Image: South Jersey Industries.
Many see the utility industry as a quiet backwater in the investing world, with giants like Duke Energy (DUK 0.97%) profiting from delivering much-needed services, and generating substantial income to return to shareholders in dividend payments. Yet South Jersey Industries (SJI) has had to deal with a host of issues recently, ranging from the shutdown of an energy facility to trying to get paid on uncollectible accounts, and deal with changing conditions in the pension and tax-credit realms.
Coming into its third-quarter financial report, South Jersey investors had hoped that the company would bounce back from recent weakness, but the utility ended up reporting a modest loss for the quarter. All in all, though, South Jersey seems optimistic about its future. Let's take a closer look at what South Jersey Industries said and how it looks going forward.
South Jersey Industries goes into the red
South Jersey Industries third-quarter results provided investors with a mix of strength and weakness. Revenue jumped by 15%, to $141.1 million, with 35% gains in the nonutility segment offsetting a roughly 5% drop in utility-related revenue.
That was well ahead of the consensus forecast for $135 million in sales, yet an even larger rise in the costs of nonutility sales hit the bottom line hard, generating a net loss that was almost triple last year's quarterly figure. Using the company's favored measure of Economic Earnings, losses widened to $5 million, producing an Economic Earnings per-share loss $0.07, far worse than the $0.11 per share profit that most investors had expected to see.
A closer look at South Jersey's numbers shows some of the challenges that the company faced during the quarter. In the regulated utility division, losses more than tripled from year-ago levels, with the company blaming ordinary seasonal impacts, as well as a rise in uncollectible accounts, and increased post-retirement benefits for the hit to profits.
Customer counts rose almost 7,000, to 370,000, and the company received approval from the New Jersey Board of Public Utilities to reduce rates in response to the slump in natural gas prices that the industry has seen throughout 2015. Because natural gas use is minimal during the summer months, South Jersey typically sees its weakest performance during the third quarter.
South Jersey's nonutility businesses had mixed performance. Overall, economic earnings for the unit were flat compared to year-ago levels. The CHP Thermal segment came in with nearly breakeven results, overcoming a larger year-earlier loss as its operating assets generated income to offset the absence of the Revel operations.
Yet Solar income got cut by more than half, as investment tax credits fell sharply from what South Jersey got last year. Landfill project losses widened slightly, but commodity marketing activities managed to cut its losses by more than half from 2014's third quarter.
CEO Michael Renna emphasized South Jersey's future. "Our core businesses continue to perform very well," Renna said, "providing the foundation that will enable us to achieve our long-term target of $150 million of Economic Earnings by 2020."
What's ahead for South Jersey Industries?
In particular, Renna emphasized that South Jersey would not change its call for earnings of $1.49 to $1.54 per share for the full 2015 year, despite the quarter's sluggish performance. "Significant infrastructure investments and customers growth in our utility, coupled with strong contributions from commodity marketing and new fuel supply contracts, will not only drive growth but will also steadily improve the quality of earnings," Renna said, and he sees longer-term strategic moves bolstering the utility's prospects throughout the remainder of the decade.
One interesting question South Jersey faces is whether to consider combinations with other utilities. Duke Energy has been a big part of the consolidation trend among utilities, with its merger with Progress Energy in 2012. Some believed that Duke Energy might end up as a buyer of TECO Energy, which ended up receiving a buyout bid from another company instead. Given South Jersey's size, it could be a potential target from a utility of similar size as Duke Energy.
South Jersey has generally followed the utility industry's overall trends, remaining a solid performer with a reasonable dividend yield. Having bounced back from some of its difficulties, investors can hope that the key winter season will get South Jersey's performance back up to its normal standards.
