FOLSOM — South Jersey Industries (NYSE:SJI) on Thursday, Nov. 6 announced income from continuing operations for the third quarter 2008 of $43.9 million, or $1.47 per share, compared with income from continuing operations of $8.6 million, or $0.29 per share, for the same quarter of 2007.
For the first nine months of 2008, SJI produced income from continuing operations of $55.3 million, or $1.85 per share, compared with $46.5 million, or $1.58 per share, for the comparable 2007 period.
SJI’s Economic Earnings from continuing operations for the third quarter of 2008 were $1.1 million, or four cents per share, compared with a loss of $1.5 million, or five cents per share, for the same quarter in 2007.
Economic Earnings for the third quarter would have been higher were it not for the timing impact of certain hedging contracts that will settle and benefit earnings in the fourth quarter of 2008. On an Economic Earnings basis, SJI’s income from continuing operations for the first nine months of 2008 totaled $47.9 million, up 11.3 percent from $43 million for the same period in 2007. Economic Earnings per share from continuing operations for the same period rose to $1.60 in 2008 from $1.46 in 2007.
The non-GAAP measure, Economic Earnings, adjusts income from continuing operations by eliminating all unrealized gains and losses on commodity derivative transactions and adjusts for realized gains and losses attributed to hedges on inventory transactions.
“The cornerstones of our company – a well-capitalized utility and our energy-centered non-utility businesses – coupled with an ongoing corporate-wide focus on efficiency, provide a strong foundation on which we continue to execute our long term plans for growth,” said SJI Chairman and CEO Edward J. Graham in a release.
“The strength of our year-to-date results, combined with our expectations for a strong fourth quarter, leaves us well positioned to deliver on the higher end of our targeted 2008 Economic Earnings per Share growth of 6 percent to 10 percent above the full year 2007 level of $2.09. As it does every November as part of its strategic process, the board of directors will consider these results, as well as future prospects, when they meet later this month to discuss the level of the dividend increase,” Graham continued.
SJI’s policy has been to increase dividends per share by at least 6 percent to 7 percent annually.
SJI’s Third Quarter 2008 Highlights:
• Economic Earnings up $2.6 million for the quarter.
• Reaffirmed 2008 Economic EPS growth guidance at 6percent to 10percent above 2007 Economic EPS of $2.09, with an emphasis on achieving the higher end of the range. This translates to Economic Earnings per share of $2.22 to $2.30 for 2008.
• Hedged approximately $29 million of pre-tax income for the 2008-2009 winter season from our combined non-utility storage and pipeline capacity assets.
• Maintained a strong balance sheet: equity-to-capitalization rate was 50 percent at Sept. 30, 2008, and has averaged 53 percent for the year-to-date.
• Maintained uninterrupted access to liquidity during this period of market turmoil.
• The board of directors authorized a Share Repurchase Program.
• South Jersey Gas was ranked second by J.D. Powers and Associates in the Eastern Region in their 2008 Gas Utility Residential Customer Satisfaction StudySM .
Non-Utility Posts Strong Results: Non-utility operations reported income from continuing operations on a GAAP basis of $45.7 million in the third quarter of 2008 compared with $10.3 million of income from continuing operations for the same period in 2007.
On an Economic Earnings basis, non-utility income from continuing operations for the third quarter of 2008 was $2.9 million, compared with $0.2 million earned for the third quarter of 2007. The increase in Economic Earnings was due primarily to strong performance at our asset management and marketing, on-site energy production, and appliance service businesses. GAAP results reflected the impact of unrealized gains from mark-to-market accounting at our asset management and marketing business. Non-utility operations produced GAAP income of $28.5 million and $20.1 million for the first nine months of 2008 and 2007, respectively. Economic Earnings from continuing operations at our non-utility businesses grew to $21.1 million for the first nine months of 2008, compared with $16.6 million for the same period in 2007. Performance at our key non-utility business lines was as follows:
Asset Management Marketing – Economic Earnings in the third quarter of 2008 for this business line rose to $0.2 million compared with a loss of $1.6 million for the third quarter of 2007.
Third quarter Economic Earnings were impacted due to the timing of the settlement of certain hedging contracts; the benefit locked in by these contracts will now be realized in the fourth quarter. For the first nine months of 2008 this business contributed $15.1 million to Economic Earnings compared with $12.9 million for the same period of 2007, an increase of 17.1percent. Having 12.1 Bcf of gas storage capacity under management and 122,500 dekatherms per day of pipeline capacity creates opportunities for this business to lock in attractive margins resulting from volatility in market pricing.
Results for 2008 have benefited significantly from the increased value of pipeline capacity, which served to offset market conditions that produced tighter margins for storage capacity. We hedge an initial profit margin on each transaction we enter into and then seek to optimize those margins by taking advantage of favorable market conditions. For the upcoming winter season we have already hedged 100percent of our storage capacity and transportation capacity. Those hedges have locked in a minimum of $29 million of pretax operating margin for this business, with the potential to opportunistically trade around those assets to further improve earnings.
On-Site Energy Production – Our on-site energy production business, Marina Energy, contributed $2.1 million to SJI’s bottom line in the third quarter of 2008, compared with $1.3 million in the prior-year period. Marina’s year-to-date 2008 performance reflected improved operating performance and higher chilled water throughput at our Atlantic City thermal plant driven by increased cooling demand and the opening of the Borgata’s new Water Club tower. For the first nine months of 2008, this business contributed $4.4 million, up 52percent from $2.9 million for the same period in 2007.
While the date on which Boyd Gaming will resume construction on its Echelon Resort remains uncertain due to current market conditions, we continue to anticipate the successful completion of both Boyd’s facility and our thermal energy plant serving it.
Contractual commitments provided by Echelon and Boyd should deliver payment streams to the project as early as November 2010, regardless of the project’s operational status.
Looking to other energy project opportunities, SJI’s fourth landfill gas-to-electricity project, a joint-venture to develop a two megawatt facility for Salem County is slated to become operational in December 2008.
We also are developing a multi-million dollar solar project for an educational facility, which is slated to begin operations in 2009. We continue to pursue energy project opportunities similar to these, as well as other combined heat and power (CHP or cogeneration) projects, in-line with the recently announced New Jersey Energy Master Plan.
Medical, educational and governmental facilities are particularly well suited applications for these projects. Marina develops, owns and operates on-site energy plants. We expect these projects to provide annuity-like income streams under long-term contracts.
Retail Services – Retail services, which include appliance warranty and repair, HVAC installation and meter reading, contributed $0.6 million in the third quarter 2008 compared with $0.5 million for the prior-year period. For the year-to-date 2008, retail services produced $1.5 million of net income compared with $0.8 million for the first nine months of 2007. As reported for the first half of the year, the combination of new sales campaigns and realized operational efficiencies continued to drive improved performance through the third quarter.
Utility Business Performance: South Jersey Gas posted a third quarter 2008 net loss of $1.9 million compared with a loss of $1.7 million in the third quarter of 2007. SJG normally reports a loss in the third quarter due to lack of heating demand. For the first nine months of 2008, SJG reported net income of $26.6 million, up from the $26.4 million posted for the same period in 2007. Performance drivers for the quarter and the nine months were customer growth and lower interest charges, offset by lower margins on gas sales to electric utilities and higher depreciation expense.
Conservation Incentive Program Results – The CIP has protected $9.0 million for the year-to-date by offsetting the impacts of reduced customer utilization levels. The CIP has enabled SJG to actively promote energy conservation in our service territory, helping our customers lower their energy bills. In addition, our customers are also benefiting under the CIP from reduced costs achieved within our gas supply and storage portfolio.
Customer Growth – South Jersey Gas added 4,214 customers during the 12- month period ended September 30, 2008, for a total of 336,004. The 1.3percent increase was achieved despite the significant slowdown in the new housing construction market nationwide. Customers added in the past 12 months are anticipated to contribute approximately $1.5 million to net income annually. Natural gas remains the fuel of choice within our service territory, with over 95percent of all new homes constructed using natural gas as their primary heating source. The clean burning characteristics of natural gas and the price advantage currently enjoyed by natural gas heat over alternative heating fuels typically used in our market should also support our efforts to acquire new customers in both the new housing and conversion markets. We have seen a significant increase in conversion interest that should benefit customer growth in 2009. We also expect a continuation of the trend of obtaining strong margins from new commercial customers that we have experienced in recent years. For the future, substantial new economic development planned for the Atlantic City market is also expected to positively impact housing demand in our service territory.
SJI’s Financial Position Remains Strong: Our equity-to-capitalization ratio, inclusive of short-term debt, was 50percent at September 30, 2008, an improvement from 48percent at the same point in 2007. Strong earnings growth was the primary reason for the improvement. The year-to-date average equity-to-capitalization ratio is 53percent. Our goal remains for this ratio to average 50percent annually. SJI’s liquidity position also remains strong as we have maintained uninterrupted access to external financing sources during this period of market turmoil.
Share Repurchase Program Announced: As announced earlier, the board of directors recently authorized the repurchase of up to 5percent of SJI’s outstanding shares over the next four years. This program provides management with a tool to optimize the company’s capital structure, demonstrating our commitment to increasing shareholder value over the long term as well as our belief in our future prospects.
South Jersey Gas Ranks in J.D. Power and Associates Survey: South Jersey Gas ranked second in the Eastern Region in the 2008 Gas Utility Residential Customer Satisfaction StudySM . The study, now in its seventh year, measures residential customer satisfaction with gas utility companies across six factors: company image, communications, price and value, billing and payment, customer service, and field service.
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