Morningstar | New Jersey Rate Case Filing Provides Latest Regulatory Test For New Jersey Resources
Despite its diversification into nonutility energy businesses, New Jersey Resources continues to collect about two thirds of its earnings from high-quality, stable, growing gas distribution and midstream operations.NJR has an enviable combination of constructive regulation and customer growth in New Jersey that has resulted in an impressive record of earnings and dividend growth. Customer growth continues well above 1% annually, and state regulators have supported infrastructure investments that should drive earnings growth for at least the next four years. Investors seeking a consistent and well-run income machine should watch for a buying opportunity. New Jersey's constructive regulation reduces the cash flow drag between investment and rate recovery. This allows NJR to support a high payout ratio and impressive dividend growth. We think NJR can increase earnings and the dividend 7% annually through 2022 with minimal regulatory risk.NJR had gone nearly 10 years since a base rate review before 2017, remarkable in the utilities industry. Not surprisingly, regulators cut NJR's allowed returns on equity to 9.75% starting in 2017, but cheap financing has offset some of that drag. Management has asked for a $128 million rate increase going into 2020, but we think that is aggressive.NJR's nonutility businesses include retail energy marketing and solar energy. The solar business is relatively stable, but energy marketing can be highly volatile based on gas prices, basis spreads, and winter weather. Extreme winter weather in 2014-15 and a cold 2018 winter that brought in substantial cash flow highlighted the option value of this business. But one wrong move could result in a substantial drag on earnings and cash flow.Investments in renewable energy should continue to provide growth as NJR capitalizes on its low cost of capital and tax incentives. However, we expect that growth to slow as new projects attract more competition and lower returns. Solar in New Jersey is the most financially attractive because of the renewable energy credits NJR can sell to the electric utilities at premium prices.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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