EUR 850.00 For Business Accounts Only

Morningstar | Management Meeting: Constructive Regulation Supports NJR Outlook

We are reaffirming our $36 per share fair value estimate after meeting with New Jersey Resources’ senior management at the American Gas Association Financial Forum. We also are reaffirming our narrow moat and stable moat trend ratings.

NJR is in the midst of a base-rate increase that will be another test of what we consider a generally constructive regulatory environment in New Jersey. NJR has requested a $128.2 million rate increase, but we think regulators are unlikely to approve that much. We expect them to chop some $20 million simply by bringing NJR’s proposed 10.875% allowed return on equity down to its current 9.75% and possibly more if regulators use the 9.6% they approved in a recent rate review for neighboring utility Public Service Enterprise Group. We assume a $95 million rate hike.

Even with a more modest base-rate increase, NJR benefits from New Jersey regulators’ support for targeted capital investment. NJR has been able to avoid potentially contentious base-rate cases by directing most of its growth investment through programs like SAFE and RISE during the last decade. The latest iteration is the Infrastructure Investment Program, which includes $507 million of planned investment over five years. Its Southern Reliability Link project is another source of earnings growth that should face little regulatory opposition when it goes into service next year.

Long-term growth at NJR’s nonutility business is less certain. Management has talked about midstream and renewable energy growth outside of its core New Jersey utility service territory. We think investors should watch closely to ensure NJR selects projects with stable, utilitylike returns. Those types of projects are in high demand right now, and it could be tough for NJR to sustain growth at its nonutility business without sacrificing some return or taking more risk.