be in state, roughly half of them out of state. As we sit here today, that has trended more toward New Jersey projects, probably closer to two-thirds [Technical Issues] deep relationships we have in the state and the very attractive TREC subsidy. And so that's the case for 2022 [Technical Issues] plan for 2023 and identifying those. I'd expect to see a bigger shift potentially out of state. And that's one of the benefits of diversification.

As you know, the successor program for projects over 5 megawatts is now targeted for finalization will sometime this winter. And so that's their line on benefit certification we can are between New Jersey and other states.

Kody Clark -- Bank of America Merrill Lynch -- Analyst

Okay. Got it. That's all I had. Thank, Steve, in fact.

Operator

And thank you. Ladies and gentlemen, this concludes our question-and-answer session. At this time, I would like to turn the conference back over to Dennis Puma for any concluding remarks.

Dennis Puma -- Director, Investor Relations

Okay. Thank you, Chad. I want to thank everybody 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 New Jersey Resources. See you next quarter. Good-bye.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Dennis Puma -- Director, Investor Relations

Stephen D. Westhoven -- President and Chief Executive Officer

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Mark G. Kahrer -- Vice President, Regulatory Affairs

Travis Miller -- Analyst

Gabe Moreen -- Mizuho Securities -- Analyst

Shar Pourreza -- Guggenheim -- Analyst

Kody Clark -- Bank of America Merrill Lynch -- Analyst

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