Earnings Call Transcript - NJR Q2 2026

Operator, Operator

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources Fiscal 2026 Second Quarter Financial Results Conference Call. The operator provided instructions. I would now like to turn the call over to Adam Prior, Director of Investor Relations. Adam, please go ahead.

Adam Prior, Director of Investor Relations

Thank you. Welcome to New Jersey Resources Fiscal 2026 Second Quarter and First Half 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 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 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 will 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 slides for today's presentation are available on our website and were furnished on our Form 8-K filed yesterday. Steve will start with this quarter's highlights and business unit overview beginning on Slide 5. Roberto will then review our financial results. Then we'll open it up for your questions. With that said, I'll turn the call over to our President and CEO, Steve Westhoven. Please go ahead, Steve.

Stephen D. Westhoven, President and CEO

Thanks, Adam. NJR reported excellent second quarter results during one of the most demanding winter periods in recent years. January and February brought sustained freezing temperatures in the Northeast region of the country. New Jersey Natural Gas experienced the highest send-out days in its history and our infrastructure, planning and operations delivered. Our teams provided safe, reliable service to homes, schools, hospitals and critical services across our communities. Our system operates exactly as designed when customers needed us most. This reflects years of disciplined investment in our infrastructure and a continued focus on safety and reliability. At Storage & Transportation, Adelphia Gateway had multiple days of operating at maximum capacity and Leaf River had withdrawals that exceeded those during the winter storm of 2021. Finally, our Energy Services team delivered exceptional results. As a result of Energy Services' outperformance, we were able to raise our fiscal 2026 NFEPS guidance for the second time this year. Roberto will provide additional details on our financial projections later in the call. With that, I'll turn to New Jersey Natural Gas and walk through how our efforts directly benefited customers on the next slide. Natural gas remains by far the most cost-effective option for home heating, particularly during periods of extreme cold; affordability and reliability go hand in hand. The same planning and operational discipline that allowed us to meet record demand this winter also helps customers manage costs during periods of higher usage. That's why we take a proactive approach to managing gas costs. Each year, we secure a significant portion of winter gas supply well in advance, limiting our customers' exposure to sharp commodity price increases. As we noted last quarter, going into this winter, the projected gas supply requirements at New Jersey Natural Gas were over 87% hedged, securing cost-effective supply to serve our customers. The average hedge price used for our customers was approximately $3.27 per dekatherm for storage and LNG, compared with the Citygate price, which traded in excess of $135 per dekatherm. This winter, New Jersey Natural Gas also delivered meaningful savings to our customers under the state-approved basic gas supply service incentive program. This helps to further manage gas costs during periods of high usage and elevated commodity prices, which we highlighted on the slide. Under this program, we generated over $93 million in gross customer savings over the winter season. Over the life of the program, we have generated over $1.6 billion in gross customer savings by optimizing our gas supply while also creating value for our shareholders. In parallel, we continue to invest in energy efficiency through our SAVEGREEN program. More than 115,000 customers have taken part in our programs to date, with customers who utilized our whole home offerings realizing bill savings of up to 30%. Finally, we provide payment flexibility and offer targeted assistance that helps customers manage usage and bills over time. Turning to Slide 7. The cost advantage of natural gas continues to support steady customer growth across our service territory. That growth reflects a combination of new construction, conversions and targeted infrastructure expansion all driven by customer demand. A recent example is Chester Township in Morris County, which is now formally included in New Jersey Natural Gas' regulated service territory. This reflects our ability to partner with communities and regulators to thoughtfully expand our footprint while continuing to deliver safe, reliable service. Now turning to our Storage and Transportation business on the next slide. As we discussed on our year-end earnings call, we expect net financial earnings from this segment to more than double over the next two years and we remain on track to achieve or surpass that goal. Over the next two years, our growth is driven by strong recontracting activity at both Philadelphia and Leaf River. These are fixed-price fee-based agreements with high-quality, credit-weighted counterparties, providing a high degree of predictability in our earnings. Moving to longer-term growth at Leaf River, we continue to make steady progress on our expansion plans. During the first quarter, we filed a FERC application in which we proposed increasing working gas capacities by more than 70% over the next few years. We recently received the environmental assessment from FERC which represents another important step in the review process, and the filing is progressing as expected. We've also secured a long-term contract supporting the initial expansion at our existing caverns with the remaining phases to be underpinned by long-term fee-based contracts as well. Overall, this project remains on track with regulatory review proceeding in line with our expectations, and we'll continue to provide updates as we move through the process. Moving to Clean Energy Ventures on Slide 9. During fiscal 2025, CEV increased installed capacity by almost 25%, and this momentum has continued with 33 megawatts of new capacity brought into service this year. We expect to increase installed capacity by an additional 50% through the end of fiscal 2027, supported by a pipeline of safe-harbor investment options in markets with supportive policy and strong demand growth. This is a diverse project pipeline that grants us the right, but not the obligation, to invest and is over 1.2 gigawatts, well in excess of our capital deployment targets. Deal flow has been strong in this segment, a result of broad industry relationships and steps taken last year to preserve investment tax credits. CEV is positioned to be increasingly selected with our investment decisions delivering strong investment returns in the high single- to low double-digit unlevered after-tax range. In addition, New Jersey and PJM require incremental electric capacity to meet rising demand, and solar offers the most expedient path to add new supply to the grid in the near term. CEV stands ready to be part of the solution. The team at CEV is in the early stages of exploring ways to leverage our portfolio of operational assets and existing PJM interconnections to add more supply to the grid in the near term. Technologies like linear generators, fuel cells and batteries offer CEV potential opportunities to optimize existing solar sites and benefit from investment tax credits into the 2030s. Moving to financing. We've historically utilized sale-leasebacks as the main mechanism to efficiently monetize the tax attributes of our solar investments. In the future, this may include the use of tax credit transferability as an additional tool. We will continue to evaluate the most economically advantaged structures available to support long-term shareholder value. Finally, last month, we reached an important milestone in CEV, surpassing 500 megawatts of in-service capacity. I want to thank the entire CEV team for their strong execution. With that, I'll turn the call over to Roberto for a financial review, and then I'll return for a few closing remarks. Roberto?

Roberto Bel, Senior Vice President and Chief Financial Officer

Thanks, Steve. Turning to Slide 11. The second quarter reflects strong execution across the portfolio and continued momentum into the second half of the year. We delivered solid net financial earnings across both our regulated and nonregulated businesses with continuous outperformance at Energy Services. As a result, we're raising fiscal 2026 guidance for the second time this year, while continuing to fund our capital plan and maintain a strong balance sheet. Moving to a brief walk for the quarter two. Fiscal 2026 second quarter consolidated net financial earnings was $221.5 million or $2.20 per share, a significant increase over the $17.3 million or $0.38 per share reported in the second quarter of fiscal 2025. Net financial earnings reflect solid performance across the portfolio with a notably higher contribution from Energy Services. For the year-to-date period, the higher net loss at CEV simply reflects last year's one-time gain resulting from the sale of our residential solar business. Overall, the mix of results restores the value of our diversified model. With that, let's turn to our capital plan on the next slide. We deployed approximately $400 million of capital across our businesses year-to-date. New Jersey Natural Gas represented roughly two-thirds of total capital spending with investments focused on strengthening core infrastructure, enhancing safety and reliability and supporting continued customer growth. We do not have any change to our estimate for fiscal 2026 and fiscal 2027 and are reaffirming our five-year CapEx outlook of $4.8 billion to $5.2 billion through fiscal 2030. More than 60% of this capital is expected to be invested as a utility with Clean Energy Ventures and Storage and Transportation comprising the balance. Collectively, these investments support our 7% to 9% long-term net growth target while remaining well within our long-term credit parameters, which I'll cover on the next slide. On Slide 14, we highlight the strength of our balance sheet, which continues to improve during periods of strong performance like this winter. We raised our adjusted debt-to-capital expectations for fiscal 2026 and project it to remain around 20% for the next five years. Energy Services' incremental cash flow this quarter enhances our ability to fund capital investment, support credit metrics and reinforces that we see no need for block equity in the foreseeable future. In addition, ample liquidity and a well-laddered debt maturity profile lessen near-term refinancing risk and preserve financial flexibility. And finally, as shown, we're updating our indicative guidance range for fiscal 2026. During our prior conference call, we raised our guidance by $0.25 per share, driven by Energy Services' outperformance in January 2026. With favorable results as Energy Services continued into February and March, we are increasing our NFEPS guidance by an additional $0.20 to a higher range of $3.48 to $3.62 per share. We are also revising our expected NFEPS contribution by segment, with Energy Services' percentage rising as a result of its outperformance and the other businesses adjusting accordingly. New Jersey Natural Gas will represent approximately 60% of the company's NFEPS for fiscal 2026. With that, I'll turn to Steve for concluding remarks on Slide 16.

Stephen D. Westhoven, President and CEO

Thanks, Roberto. NJR, once again, delivered exceptional results during a demanding winter period, reinforcing the reliability of our system and the durability of our business model. Our long-term growth continues to be anchored by our regulated utility with clear visibility into capital investment in New Jersey Natural Gas and a continued focus on operating safely and reliably when customers need us the most. Storage and Transportation remains well positioned with clear earnings visibility in the near term and additional upside over time as capacity expansion opportunities progress. Clean Energy Ventures, our portfolio continues to scale as expected, supported by a secured development pipeline and disciplined capital deployment. Taken together, execution across our complementary businesses provides momentum into the remainder of the year and reinforces our confidence in the path ahead. Finally, I want to thank our employees across NJR; your dedication, professionalism and commitment, especially through another challenging winter, are the foundation for our success. With that, let's open up the line for questions.

Operator, Operator

The operator provided instructions. Your first question comes from the line of Gabe Moreen with Mizuho.

Dylan Lipner, Analyst, Mizuho

Hi, everybody. This is Dylan Lipner on for Gabe. Good quarter. Just want to kind of hit back on CEV. If you guys could provide some more color on what you're seeing in the sense of solar project opportunities and outreach from PJM in the state, particularly as New Jersey looks to address generation gaps?

Stephen D. Westhoven, President and CEO

Yes. Really, it's been playing out just like we said all along. We see a number of safe-harbor projects. We've got a 1.2 gigawatt pipeline of projects available to us and the state has been certainly encouraging for development with the capacity shortfalls in PJM. The quickest way to bring new capacity to market is through solar. So yes, we're continuing to make investments, and we've got a number of really attractive choices in that space and we're continuing to develop solar. All things are going as we said over the past few calls.

Dylan Lipner, Analyst, Mizuho

Got you. And do you guys see this playing out more in the near term or towards the end of the day?

Stephen D. Westhoven, President and CEO

I mean, we're not changing our CapEx guidance. So we're still continuing to move forward to hit those numbers. The pressure on the market to develop and bring more capacity to electric customers in New Jersey is moving forward and is certainly an important part of the administration's goals of trying to lower electric costs.

Operator, Operator

The operator provided instructions. Your next question comes from the line of Travis Miller with Morningstar.

Travis Miller, Analyst, Morningstar

Good morning, everyone. Thank you. I wonder if you can go into a little more on Energy Services. What's happening fundamentally since February that's changed both your outlook and what you're actually realizing in that business?

Stephen D. Westhoven, President and CEO

Are you just referring to the guidance raise?

Travis Miller, Analyst, Morningstar

Yes, the guidance raise, yes. Relative to what you talked about in February, obviously, last winter in March and April. But wondering what's going on there, what you're seeing differently?

Stephen D. Westhoven, President and CEO

Yes. Really, when we raised guidance back in February, that was prior to the end of the winter period. Much of the winter had not yet transpired to that point. Through February and March, that book continued to increase in value as the winter concluded, we were able to close the books and look at those numbers. The earnings guidance raise that you see here is reflective of that. Energy Services continues to be a business that performs well for us long term. It lowers our debt and equity needs by the cash that it is able to bring in and does so with a low-risk profile. So we hope it continues going forward. But really, the whole reason for the initial raise and the subsequent raise was really just timing and having the winter conclude.

Travis Miller, Analyst, Morningstar

Okay. So the initial one incorporated firm results, right? And then this subsequent raise now incorporates additional post-period results. Is that right?

Stephen D. Westhoven, President and CEO

Yes, that's right.

Travis Miller, Analyst, Morningstar

Okay. And then Leaf River, when does that expansion CapEx start to come into the plan? And related to that, at what point do you need some extra financing above and beyond your plan, either equity or debt, to support the Leaf River expansion?

Stephen D. Westhoven, President and CEO

So we won't need any additional financing for Leaf River. Capital expenditures are starting now. We have started to make commitments on equipment and arrange for contractors and other things that begin the process of construction. You saw that we received the environmental assessment from FERC not too long ago. So everything is moving along as it should according to schedule. And of course, we've got that all backed by a long-term contract. We're moving forward on that project and expect to have that service in fiscal year 2027-2028.

Operator, Operator

That concludes our question-and-answer session. I will now turn the call back over to Adam Prior for closing remarks.

Adam Prior, Director of Investor Relations

Thanks so much, and I'd like to thank everybody for joining us this morning. As always, we appreciate your interest and investment in NJR. We'll see many of you in Scottsdale at AGA in May, and have a good rest of your day. Appreciate it.

Operator, Operator

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