NJR Financial Analysis

Analysis Date: 2/5/2025

Business Model

New Jersey Resources (NJR) operates a diversified energy business model. Its primary revenue streams are derived from regulated utility operations (New Jersey Natural Gas - NJNG), clean energy investments (Clean Energy Ventures - CEV), storage and transportation assets (S&T), and energy services (ES). NJNG's revenue is generated from natural gas distribution to customers. CEV revenues come from the sale of solar energy and related environmental attributes (SRECs, TRECs). S&T revenues are fee-based, derived from transportation and storage services. ES revenue is from wholesale natural gas sales and customized energy solutions.

Revenue Sources

• Natural Gas Distribution (NJNG): Primarily through regulated tariffs for gas delivery to residential, commercial, and industrial customers in New Jersey.
• Clean Energy Ventures (CEV): Sale of solar electricity, Solar Renewable Energy Certificates (SRECs), Transition Renewable Energy Certificates (TRECs), and related incentives from solar projects.
• Storage and Transportation (S&T): Fee-based revenues from providing natural gas storage and transportation services through Leaf River, Steckman Ridge, and Adelphia Gateway assets.
• Energy Services (ES): Revenue from wholesale natural gas sales, asset management agreements, and energy optimization strategies.
• Home Services (NJRHS): Sales and installation of home comfort equipment and service contracts.

Income Statement Analysis

• Operating Revenues increased by 4.5% year-over-year, indicating business growth, primarily driven by the Utility segment and potentially offset by non-utility revenue fluctuations.
• Gas Purchases (Utility and Nonutility) increased, reflecting higher gas costs or increased sales volume in both segments.
• Operation and Maintenance expenses decreased by 6.15%, a positive trend indicating improved operational efficiency or cost management.
• Regulatory Rider Expenses increased by 17.13%, which could be related to increased investments recovered through riders, impacting revenue and potentially margins.
• Depreciation and Amortization increased by 12.51%, likely due to increased capital investments in utility infrastructure and clean energy projects.
• Total Operating Expenses decreased by 9.84%, mainly driven by the significant 'Gain on Sale of Assets', and reduced O&M, offsetting increases in gas purchases, regulatory rider expenses, and depreciation.
• Operating Income significantly increased by 39.6%, driven by lower operating expenses, particularly due to the gain on asset sale, indicating improved profitability in the quarter.

Balance Sheet Analysis

• Cash and Cash Equivalents decreased significantly by 70.77%. This substantial decrease needs further investigation to understand the reasons, such as investments, debt repayment, or operational needs. However, the absolute value is still in millions.
• Total Assets slightly increased by 0.64%, indicating modest growth in the company's asset base.
• Total Long-Term Debt (Including Current Maturities) increased by 1.84%, suggesting a slight increase in leverage, possibly to fund operations or investments.
• Total Equity increased by 3.37%, reflecting an increase in the net worth of the company, likely driven by earnings during the quarter.

Capital Allocation

NJR's capital allocation strategy is focused on investments in regulated utility infrastructure, clean energy projects, and maintaining a strong financial profile. Dividends: NJR has a long history of dividend growth, as evidenced by the consistent increases in dividends per share over the past years and a recent 7.1% increase in the quarterly dividend rate. The current annual dividend is $1.80 per share, with a yield around 3.75%. This indicates a commitment to returning value to shareholders through dividends. Share Repurchases: There's no explicit mention of share repurchases in the provided documents, suggesting that dividends and business reinvestment are the primary focus of capital allocation. Business Reinvestment: A significant portion of capital expenditure is directed towards NJNG's infrastructure enhancement, customer growth, and energy efficiency programs like SAVEGREEN. CEV's commercial solar project pipeline and S&T's capacity recovery projects also represent substantial reinvestment in growth areas. The capital plan for FY2025-FY2026 ranges from $1.3B to $1.6B, showing a strong commitment to reinvesting in the business for long-term growth. Management emphasized strategic capital deployment to enhance utility infrastructure, expand clean energy portfolio, and optimize storage and transportation assets.

Management Commentary

Fiscal 2025 is off to a strong start. During the Q1, we continued to execute on our strategic initiatives, driving growth across our business segments.

At New Jersey Natural Gas, we achieved a significant milestone with the implementation of new rates following the approval of our base rate case. This was supportive of our ability to recover the $850,000,000 of investments made since our last rate case and results in a rate base of $3,200,000,000.

Clean Energy Ventures continues to advance its commercial solar strategy with a project pipeline of over 1 gigawatt.

Our fiscal 2025 NAP EPS guidance is $3.05 a share to $3.20 per share, which exceeds our long term growth rate of 7% to 9% and incorporates the one time gain from our sale of our residential solar portfolio.

Operating cash flows were negative in Q1 2025 compared to positive in Q1 2024.

Adelphia Gateway Section 4 rate case is progressing with expected resolution later this year, subject to FERC outcome and potential hearing.

Overall Sentiment: Positive. Management expresses confidence in the company's performance and strategic direction, highlighting strong Q1 results, successful rate case settlement, growth in Clean Energy Ventures, and reaffirmation of fiscal year guidance. The overall tone is optimistic, focusing on execution and growth across all segments. While operating cash flow was negative, the positive impact of the asset sale and overall financial outlook are emphasized.

Recommendation

Rating: Hold

Reason for Rating: Based on the analysis, a 'Hold' recommendation appears appropriate for NJR at this time. The company demonstrates strengths in its regulated utility business and clean energy growth potential, supported by a diversified business model and a history of dividend growth. The successful rate case settlement at NJNG and the gain from the residential solar portfolio sale are positive near-term catalysts.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/5/2025, 7:52:27 AM