Executive Summary / Key Takeaways

• Rate Base Inflection Drives Earnings Power: New Jersey Natural Gas's $157 million rate increase, effective November 2024, transforms the utility segment into a high-single-digit growth engine, contributing 65-68% of fiscal 2025 earnings and positioning it to exceed 70% in fiscal 2026 as the core earnings driver.

• Strategic Capital Recycling Unlocks Flexibility: The $132.5 million sale of CEV's residential solar portfolio in November 2024 crystallizes value from mature assets, providing dry powder for a $5 billion, five-year capital plan without requiring dilutive equity issuance.

• Infrastructure Expansion Targets High-Demand Markets: Leaf River's FERC filing to increase working gas capacity by over 70% (to 55 Bcf by 2028) leverages Gulf Coast demand growth and contracted rate improvements from $0.09 to nearly $0.20 per dekatherm, positioning Storage & Transportation to more than double earnings by 2027.

• Diversified Growth Anchored by Regulatory Stability: With 30 consecutive years of dividend increases and a 54% equity-to-capitalization ratio at NJNG, the company combines utility predictability with optionality in clean energy and energy services, delivering five straight years of guidance beats.

• Valuation Discount Reflects Market Skepticism: Trading at 13.4x earnings and 1.87x book value with a 4.2% dividend yield, NJR trades at a notable discount to peers like PEG (18.9x) and NI (21.8x), despite superior near-term earnings growth driven by the rate case resolution.

Setting the Scene: A Centenarian Utility Reinventing Itself

New Jersey Resources, founded in 1922 and headquartered in Wall, New Jersey, operates a hybrid model rare among utilities: a regulated natural gas distribution utility that funds diversification into clean energy, wholesale services, and midstream infrastructure. This structure emerged from strategic necessity. As a second-tier gas utility serving 564,000 customers across six New Jersey counties, NJR lacks the scale of Public Service Enterprise Group , which dominates the state with 1.9 million gas customers. Rather than compete head-on, NJR built a diversified platform where the utility provides stable cash flows while unregulated segments capture growth from decarbonization and gas market volatility.

The company's service territory—covering 1,538 square miles in suburban counties near New York City—sits in one of the most economically vibrant corridors in the Northeast. Monmouth, Ocean, and Morris counties experience steady population growth and commercial development, driving consistent customer additions. This geographic advantage underpins NJNG's ability to grow rate base at high-single-digit rates through 2030, a trajectory that larger but more mature utilities struggle to match. The utility's 17% peak day sendout capacity from two LNG facilities, including a Power-to-Gas hydrogen injection system, provides operational flexibility that smaller competitors cannot replicate.

Industry dynamics favor NJR's positioning. Data center electricity demand is projected to consume 9.1% of U.S. power by 2030, up from 4% today, creating a natural gas demand tailwind as gas-fired generation provides reliable backup. The Gulf Coast, where Leaf River operates, ranks among the fastest-growing energy demand centers nationally. Meanwhile, New Jersey's electric capacity shortfall makes shovel-ready solar projects the quickest path to new generation, directly benefiting CEV's 479 MW commercial solar portfolio across seven states. These trends explain why management can commit to a $5 billion capital plan—40% higher than the prior five years—while maintaining that no equity issuance is needed.

Technology, Products, and Strategic Differentiation

NJR's competitive moat rests on three pillars: regulatory relationship management, operational flexibility, and capital efficiency mechanisms. The SAVEGREEN energy efficiency program exemplifies the first pillar. Approved for $385.6 million in direct investment through June 2027, SAVEGREEN delivers near real-time returns through an accelerated cost recovery mechanism that eliminates regulatory lag. The program improves capital efficiency while reducing customer bills and emissions—a trifecta that strengthens NJNG's regulatory standing and supports future rate case approvals. In fiscal 2025, record investment of $98 million demonstrates the program's scalability.

The Power-to-Gas system at NJNG's Howell Township LNG plant showcases operational innovation. Using solar power to produce hydrogen for injection into the natural gas system, this technology positions NJNG as a forward-looking utility committed to sustainability without abandoning its core gas infrastructure. While the immediate financial impact is modest, the strategic significance is profound: it provides a decarbonization pathway that maintains the value of gas distribution assets as competitors face pressure from electrification advocates.

CEV's commercial solar strategy reflects deliberate diversification. With 93.6 MW placed into service in fiscal 2025—the highest annual capacity in its history—and a pipeline of 131 MW scheduled over the next two years, CEV avoids over-reliance on New Jersey's policy regime. Approximately 800 MW of additional opportunities across seven states provide flexibility to deploy capital where returns are most attractive. The residential solar sale wasn't just a monetization event; it was a strategic pruning that allows management to focus on higher-margin commercial projects with stronger counterparty credit quality.

In Storage & Transportation, Leaf River's salt dome geology provides structural advantages that greenfield developments cannot match. The ability to expand existing caverns rather than develop new sites from scratch reduces both cost and timeline, creating a speed-to-market advantage. The average contract rate increase from $0.09 to nearly $0.20 per dekatherm since the 2019 acquisition demonstrates the facility's scarcity value in a tightening storage market. Adelphia's FERC rate case settlement, approved in November 2025, enables recovery of substantial investments and operational improvements, clearing the path for earnings acceleration.

Financial Performance & Segment Dynamics: Evidence of Strategy Execution

Fiscal 2025 results validate the thesis that NJR's utility engine is accelerating while strategic assets are being optimized. Consolidated net income increased $45.9 million year-over-year, driven by an $80.1 million jump at NJNG and a $27.5 million gain at CEV, partially offset by a $65.9 million decline at ES. This mix shift—two-thirds of EPS from the utility, rising to over 70% excluding the solar sale gain—strengthens earnings quality and reduces volatility.

NJNG's $1.30 billion in operating revenue (+27.7%) and $686.4 million utility gross margin reflect the November 2024 rate increase's full impact. Net income of $213.5 million compares to $133.4 million in fiscal 2024, a 60% increase that demonstrates the operating leverage inherent in rate base growth. Capital expenditures of $437.6 million funded infrastructure expansion while maintaining a 54.1% equity-to-capitalization ratio, well above the 30% regulatory threshold. This financial strength preserves dividend capacity and eliminates the need for external equity.

CEV's $56.2 million gain on the residential solar sale masked underlying operational performance. Operating revenues declined $18.1 million due to SREC timing and the absence of residential revenue, while O&M expenses rose $12.1 million from SREC transfers. Yet net income still grew $27.5 million, proving the portfolio's embedded value. With 479 MW in service and a target to expand capacity over 50% in two years, CEV is positioned to contribute 10-15% of fiscal 2026 earnings, down from over 20% in fiscal 2025 but on a more sustainable commercial-focused basis.

ES's $65.9 million earnings decline stems from lower AMA revenue and higher natural gas purchase prices. The segment's long option strategy—capitalizing on price differentials between locations and time periods—performed poorly in a year of compressed basis differentials. However, the $260 million in cash generated from AMAs during fiscal 2022-2024 and the $34 million annual run rate through fiscal 2031 demonstrate the strategy's long-term value. The 108.60 Bcf of gas managed in fiscal 2025, down from 125.30 Bcf, reflects both market conditions and NJR's disciplined approach to margin-over-volume.

ST's $6.3 million earnings increase, driven by $10.2 million higher hub services and firm storage revenue at Leaf River, shows early returns from recontracting efforts. The segment's 8-12% contribution to fiscal 2026 NFEPS, up from 4-6% in fiscal 2025, reflects management's confidence that Adelphia and Leaf River will more than double earnings by 2027. This acceleration diversifies earnings away from weather-sensitive distribution and commodity-exposed trading toward fee-based, FERC-regulated returns.

Outlook, Guidance, and Execution Risk

Management's fiscal 2026 guidance of $3.03-3.18 NFEPS implies 7-9% growth, consistent with long-term targets but leaving room for upside. The utility's expected 70% contribution provides a stable foundation, while ST's earnings doubling and CEV's 10-15% contribution offer growth optionality. The $5 billion capital plan—$3 billion allocated to NJNG, $210-290 million to CEV, and $45-60 million to ST—reflects disciplined allocation toward the highest-return opportunities.

Execution risks center on three areas. First, the Leaf River expansion's $350 million investment requires successful completion of the 70% capacity increase by 2028, with each phase backed by long-term contracts. While the non-binding open season drew "encouraging interest," as CEO Steve Westhoven noted, finalizing contracts could take "multiple months or maybe even a year." The brownfield advantage—existing wells and facilities—reduces execution risk compared to greenfield projects, but FERC approval and construction timelines remain uncertain.

Second, CEV's $350 million, two-year solar pipeline depends on federal tax credit policy. The Inflation Reduction Act's 30% ITC, modified by the One Big Beautiful Bill Act of 2025, requires projects to be in service by December 31, 2027, or begin construction before July 4, 2026. Westhoven emphasized that "most of our contracts incorporate structured provisions that preserve returns in the event of cost increases," mitigating tariff and policy risks. However, SREC price volatility and state-level incentive changes could impact returns.

Third, ES's performance remains hostage to natural gas price differentials. While the long option strategy generated substantial cash in prior years, fiscal 2025's decline shows the segment's inherent volatility. Management's guidance of 5-10% NFEPS contribution for fiscal 2026, down from 9-11% in fiscal 2025, reflects conservative assumptions about market conditions. The risk is that prolonged basis compression could further reduce contributions, though the contracted $34 million annual AMA revenue through 2031 provides a floor.

Risks and Asymmetries: What Could Break the Thesis

The investment narrative faces material risks from regulatory, operational, and market sources. Climate change legislation poses the most significant long-term threat. New Jersey's aggressive decarbonization goals could lead to restrictions on natural gas infrastructure or mandates for electrification that erode NJNG's customer base. While SAVEGREEN and hydrogen initiatives demonstrate adaptation, a fundamental policy shift away from gas would undermine the utility's 70% earnings contribution and high-single-digit rate base growth assumption.

Operational risks concentrate in the unregulated segments. The Leaf River expansion requires FERC approval and successful cavern development. Salt dome geology, while advantageous, presents technical challenges that could cause cost overruns or delays. Westhoven's comment that "it's too early to tell" on final contract terms highlights the uncertainty. Similarly, CEV's 800 MW pipeline opportunity requires disciplined project selection to avoid overexposure to any single state's policy regime.

Market risks include interest rate increases that raise NJR's cost of capital on $1.1 billion in fixed-rate debt and $575 million in revolving credit capacity. While 94% of debt is fixed-rate, refinancing risk emerges in 2026-2027 as $200 million in notes mature. Inflation in construction costs could pressure returns on the $5 billion capital plan, though contract provisions aim to preserve margins.

The asymmetry lies in potential upside from data center demand and Gulf Coast gas growth. If AI-driven electricity demand accelerates beyond forecasts, NJNG's system expansion and Leaf River's storage capacity could command premium pricing. The utility's BGSS incentive programs, which saved customers nearly $800 million over the last decade, provide regulatory goodwill that could support future rate relief. Conversely, if natural gas prices collapse and basis differentials disappear, ES's earnings could fall below the 5% contribution floor, while a major pipeline incident could trigger regulatory penalties and damage NJR's reputation.

Valuation Context: Discounted Quality with a Yield Floor

At $44.59 per share, NJR trades at 13.4 times trailing earnings and 1.87 times book value, offering a 4.21% dividend yield. These multiples stand at a discount to direct peers: PEG trades at 18.9x earnings with a 3.17% yield, NI at 21.8x with 2.67%, SR (SR) at 18.9x with 4.0%. Only UGI (UGI) trades at a lower multiple (12.2x), but with a weaker 3.99% yield and negative operating margins.

The valuation gap reflects market skepticism about NJR's hybrid model. Investors traditionally prefer pure-play utilities for predictability or pure-play renewables for growth. NJR's combination of regulated gas, volatile energy services, and capital-intensive solar creates a complexity discount. Yet this same combination drives the five-year guidance beat streak and provides multiple levers for growth.

Cash flow metrics support the story. Price-to-operating cash flow of 9.6x compares favorably to PEG (PEG)'s 13.4x and NI (NI)'s 8.9x. The projected $460-500 million in fiscal 2025 operating cash flow covers the $1.3-1.6 billion capital plan when combined with $1.1 billion in fixed-rate debt capacity and $401 million available on the revolver. The 20% FFO-to-debt ratio and well-laddered maturity profile minimize refinancing risk.

The dividend payout ratio of 54.8% leaves room for continued increases aligned with the 7-9% NFEPS growth target. With 30 consecutive years of hikes, NJR's dividend aristocrat status provides a valuation floor that riskier renewables or merchant gas peers lack. The market's failure to price this stability, despite five years of execution proof, creates potential upside if the utility segment's acceleration becomes more widely appreciated.

Conclusion: A Utility Growing Like an Infrastructure Play

New Jersey Resources has engineered a rare combination: a regulated utility growing at high-single-digit rates while unregulated segments provide call options on decarbonization and gas market volatility. The $157 million rate increase and $5 billion capital plan, funded without equity issuance, demonstrate that the core gas distribution business has reached an inflection point where scale and regulatory relationships generate accelerating returns.

The strategic solar sale and Leaf River expansion filing show management's discipline in recycling capital from mature assets into higher-growth opportunities. This capital efficiency, combined with SAVEGREEN's near real-time recovery mechanism, creates a self-funding growth model that larger, more bureaucratic utilities struggle to replicate.

The investment thesis hinges on two variables: NJNG's ability to sustain high-single-digit rate base growth through 2030, and successful execution of the Leaf River expansion to capture Gulf Coast demand. If both deliver, the current 13.4x earnings multiple will prove conservative as the market re-rates a utility with infrastructure-like growth. The 4.2% dividend yield provides downside protection while the embedded options in CEV and ST offer upside asymmetry—a combination that explains why NJR has beaten guidance for five consecutive years and why it may continue to do so.