New Jersey Resources Has Growth at Gas Utility and Clean Energy Businesses

Strategist

Travis Miller

New Jersey Resources, or NJR, is one of the few U.S. utilities that has committed to maintaining and growing a diverse set of businesses from rate-regulated natural gas distribution to renewable energy investments. Management's investments in nonregulated energy businesses such as solar and natural gas midstream are paying off nicely for investors.

Constructive regulation and customer growth in New Jersey have produced steady earnings growth for NJR's regulated gas distribution business. But that legacy business is set to contribute only about 60% of earnings in the coming years if NJR's midstream and renewable energy businesses continue to grow rapidly.

We forecast 8% annual average consolidated earnings growth, in line with management's 7%-9% target. NJR has exceeded that growth recently due to three consecutive years of unusually large weather-related benefits.

We expect NJR to invest $700 million in new solar projects during the next three years Other growth opportunities could include hydrogen and renewable natural gas. These projects support clean energy goals in New Jersey and other states.

New Jersey's historically constructive regulation allows NJR to pay out a higher share of earnings and grow the dividend in line with the utility's earnings growth. Regulators approved a settlement in November 2021 that maintains its 9.6% allowed return on equity from NJR's 2016 and 2019 rate cases. NJR plans to request another rate increase soon.

Although NJR's allowed ROE is lower than other utilities, the utility enjoys other rate mechanisms for its safety and upgrade investments that support steady cash flow. We expect NJR's regulated distribution utility can grow earnings 6% annually based on 1% customer growth and about $450 million of annual infrastructure investments.

NJR's $367.5 million acquisition of the Leaf River (Mississippi) Energy Center in late 2019 paid off big in early 2021 when extreme cold weather allowed NJR to profit from its gas in storage. New Jersey Resources' energy services business has performed exceptionally well when gas markets turn volatile during extreme weather events, but we don't think that business has an economic moat.

Business Strategy & Outlook

NJR owns a difficult-to-replicate network of natural gas distribution and midstream assets, providing an essential energy source to customers. In exchange for a service territory monopoly, state regulators set rates for NJR's distribution utility at levels that aim to keep customer costs low while providing adequate returns for capital providers. This implicit contract between regulators and the utility should, in the long run, allow NJR to earn a small spread over its cost of capital.

NJR's rate-setting mechanisms and overall regulatory environment are mostly constructive, consistently leading to returns on invested capital modestly above the weighted average cost of capital. We have strong confidence that NJR's ROICs will remain at a healthy spread over WACC for the foreseeable future, leading us to assign the company a narrow moat. 

As with all regulated utilities, we think regulatory caps on revenue and returns preclude NJR from establishing a wide economic moat.

NJR derives one third of its earnings and cash flows from businesses that have few competitive advantages, particularly its energy services business and renewable energy investments. These businesses would have to grow significantly relative to the utility for us to consider re-evaluating NJR's economic moat.

We consider its midstream business, which contributes about 10% of earnings, to have efficient-scale competitive advantages consistent with a narrow economic moat.

Narrow

Economic Moat

New Jersey Resources

New Jersey Resources Corp. is a holding company. The firm provides safe and reliable natural gas and clean energy services, including transportation, distribution, asset management and home services. It operates through the following segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services, Storage and Transportation, and Home Services and Other. The Natural Gas Distribution segment regulates natural gas services, off-system sales, capacity, and storage management operations. The Clean Energy Ventures segment consists of capital investments in clean energy projects. The Energy Services segment consists of unregulated wholesale and retail energy operations, as well as energy management services. The Storage and Transportation segment consists of investments in the natural gas storage and transportation market, such as natural gas storage and transportation facilities. The company was founded in 1981 and is headquartered in Wall, NJ.

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New Jersey Resources Corp. is a holding company, which engages in the provision of regulated natural gas distribution services, transmission and storage services, and operates certain unregulated businesses. It operates through the following segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services, Storage and Transportation, and Home Services and Other. The Natural Gas Distribution segment regulates natural gas services, off-system sales, capacity, and storage management operations. The Clean Energy Ventures segment consists of capital investments in clean energy projects. The Energy Services segment refers to the unregulated wholesale and retail energy operations, as well as energy management services. The Storage and Transportation segment is involved in the investments in the natural gas storage and transportation market, such as natural gas storage and transportation facilities. The company was founded in 1981 and is headquartered in Wall, NJ.

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