South Jersey Industries Inc. Earnings Improve As Its Strategy Pays Off

By Markets Fool.com

Revel Casino in Atlantic City. Image source: Getty Images.

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South Jersey Industries (NYSE: SJI) recently reported solid second-quarter results. The utility saw a significant increase in economic earnings (a non-GAAP number the company uses to smooth out the unpredictability of commodity price hedges), thanks in part to some strategic changes it made over the past year. But although earnings surged, the increase came off a small base, because the second quarter is a seasonally slow one for the company and it had a writedown in last year's second quarter, after a big bet went bad.

South Jersey Industries Inc. results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Economic earnings

$8.7 million

$1.9 million

357.9%

Economic earnings per share

$0.12

$0.03

300%

Data source: South Jersey Industries Inc.

What happened with South Jersey Industries this quarter?

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South Jersey's energy production business vastly improved:

  • The company's regulated business, South Jersey Gas, delivered steady results. The utility produced $5 million in earnings, which was slightly lower than the $5.2 million it generated in the year-ago period. While earnings were flat, solid customer growth and the contribution from recent investments drove a 3.6% improvement in the company's year-to-date results.
  • SJ Energy Group, which is the company's wholesale and retail commodity business, delivered a $0.3 million loss in economic earnings from continuing operations. That's a reversal from the $0.7 million in positive economic earnings in the year-ago period. However, this year's second quarter didn't include two new fuel supply management contracts that were added but didn't affect results because the facilities served began operations in June.
  • SJ Energy Services, which is the company's energy production business, was the highlight this quarter. Economic earnings from continuing operations were $4.1 million, which obliterated the year-ago loss of $4 million. Non-recurring items affected both periods, but on a net basis, economic earnings were up $1.9 million as a result of the strategic decisions the company madeto reposition its energy production portfolio to boost performance.
  • While economic earnings spiked, the year-to-date numbers are more reflective of the company's actual performance. On an absolute basis, economic earnings are up 8.1% to $65.7 million, though flat on a per-share basis at $0.89.

What management had to say

CEO Michael Renna,commenting on the company's results, said:

Our second-quarter performance reflects our continuing focus on driving growth through our core business lines. Strong year-over-year growth in our utility and in our wholesale business provides the foundation for near- and longer-term performance. We also experienced marked improvement in our energy production business. After undergoing some significant changes in 2015, this area has rebounded well, delivering stronger operating performance in 2016 than in 2015, both for the second quarter and year to date.

The company's energy production business has been under pressure, in part because of a bad bet on Atlantic City. In last year's second quarter, the company recorded a $10.9 million writedown from an investment in the central energy facility for the now defunct Revel Casino property in Atlantic City. It was an investment the company made as part of a joint venture to take over construction and management of the facility's power plant project in 2011. However, that bet went south when Revel closed in 2014.

Looking forward

South Jersey's aim in the future is to avoid risky bets like Revel. Instead, it has a strategy to achieve "growth from high-quality, repeatable, low-risk earnings streams," according to Renna. So far that strategy is working, leading the company to reaffirm its economic earnings-per-share target of between $1.29 and $1.35 for 2016. Further, it continues to progress toward its long-term goal to deliver $150 million of annual economic earnings by 2020.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends South Jersey Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.