Earnings Call Transcript - NJR Q4 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources Fiscal 2025 Fourth Quarter and Year-End Financial Results Conference Call. Thank you. And I would now like to turn the conference over to Adam Prior, Director of Investor Relations. You may begin.

Adam Prior, Director of Investor Relations

Thank you. Welcome to New Jersey Resources Fiscal 2025 Fourth Quarter and Year-End Conference Call and Webcast. I'm joined here today by Steve Westhoven, our President and CEO; Roberto Bel, our Senior Vice President and Chief Financial Officer; as well as other members of our senior management team. Certain statements in today's call contain estimates and other forward-looking statements within the meaning of the securities laws. We wish to caution listeners of this call that the current expectations, assumptions and beliefs forming the basis of our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to materially differ from our expectations as found on Slide 2. These items can also be found in the forward-looking statements section of yesterday's earnings release. Furnished on Form 8-K and in our most recent Forms 10-K and 10-Q as filed with the SEC. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking 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 earnings, 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 plan for today's presentation are available on our website and were furnished on our Form 8-K filed yesterday. Steve will start with this year's highlights and a business unit overview beginning on Slide 5. Roberto will then review our financial results. Then we will open it up for your questions. With that said, I will turn the call over to our President and CEO, Steve Westhoven. Please go ahead, Steve.

Stephen D. Westhoven, President and CEO

Thanks, Adam, and good morning, everyone. I hope you all had a chance to review our earnings materials, which include detailed disclosures on our growth prospects. I wanted to start by discussing a few highlights. We delivered excellent results in fiscal 2025, driven by strong execution and performance. For the fifth year in a row, we exceeded initial earnings guidance and long-term growth targets. After a successful 2025, there are a few key themes as we look ahead for fiscal 2026 and beyond. First, consistency in execution. We're guiding to NFEPS of $3.03 to $3.18 per share in fiscal 2026. The range is consistent with our long-term 7% to 9% growth rate, while leaving additional room for upside. Second, targeted capital deployment. We expect to invest roughly $5 billion over the next 5 years across the whole company, with roughly 60% allocated to our utility, New Jersey Natural Gas. To put the $5 billion in context, this represents a 40% increase compared to the CapEx spend over the last 5 years. Third, a healthy balance sheet anchored in disciplined financial management. We expect credit metrics to remain strong with healthy cash flows, ample liquidity, and a balanced debt maturity profile that supports long-term stability. Importantly, NJR requires no block equity issuance to execute on its capital plan. On the next slide, we highlight a few of the key drivers of our business segments. To begin, New Jersey Natural Gas is positioned for high single-digit rate base growth through 2030. S&T is expected to more than double net financial earnings by 2027, driven by favorable recontracting of both Adelphia and Leaf River. Looking ahead, we recently filed with FERC a plan to increase working gas capacity by over 70% at Leaf River. And in Clean Energy Ventures, we expect to expand capacity by more than 50% over the next 2 years with a robust pipeline of safe harbor projects. In short, through a disciplined capital investment strategy, we have visibility to deliver sustainable growth well into the future, supported by a solid balance sheet. And we are able to achieve all this with minimal dilution to shareholders. Let me turn to a brief discussion of each business unit, starting with New Jersey Natural Gas on Slide 7. Our planned investments at New Jersey Natural Gas are expected to drive high single-digit rate base growth through 2030. The New Jersey Natural Gas operates within a constructive utility framework and continues to make responsible investments in safety and reliability while prioritizing affordability for our customers. Natural gas is by far the cheapest option for customers to heat their homes. Energy efficiency programs such as SAVEGREEN further reduce usage and costs while aligning with environmental goals. For example, residential customers who fully participate in SAVEGREEN's whole home offerings see a reduction of up to 30% in their energy usage, saving hundreds of dollars in utility costs every year. Moving to the next slide. Storage & Transportation is emerging as a key earnings growth driver for NJR. Over the next 2 years, we expect NFE to more than double at S&T, and this is largely driven by strong recontracting in both the Adelphia and Leaf River. These are fixed-price contracts with quality and creditworthy counterparties. When we recently reached a settlement in our FERC rate case in Philadelphia, this constructive outcome enables recovery of the substantial investments and operational improvements made in recent years. While near-term earnings are set to double, we are actively pursuing organic growth opportunities for additional upside at Leaf River, which we outlined on the next slide. When we acquired Leaf River in 2019, we positioned NJR as a leading service provider in the Gulf Coast, one of the highest growing energy demand centers in the United States. In addition to the prime location, the long-term value of the asset was enhanced by expansion options beyond the three existing operating caverns. Since our purchase of the asset, market demand has strengthened. Throughout fiscal 2025, we conducted a number of nonbinding open seasons, which confirmed the high level of commercial interest and capacity expansion. Following this favorable response, we filed a FERC application at the end of October that included several complementary investments to increase Leaf River's working gas capacity by over 70%. They include the expansion of our existing caverns to working gas capacity of 43 Bcf by 2028, and the development of an additional fourth cavern that will bring total capacity to 55 Bcf. Each phase of the investment is expected to be backed by long-term fee-based contracts, building on our already strong entity growth. This phased approach has an inherent speed-to-market advantage that positions NJR ahead of greenfield development options. To conclude, we see considerable upside in both the near and long-term as S&T becomes a greater contributor to NJR's earnings profile. Moving to Clean Energy Ventures on Slide 10, we expect to grow in service capacity by more than 50% over the next 2 years. Looking ahead, we have a strong project pipeline designed to maintain investment tax credits through strategic safe harboring. This positions CEV to deliver continued growth in high single-digit unlevered returns. So with that, I'll turn the call over to Roberto for a financial review. Roberto?

Roberto Bel, Senior Vice President and Chief Financial Officer

Thanks, Steve. Fiscal 2025 was an excellent year with strong even growth, a solid balance sheet, and continued investment across our businesses. Slide 12 highlights a few fiscal 2025 accomplishments. New Jersey Natural Gas achieved a constructive outcome in its recent rate case and delivered record investments for Clean Energy Ventures. Clean Energy Ventures added record new capacity. In fiscal 2025, CEV placed 93 megawatts of new commercial solar capacity into service, expanding our portfolio to 479 megawatts. In addition, CEV secured investment options for years to come through effective safe harboring. In Storage & Transportation, Adelphia received approval settlement on its third rate case, leveraging our advanced expansion initiatives. Energy Services achieved strong cash flow generation, and our Home Services business was named a top 20 ProPartner for the ninth consecutive year. We also marked an important milestone: 30 consecutive years of dividend increases, reporting confidence in our long-term plan. On the next slide, we finished the year at the top end of our guidance range, which was raised earlier this year. We delivered financial results ahead of expectations; roughly 2/3 of total EPS came from the utility. When you exclude the net impact of the sale of our residential solar assets, that figure raises over 70%, underscoring the stability of our earnings. Drivers of our performance include the completion of our rate case and a record year of saving investment. Additional drivers include approximately $0.30 per share from the sale of our initial solar portfolio, improved performance from our Storage and Transportation business, and strong winter results from Energy Services. Moving to a discussion of CapEx on Slide 14, we deployed $850 million across our businesses, which I'll highlight in the next few slides. On Slide 15, New Jersey Natural Gas represented approximately 64% of total CapEx with investments directed towards strengthening core infrastructure, enhancing system safety and reliability, and supporting customer growth. Almost half of these investments are recovered with minimal lag. As shown on Slide 16, fiscal 2025 CapEx for CEV came in well above expectations, reflecting accelerated progress. Importantly, our capital deployment target is fully safe harbor, securing tax benefits for future capital expenditures. Building on this from 2025, I wanted to shift our CapEx outlook on Slide 17. We're sharing a 5-year CapEx outlook of $4.8 billion to $5.2 billion through fiscal 2030. This represents a 40% increase over the previous 5 years of capital spending across our businesses. We expect that more than 60% of our total projected CapEx will be dedicated to the utility with CEV and S&T representing the balance. Together, these investments support our 7% to 9% long-term NFEPS growth target while maintaining a solid balance sheet, as discussed in the next slide. Strong cash generation across our businesses translates into an adjusted FFO to adjusted debt ratio that is projected to remain around 20% for the next 5 years with no block equity needed. Additionally, ample liquidity and a well-ordered debt maturity profile minimize near-term refinancing risk and preserve financial flexibility. Finally, we're initiating fiscal 2026 EPS guidance with a range of $3.03 to $3.18 per share. The range is consistent with our long-term 7% to 9% growth rate while leaving additional room for upside. The utility is expected to contribute approximately 70% of fiscal 2026 EPS, complemented by earnings growth from CEV and S&T and a baseline outlook for Energy Services. With that, I'll turn it back to Steve for concluding remarks on Slide 21.

Stephen D. Westhoven, President and CEO

Thanks, Roberto. Over the last 25 years, we've delivered industry-leading returns, reflecting both the quality of our utility investments and disciplined contributions from our non-utility businesses. While our infrastructure investments have been the foundation of this performance, energy services that complement that strength enhance consolidated returns and provide flexibility to reinvest in our infrastructure businesses. To recap, fiscal 2025 was another year of solid execution, marking 5 consecutive years of exceeding initial earnings expectations. Our long-term growth remains anchored by our regulated utility with clear visibility into capital spending at New Jersey Natural Gas. Storage and Transportation is set for accelerated growth with earnings expected to more than double in the near term before we even begin to factor in those capacity expansions we highlighted earlier. Over the next 2 years, Clean Energy Ventures expects a 50% increase in installed capacity, and our project pipeline is secured into the future through proactive safe harboring. As the year stands, we are a balanced, diversified energy infrastructure company built for long-term stability and value creation. The outlook for fiscal 2026 and beyond is clear, well-funded, and utility-anchored. As we all know, New Jersey recently had a gubernatorial election; electricity prices and affordability issues were front and center. We understand the challenges that this state is facing today, and we look forward to working with the new governor to meet the call for swift deployment of clean energy solutions and to continue providing affordable natural gas service to families and businesses. Finally, a sincere thank you to all NJR employees for your dedication and hard work throughout the past year. Your commitment is the foundation for our continued success. So with that, let's open the line for questions.

Operator, Operator

Our first question comes from Gabe Moreen with Mizuho.

Gabriel Moreen, Analyst

Good morning, everyone. Just a question, maybe to start off on S&T here and Leaf River. It seems like a lot of positive developments. One, can you just talk about contract renegotiations and the extent to which maybe all the original contracts have rolled over on a remarketed or resigned at market rates at this point? Or is there still more to go on that front in the years ahead? And then secondly, around the FID of some of the bigger expansions that you may be looking at, can you just talk about potential timing for FID-ing those projects given the customer interest that you've seen in some of the nonbinding open seasons?

Stephen D. Westhoven, President and CEO

Yes, sure. So talking about the contracts, the contract tenure at Leaf River has various terms. So we've always got contracts that are coming on and off. I would say there's probably a bias towards the longer-term contracts currently. Certainly, the way the market is moving, any contract that you're signing up for in the future is higher than ones in the past. Remember, when we purchased that deal, the average contract rate was probably about $0.09 a dekatherm per month. We're now up to almost $0.20 dekatherm per month on average. So there’s a big contract upgrade there, and that's really driving the doubling of the net from S&T over the next few years. Moving forward, further constructive story, the open season provided for about 3 times the amount of capacity that we had available. Looking at the first filing, we've got a few stages or phases of investment and expansion at that facility. I would say that before we make any investment, we've got contracts to back it. That's something we've talked about for a long time, and we're not going to deviate from that. We've got signed contracts in place that provide a bit of clarity on where the revenues are coming to support those investments. You can make that assumption moving forward. As we make these investments, the first two involve expanding the compressor station and enlarging some of the existing facilities. Those are projects we are starting to initiate. You can see this reflected in our capital plan moving forward. Those are going to lead nicely into a fourth cavern expansion in the later years, so we'll evaluate that as we get closer to it. Like we said, the open season certainly supports it, and it’s very instructive for that business moving forward.

Gabriel Moreen, Analyst

And maybe if I can turn to CV, I think I have a bit more confidence in terms of the growth outlook there. Can you just talk about has anything shifted on the ground in terms of your ability to start construction, how much of the 50% increase here has actually started construction or is waiting on interconnects, and why you think you may be past some of the delays that you may have seen in the past in this segment?

Stephen D. Westhoven, President and CEO

Yes, we certainly have spent quite a bit of money. As you can imagine, the construction cycles are a little bit longer, and they go across fiscal years. So we're spending money now for projects that are going to come into service in the next fiscal year and then in the fiscal year afterwards. When we talked about in the last call, we've safe-harbored a significant number of megawatts. So we've got great options moving forward. I think the other thing to consider, as well, is that the capacity shortfall in the State of New Jersey and PJM is pushing for the quickest way to bring capacity to the market. Those projects that are shovel-ready are among our options. We feel well positioned going forward. That combined with the fact that we've got mature positions within the PJM as well. Everything is moving forward, with a great number of options. You can see by our capital plan, along with the extension of that capital plan out 5 years, the confidence that we have in our investments moving forward.

Operator, Operator

And our next question comes from the line of Jamieson Ward with Jefferies.

Jamieson Ward, Analyst

Congrats on another strong result, and thanks for the extra visibility with the 5-year look on CapEx and on CEV, which I'll maybe build on Gabe's question here. With the favorable treasury guidelines and all the planned investment in safe harbor, what's the realistic deployment timeline? It's probably the most common inbound question we get. But as we think about that pipeline, how should we model the earnings cadence?

Stephen D. Westhoven, President and CEO

So for the investments, we've got the capital plan that we put out there. Certainly, I just talked about it with Gabe from a policy perspective; we believe that there's going to be a lot of pressure to add as much capacity as possible, and that's favorable for our business. If you look at the number of safe harbor projects we have, especially over the next 2 years, we've got projects safe harboring that are in excess of what we need in our capital plan. So you have some ability to accelerate that. The capital plan that we have is the most accurate picture of what we're going to be able to achieve. I think looking at that, you can take your guidance from there.

Jamieson Ward, Analyst

That's terrific. I'll skip S&T because it was a very thorough answer before. I'll just ask one more quick one on CEV and then on the overall plan. So as we think about SREs, TREs, et cetera, what's the weighted average contract life? How should we be thinking about the time frame? That's the second most common question we get that's CEV-related. I think you're going to find a lot less questions after this deck. So thanks for all the information. But I'll just ask that one.

Stephen D. Westhoven, President and CEO

So you're asking about the time-related aspects, specifically the duration assigned to TREs and SREs and their longevity? I'm trying to understand the exact details of your question.

Jamieson Ward, Analyst

Yes. So just at a high level, we modeled roll-off over the next few years. The question that we get is just how confident are you in the numbers that you've got there. So just looking for a very high level, just a weighted average life remaining, right? Because, of course, the strike sort of trimmed down or tailored down over the last few years, and you're going to have SMT, which you were speaking to earlier. Obviously doubling and picking up a lot of that lag there. So just a quick question on that and then one on the overall 2030 CapEx plan.

Stephen D. Westhoven, President and CEO

So I'll talk about solar just from a broader perspective. We just talked about it was the quickest way to bring capacity to the market, and you can see the capital that we can deploy over the next 2 years being significant and possibly accelerating with certain policy adjustments. The process that we have, we've got the schedule for TRECs, SRECs; everyone knows the longevity of those. Additionally, as infrastructure becomes more challenging to build at each of these facilities, you have the ability to repower or put in battery options. You've already got an interconnect there as well. Kind of increases in Class 1 RECs have been shown over time. So speaking to the long-term value of these facilities, as the need for capacity grows, it won't make sense to retire capacity. Hence, there are expectations that continuing to operate these facilities as well are in play. We'll also consider how to improve these facilities moving forward. Organic growth remains crucial for us and enhancing and growing those facilities is essential as well. Hopefully, that answers your long-term view of how we're thinking about these assets.

Jamieson Ward, Analyst

I think the 4.8% to 5.2% range through 2030 looks good. I was going to ask about affordability, but I saw your slides in the appendix. As a final question, given everything in New Jersey and what you mentioned in your prepared remarks, do you have anything else to add about your affordability efforts there as we look ahead to the next rate case? We just received new rates in November 2024. That's all from me.

Stephen D. Westhoven, President and CEO

Thanks, Jamieson. Natural gas is the cheapest way that you can keep your home warm and your business running. We like our position when affordability becomes part of the conversation. As I mentioned in the presentation, we've got energy efficiency programs and SAVEGREEN where we're able to save customers money as well. We look forward to working with the new administration and identifying ways that we can keep the affordability story going from our company and assisting our customers in reducing costs as much as possible.

Operator, Operator

And our next question comes from the line of Eli Jossen with JPMorgan.

Elias Jossen, Analyst

Just wanted to start on the EPS growth outlook. Seeing some kind of drivers within the Leaf River storage capacity and overall S&T earnings upside. Are there any kind of headwinds elsewhere in the business to keep the growth rate largely the same across or possible decline in CEV contributions? Or can you just kind of frame tailwinds and headwinds for the overall range?

Stephen D. Westhoven, President and CEO

Yes. I'd say that we're an energy infrastructure and energy services company, and this country needs more energy. So we're going to make investments to facilitate that growth. You can see that reflected in our capital. Everything looks positive at this point. We're primarily focused on executing our plans to increase our earnings going forward. So, overall, we have confidence in these elements.

Elias Jossen, Analyst

Got it. Maybe just to frame it differently. Is there material upside from the S&T business within the growth range should you execute on some of the projects that you outlined?

Stephen D. Westhoven, President and CEO

I mean, there's always upside in our business. We're the same business we were last year and the year before, and we've always managed to capture some upside in these markets. We certainly normalize our expectations on the basis and recognize there's an ability to accelerate any of these infrastructure projects given the right policy initiatives. We're following a comprehensive plan that we believe is executable. We're optimistic that some opportunities will arise, and we'll ensure that we can execute perhaps even more quickly.

Operator, Operator

The next question comes from Travis Miller with Morningstar.

Travis Miller, Analyst

Kind of a combined question here on Slides 8 and 9. How much of that increase from fiscal 2025 to '27 on Slide 8 is due to the Adelphia rate case versus the recontracting and Leaf River? Going to Slide 9, is that capacity expansion trajectory also an earnings trajectory? I guess the crux in both of those is the recontracting element. First, that split between Adelphia rate case and the recontracting. And then is the recontracting an extra above that capacity addition? Does that make sense?

Stephen D. Westhoven, President and CEO

There's likely more coming from Leaf River recontracting at those sectors. But the bottom line is that for existing assets with no capital investment, we have been able to double the earnings coming from those assets, driven primarily by better overall contracts and higher prices coming from the customers. Great story. Looking at your forward growth opportunities, as I mentioned, we have the ability to expand a little bit at Adelphia Gateway and add more customers in that pipeline as well. Depending on how far this market goes, which I believe it will grow, we will need more and more energy and expansion of organic infrastructure. It's challenging to pinpoint where it will stop, but because we have existing assets, we can expand and we’re also able to start making the investments you see, at least in the short term. I believe it will continue in the longer-term as well.

Travis Miller, Analyst

Okay. Is that recontracting assumption based on today's rate at $0.27 at $0.20 dekatherm that you mentioned? Or is there another assumption you're making on the recontract?

Stephen D. Westhoven, President and CEO

Yes. It's not an assumption, Travis. These are contracts that we have in hand. These are not estimates of what the forward value is. These are contracts that we've got signed and they’re driving our earnings over the next 2 years in that business unit.

Travis Miller, Analyst

One high-level question. With all the CapEx you have and obviously the Leaf River, et cetera, how much capacity might you have to do more M&A in organic growth, either logistical, operational, or financial?

Stephen D. Westhoven, President and CEO

Yes. I mean, we're always looking to make bolt-on acquisitions and take advantage of available assets that fit within our current business structure. We're focused on building these businesses. If something comes along that fits organically, we will consider it. We've got the capacity on our balance sheet, and we like these businesses—the infrastructure business. So we'll continue to pursue opportunities just as we have in the past.

Operator, Operator

And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Adam Prior for closing remarks.

Adam Prior, Director of Investor Relations

Thanks, Abby, and I'd like to thank all of you for joining us. As always, we appreciate your interest and investment in NJR and we look forward to talking to all of you at Utility Week in a couple of weeks. Thank you so much. Have a good rest of your day.

Operator, Operator

And this concludes today's call, and we thank you for your participation. You may now disconnect.