South Jersey Industries Writes Down Revel, but Remains Optimistic

The utility company is aiming to refocus its efforts on its core utility business.

Dan Caplinger
Dan Caplinger
Aug 13, 2015 at 7:17PM
Energy, Materials, and Utilities

Image: South Jersey Industries.

Most investors look at utility companies as a great way to earn solid dividend income. Yet with the changes in the utility industry over time, companies have had to decide whether to pursue relatively conservative opportunities in the regulated utility sector, or look at nonregulated businesses for potential growth.

South Jersey Industries (NYSE:SJI) has tried to diversify beyond its core natural-gas utility business in the past, but coming into its second-quarter financial report, the company's investors were nervous about one key investment it had made. South Jersey's results included a big writedown related to that project, but the company hopes to move forward and look for better chances to grow. Let's look more closely at South Jersey Industries and its latest results to check on its long-term prospects.

South Jersey Industries has a mixed quarter
South Jersey Industries reported reasonably strong GAAP results in its second-quarter report. Revenue climbed by a third, to $177.7 million, with the nonutility segment providing the lion's share of the gains. Net income climbed by 38%, to $13.3 million, but using the company's preferred Economic Earnings metric, income plunged 80%, producing economic earnings per share of just $0.03, far less than the $0.12 per share consensus forecast.

One key reason for the big disparity between GAAP and economic earnings was South Jersey's decision to write down its investment in the energy assets at the Revel Casino in Atlantic City. The utility's agreement with the casino went awry when Revel declared bankruptcy. In the ensuing sale of the property, conflicts with new ownership led South Jersey to conclude that the lack of operating income from the facility warrants the writedown decision.

Elsewhere, South Jersey's performance was mixed. In the regulated utility business, net income climbed 37% from the second quarter of 2014, with the company citing rising customer counts and improved rates for the segment. Yet the non-utility business was relatively sluggish, with SJ Energy Services seeing a drop in net income by about a third due to poor weather, even after adjusting for the Revel writedown.

The CHP Thermal business saw economic earnings almost disappear, while the solar unit saw net income fall by more than a quarter. The Landfill segment continued to lose money, although at a slower pace than this time last year. The SJ Energy Group turned around a year-ago loss with a modest profit, as commodity-marketing activity looked more promising.

CEO Michael Renna tried to cast the big writedown in a positive light. "The decision to write down our investment in the energy assets at Revel enables us to focus our full attention and efforts on the areas of our business that will drive SJI's growth in 2015 and beyond," Renna said. Still, the company is optimistic, with Renna noting that, "we anticipate strong growth from our utility and increasing contributions from our commodity marketing and fuel supply management business lines."

Can South Jersey Industries keep growing?
South Jersey expects that the gas utility unit will continue to be the key contributor to earnings in 2015, making up about 65% to 70% of the company's overall earnings for the year. Renewables will contribute about another quarter of the utility's earnings, while the SJ Energy Group should bring in enough earnings to offset losses from the cogeneration segment.

Still, South Jersey had to revise its guidance for the remainder of the year. The utility now believes that it will bring in between $1.49 and $1.54 per share in economic earnings for the year. If you take out the impact of the Revel writedown, South Jersey thinks it can grow at about a 4% to 8% rate.

South Jersey's earnings guidance was slightly below expectations, so it wasn't surprising to see the company's stock fall on the day of the announcement. Since then, though, investors have sent the shares back upward, as the relatively stable growth opportunities for the utility look attractive compared to the increasingly volatile stock market environment. South Jersey appears to be ready to put the Revel difficulties behind it, and aim at growing its remaining businesses to the fullest extent possible.