New Jersey Resources

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

New Jersey Resources is a diversified energy services company, primarily operating in regulated natural gas distribution, clean energy, energy services, and energy storage, mainly in New Jersey, with some operations in other parts of the U.S.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

New Jersey Resources (NJR) is a diversified energy services company with four main segments. It’s core operations involves the distribution of natural gas to approximately 760,000 residential and commercial customers through its New Jersey Natural Gas (NJNG) subsidiary. The company is also involved in clean energy ventures via NJR Clean Energy Ventures (NJRCEV) and serves energy solutions through its NJR Energy Services (NJRES). Additionally, they own and operate natural gas storage facilities and transportation assets.

NJR operates primarily in New Jersey and also has some assets in other parts of the United States.

Revenue Distribution

  • Natural Gas Distribution (NJNG): This segment remains NJR’s core business, generating the majority of the company’s revenues by distributing natural gas to residential and commercial customers across its service territory. This revenue is typically quite stable due to its regulated nature. It accounts for about 80% of NJR’s revenue.
  • Clean Energy Ventures (NJRCEV): This segment focuses on renewable energy projects, primarily solar and wind. Their activities involve the development, construction, and operation of these renewable energy installations.
  • Energy Services (NJRES): NJR Energy Services conducts wholesale and retail energy commodity sales, transportation, and other energy related activities. This segment is subject to fluctuations in energy commodity prices and market demand.
  • Storage and Transportation (S&T): This smaller segment involves natural gas storage facilities and transportation assets, which also have the potential to generate more recurring income.

Recently they have diversified to energy efficiency programs through SAVEGREEN to increase revenue.

  • Transition to Clean Energy: The broader industry trend is a shift towards cleaner energy sources, which puts companies in the regulated natural gas distribution space at risk of being disrputed.
  • Regulation and Policy: NJR’s business is heavily influenced by regulations, especially in its core natural gas distribution segment. Changes in these rules can significantly affect profitability.
  • Energy Prices: Commodity price fluctuations, especially natural gas prices, have a direct impact on the company’s operating profits, especially in the energy services sector.
  • Competition: NJR faces competition from various other energy providers, including companies providing electricity and other forms of energy, in addition to competing with other natural gas distributors within its service region.

What Makes NJR Different

  • Diversified Portfolio: Unlike pure-play utility companies, NJR has a diversified portfolio spanning natural gas distribution, renewable energy, energy services, and midstream infrastructure, which can provide more predictable cash flows and opportunities for growth in different market conditions.
  • Focus on New Jersey: NJR maintains a concentrated presence within New Jersey, which may allow for better operating proficiency and cost controls in this geography.

Moat Assessment: 2 / 5

NJR’s moat can be described as narrow, with some sources of competitive advantage, but several limitations.

The main problem is the commoditized nature of energy and the regulations that constrain the profitability and freedom of the business.

  • Regulated Nature of NJNG: The core business, NJNG, operates under regulated utility frameworks, which creates some level of stability and barriers to entry due to regulatory approvals, rate-setting and established infrastructure requirements. This provides a narrow moat due to the stable recurring revenues.
  • Local Market Presence: NJR has a strong, established presence in the New Jersey market, making it difficult for new entrants to achieve scale and challenge its customer base. This geographic advantage creates some lock-in for customers.
  • Midstream Assets: The storage and transportation segment provides strategic assets that are difficult and expensive for other companies to replicate, and that generate recurring income from transportation or usage of capacity.
  • Renewable Assets: Although the renewable energy sector has a lot of tailwinds, and is great for the future, NJR hasn’t demonstrated any great ability to generate sustainable competitive advantage, as it is exposed to constant competitive forces.

Limitations to the Moat

  • Regulatory Risks: While regulation ensures some profit and stability, it also limits potential profitability as regulatory decisions constrain the business.
  • Commoditization: The energy markets, especially natural gas, are commoditized, with limited product differentiation, which means that price is a major component of competition.
  • Interconnection with Macro-economics: A large part of their business is dependent on interest rates, inflation, and government support, making them extremely sensitive to external forces that cannot be easily predicted.

Risks to the Moat and Business Resilience

  • Regulatory changes: Changes in regulations, particularly rate increases or tax laws, could have a big impact on the profits, growth or cost structure of the business. It’s something that is always evolving and hard to predict.
  • Environmental and Social Concerns: Shift towards renewable energy and environment friendly energy usage can affect NJR’s core natural gas distribution business. New government policy might render their business model not profitable.
  • Competition: New entrants or aggressive competitors in each of the businesses may affect NJR’s ability to generate sustainable long-term profits. The risk is higher in newer energy sectors like clean energy, where incumbents are not as well-established.
  • Economic Downturns: In cases of economic slowdown or recession, demand for energy, may decrease, reducing overall volume for the company. In addition, the ability of its customers to meet their commitments could be reduced.
  • Technology Disruption: Technological disruptions can impact a company’s profitability and demand of its products. Since they own gas infrastructure, other cleaner technologies might reduce the need for it in the future.
  • Climate risks: The intensity and frequency of severe weather is increasing in the region they operate in, which can damage their assets and affect their operations.
  • Interest rate risk: The company has a lot of debt and they are exposed to changes in interest rates, which could significantly increase interest payments and affect profitability, especially the regulated ones.

Financial Analysis

New Jersey Resources has decent financial strength, and most ratios are in line with what’s expected in the utilities industry. It also has decent profitability, but future outlook is mixed due to changes in the energy industry.

Income Statement

  • Revenue Trend: NJR has shown consistent revenue growth over the past few years, but it has also been volatile. This reflects the company’s exposure to market prices and other economic factors.
  • Profitability: They have positive gross and operating margins, but it is relatively low at about 10%. Net income as a % of revenue is quite low, in the range of 2-5%. However this is pretty normal for companies in this industry.
  • Impact of Acquisitions: The acquisition of new businesses and energy infrastructure may enhance revenue growth, but there is also increased capital expenditure that comes with it.

The impact of acquisitions on the long-term earnings isn’t fully clear yet.

Balance Sheet Health: 3 / 5

  • Debt Levels: NJR has a high debt-to-equity ratio, which is typical for utility companies as it requires substantial capital investments. They have $5.8 billion of debt and only $2.1 billion of equity.

The debt levels are something you will need to keep monitoring going forward. High debt means increased interest payments, and thus increased volatility in earnings.

  • Liquidity: They have enough cash flow to meet its immediate obligations, but liquidity is a key parameter to monitor.
  • Leverage: The company’s financial profile is leveraged, reflecting a reliance on debt financing to maintain its infrastructure, growth, and operations. This is concerning since interest rates are likely to go up.
  • Tangible Assets: NJR has a good number of tangible assets that is related to its infrastructure.
  • Going Forward: It’s important to see how well management will keep the debt under control and take advantage of their new expansion and acquisitions.

Understandability Rating: 2 / 5

NJR’s business is not easy to understand, it requires understanding regulations, accounting of different types of assets, debt, and profitability in various energy businesses.

  • Diversification: Its complex operations in multiple segments make it harder to understand and analyze each segment.
  • Accounting Complexity: There are a lot of adjustments needed to understand the various types of revenue recognitions and profitability.
  • Regulatory Framework: Heavy reliance on regulatory frameworks makes it difficult to understand the sources of profitability.
  • Financial Instruments: Its use of complex financial instruments such as derivative and other off-balance sheet funding techniques are hard to analyze and predict outcomes.
  • Interconnectivity: The interconnectivity of its various parts makes it hard to analyze and derive results as each affects the others in several ways.
  • Energy Markets: The intricacies of the energy market in general makes it difficult to project future returns.

Recent Concerns and Management Commentary

Recent earnings calls and the 10-Q highlighted management’s main priority of achieving growth targets by increasing volumes of sales in natural gas as well as clean energy. However, it seems to be a challenge to achieve this due to the company’s high costs and lower-than-expected ROIC.

  • Inflation and Macroeconomic Factors: Management has highlighted the concerns about the impact of rising costs and interest rates and is trying to tackle it by focusing on increased efficiency and lower operating costs.
  • Regulatory Issues: The Company is trying to navigate the effects of some regulatory changes which may limit future revenue.
  • Debt Management: Management seems to be keeping a close eye on its capital structure and is attempting to make sure they don’t end up with higher amounts of long term debt, in addition to the efforts to lower its costs.
  • Long-Term Growth: The management has reaffirmed its target of doubling profits in the next 5-7 years, which is based upon growth from its diverse operations. They want to be well-positioned for growth in all of its segments.
  • Capital allocation: Management is focused on increasing capital allocation to renewable generation and infrastructure projects with strong profit margins.
  • Commitment to shareholders: They are still committed to maintaining the dividend payout ratio between 60-65%

Management seems to be on the lookout to increase value for its investors, both in short-term and long-term.

The takeaway here seems to be that although the management is optimistic about future growth, the current profitability of the business is not that great and there are significant external risks to the business, that the management can only mitigate at best but not avoid.