Morningstar | All Eyes on Progress of NJR's Regulatory Activity in New Jersey
We are reaffirming our $36 fair value estimate and narrow moat and stable moat trend ratings for New Jersey Resources after it reported net financial earnings per share of $1.27 in the second quarter of fiscal 2019, down from $1.62 last year. Management reaffirmed its $1.95-$2.05 EPS guidance for 2019, in line with our estimate.We anticipated lower earnings due to the exceptional outperformance of the firm's energy services segment last winter. A return to normal earnings at Energy Services was a $53.5 million drag on second-quarter earnings and a $65.4 million drag on first-half earnings, year over year. We expect that drag to disappear in the second half.
We continue to expect the firm can grow its dividend 7% annually at least the next three years even though earnings could take several years to top 2018 results.
The New Jersey utility steps in to a key regulatory period during the next nine months as state regulators consider its request for a $128.2 million rate increase. We assume a $95 million annualized rate increase. The primary difference is our assumption that regulators will approve an allowed return on equity closer to the utility's current 9.75% than its 10.9% request.
The utility also is proposing a five-year, $507 million Infrastructure Investment Program. Although most of the early planned investment was already contemplated in the company's $1.2 billion 2020-21 capital investment plan, we think packaging the investments into one comprehensive plan could help secure approval for the investments in the outer years. Management used a similar strategy with its NJ RISE and SAFE investment programs.
We think later this year the firm might address its midstream growth plans beyond 2020 when its Adelphia Gateway and Penn East projects go into service. New Jersey Resources should be able to grow that segment modestly with smaller incremental investments, but we wouldn't be surprised if management tries to find another large project.
New Jersey Resources is an energy services holding company whose principal business is the distribution of natural gas through a regulated utility, providing other retail and wholesale energy services to customers and investing in clean energy projects and midstream assets. The company's segments are: Natural Gas Distribution, which consists of regulated natural gas services, off-system sales, capacity and storage management operations; Clean Energy Ventures, which consists of capital investments in clean energy projects; Energy Services, which consists of unregulated wholesale and retail energy operations; and Midstream, which consists of investments in the midstream natural gas market.
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