SJI Reports Third Quarter 2022 Results Acquisition Proceeding on Track

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FOLSOM, NJ (November 2, 2022) - SJI (NYSE: SJI) today reported operating results for the third quarter ended September 30, 2022. Highlights include:

• Q3 2022 GAAP earnings $(0.31) per diluted share compared to $(0.23) per diluted share in 2021 Economic Earnings* $(0.18) per diluted share compared to $(0.17) per diluted share in 2021
• YTD 2022 GAAP earnings $0.59 per diluted share compared to $0.06 per diluted share in 2021 Economic Earnings $1.08 per diluted share compared to $1.02 per diluted share in 2021
• YTD Economic EPS improvement reflects increased profitability from both Utility and Non-Utility operations and the impact of financing activities
• Acquisition by IIF — Transaction proceeding on track with requisite approvals; NJBPU review underway
• Regulatory Initiatives — ETG base rate case completed in August; SJG base rate case proceeding on schedule
• RNG Production — ten dairy farms under development; Expected in-service in 2023

"Our businesses have performed very well in 2022, and we remain on track to achieve our goals for the year," said Mike Renna, SJI President and Chief Executive Officer. "Our regulatory initiatives and clean energy investments targeting enhanced infrastructure safety, reliability and decarbonization continue to advance. And our acquisition by IIF continues to secure requisite approvals. We look forward to the start of a new chapter for SJI in 2023, alongside our experienced partners at IIF, and ever dedicated to our mission of providing exceptional service to the more than 700,000 New Jersey customers we are honored to serve every day,” added Renna.

Third Quarter 2022 Results

For the three-month period ended September 30, 2022, SJI reported consolidated GAAP earnings of $(37.8) million compared with $(25.8) million in the prior year period.

SJI uses the non-GAAP measure of economic earnings when discussing results. We believe this presentation provides clarity into the continuing earnings of our business. A full explanation and reconciliation of economic earnings is provided under “Explanation and Reconciliation of Non-GAAP Financial Measures” later in this report and in our 10-K for the year ending December 31, 2021.

For the three-month period ended September 30, 2022, economic earnings were $(22.4) million compared with $(18.8) million in the prior year period.

UTILITY

Utility entities include the regulated operations of South Jersey Gas (SJG) and Elizabethtown Gas (ETG). Third quarter 2022 GAAP earnings were $(24.5) million compared with $(9.4) million in 2021. Economic earnings were $(19.3) million compared with $(17.2) million in 2021.

South Jersey Gas

Performance. Third quarter 2022 GAAP/economic earnings were $(8.1) million compared with $(7.7) million in 2021. Utility margin increased $1.9 million, reflecting customer growth and the roll-in of investments from infrastructure replacement programs. We define utility margin, a non-GAAP measure, as natural gas revenues plus depreciation and amortization expenses, less natural gas costs, regulatory rider expenses and related volumetric and revenue-based energy taxes. Total expenses increased $2.3 million, primarily reflecting higher depreciation and interest expenses.

Customer Growth. SJG added approximately 5,000 new customers over the last 12 months and now serves approximately 412,000 customers. SJG’s 1.2% customer growth rate compares favorably to the peer average and remains driven by gas conversions from alternate fuels such as oil and propane, and new construction.

Infrastructure Modernization. SJG's Infrastructure Investment Program (IIP) accelerates planned capital expenditures to enhance the delivery of safe, reliable, affordable natural gas, create jobs, and support the State’s environmental goals. SJG's program authorizes investment of $200 million from 2022-2027 for important infrastructure upgrades including the replacement of up to 250 miles of pre-code coated steel and vintage plastic main. Our annualized investment of approximately $40 million from July 2022 to June 2023 is anticipated to commence recovery on October 1, 2023 under the terms of the program.

Base Rate Case. In April, SJG filed a petition with the NJBPU requesting an increase of $73.1 million to its base rates, which was updated in September to an increase of $82.3 million. The request is based on a proposed pre-tax return on invested capital of 7.77%, with a capital structure that includes a common equity component of 57.0% and a return on common equity (ROE) of 10.75%. The request is predominantly driven by the significant capital investments that SJG has made since its last base rate proceeding that was resolved in 2020.  These capital investments have been and will continue to be made to ensure the safety, reliability and resiliency of SJG's distribution system, allow SJG to continue to provide safe, reliable and best in class customer service, and facilitate the environmental goals of NJ and SJI's commitment to ensuring that it is part of New Jersey’s clean energy future. A resolution of the case is expected later this year.

Energy Efficiency. Through energy efficiency programs, SJG advances New Jersey’s clean energy goals in a manner that benefits customers, the environment and the State’s green economy while recovering our investments in a timely manner. SJG's energy efficiency program, as approved by the BPU in April 2021, authorizes investment of $133.2 million from July 1, 2021 to June 30, 2024. The revenue requirement associated with our net investment of approximately $25 million from July 2021 to June 2022 commenced recovery in July 2021 under the terms of the program.

Elizabethtown Gas

Performance. Third quarter 2022 GAAP earnings were $(16.4) million compared with $(1.7) million in 2021. Economic earnings were $(11.3) million compared with ($9.5) million in 2021. Utility margin, as previously defined, increased $3.9 million, reflecting an increase in base rates, customer growth and the roll-in of investments from infrastructure replacement programs. Total expenses increased $5.7 million, primarily reflecting higher O&M, depreciation and interest expenses.

Customer Growth. ETG added approximately 5,000 new customers over the last 12 months and now serves approximately 307,000 customers. ETG’s 1.5% customer growth rate has increased from its historic 0.9% rate, driven by increases in gas conversions from alternate fuels such as oil and propane, and new construction.

Infrastructure Modernization. ETG's Infrastructure Investment Plan (IIP) authorizes investment of $300 million from 2019-2024 for important infrastructure upgrades including the replacement of up to 250 miles of cast iron and bare steel mains. Our investment of approximately $58 million from July 2021 to June 2022 commenced recovery on October 1, 2022.

Base Rate Case. In August, the NJBPU approved a settlement authorizing ETG to increase base rates by $40 million effective September 1, 2022. The increase reflects a $1.28B rate base, 9.6% ROE and 52.0% common equity component. The request was predominantly driven by the significant capital investments that ETG had made since its last base rate proceeding that was resolved in 2019. These capital investments have been and will continue to be made to ensure the safety, reliability and resiliency of ETG's distribution system, allow ETG to continue to provide safe, reliable and best in class customer service, and facilitate the environmental goals of NJ and SJI's commitment to ensuring that it is part of New Jersey’s clean energy future.

Energy Efficiency. ETG's energy efficiency program, as approved by the BPU in April 2021, authorizes investment of $74.0 million from July 1, 2021 to June 30, 2024. The revenue requirement associated with our net investment of approximately $12.7 million from July 2021 to June 2022 commenced recovery in July 2021 under the terms of the program.

NON-UTILITY

SJI's non-utility entities include Energy Management, Energy Production and Midstream. Third quarter 2022 GAAP earnings were $15.7 million compared with $(6.8) million in 2021. Economic earnings were $7.8 million compared with $8.1 million in 2021.

Energy Management

Performance. Energy Management includes Wholesale Services (Fuel Management/Marketing) and Retail Services (Account Services/Energy Consulting). Third quarter 2022 GAAP earnings were $16.8 million compared with $(10.0) million in 2021. Economic earnings were $8.6 million compared with $4.4 million in 2021, reflecting higher margins from daily energy trading activities, robust asset optimization opportunities as compared with the year ago period, and contributions from consulting activities, meter reading and appliance service contract fees.

Energy Production

Performance. Energy Production primarily includes renewable (fuel cell/solar) and decarbonization (REV/RNG development) investments. Third quarter 2022 GAAP earnings were $(2.2) million compared with $3.4 million in 2021. Economic earnings were $(0.8) million compared with $3.9 million in 2021, primarily reflecting timing associated with investment tax credits (ITC's) from fuel cell and solar investments and contributions from SJI's 35% equity interest in REV. RNG development activities at ten dairy farms is proceeding on track, with in-service anticipated in 2023.

Midstream

Performance. Third quarter GAAP earnings were $1.1 million compared with $(0.3) million in 2021. Economic earnings were $0.0 million compared with $(0.3) million in 2021, reflecting the absence of allowance for funds used during construction following cessation of the PennEast Pipeline project in 2021.

OTHER

Performance. Other entity includes interest on debt, including debt associated with past acquisitions. Third quarter 2022 GAAP earnings were $(29.0) million compared with $(9.6) million in 2021, resulting from a valuation allowance recorded on certain state net operating losses. Economic earnings were $(10.8) compared with $(9.6), reflecting increased outstanding indebtedness and higher interest and bank fees.

Nine months YTD GAAP earnings were $73.0 million compared with $6.3 million in 2021. Economic earnings were $133.3 million compared with $112.1 million in the year-ago period.

UTILITY

Utility entities contributed nine months YTD GAAP earnings of $104.2 million compared with $115.5 million in 2021. Economic earnings were $110.7 million compared with $107.7 million in the year-ago period.

• SJG. YTD GAAP earnings were $85.4 million compared with $82.2 million in 2021. Economic earnings were $86.8 million compared with $82.2 million in 2021. Utility margin increased $15.3 million, reflecting customer growth and the roll-in of investments from infrastructure replacement programs. Total expenses increased $10.7 million, primarily reflecting higher depreciation and interest expenses.

• ETG. YTD GAAP earnings were $18.8 million compared with $33.3 million in 2021. Economic earnings were $23.9 million compared with $25.4 million in 2021. Utility margin increased $9.6 million, reflecting an increase in base rates, customer growth and the roll-in of investments from infrastructure replacement programs. Total expenses increased $11.1 million, primarily reflecting higher depreciation and interest expenses.

NON-UTILITY

Nine months YTD GAAP earnings were $19.1 million compared with $(81.2) million in 2021. Economic earnings were $51.3 million compared with $32.2 million in 2021.

• Energy Management. YTD GAAP earnings were $9.7 million compared with $(0.4) million in 2021. Economic earnings were $41.5 million compared with $25.4 million in 2021, reflecting improved asset optimization opportunities, colder weather and contributions from consulting activities.

• Energy Production. YTD GAAP earnings were $7.7 million compared with $4.6 million in 2021. Economic earnings were $9.9 million compared with $4.9 million in 2021, reflecting ITC's and income associated with fuel cell and solar investments and contributions from SJI's equity interest in REV.

• Midstream.  YTD GAAP earnings were $1.7 million compared with $(85.4) million in 2021. Economic earnings were $0.0 million compared with $1.9 million in 2021, reflecting the absence of AFUDC related to the project.

OTHER

Nine months YTD GAAP earnings were $(50.3) million compared with $(28.1) million in 2021, resulting from a valuation allowance recorded on certain state net operating losses. Economic earnings were $(28.7) million compared with $(27.8) million in 2021, reflecting lower outstanding indebtedness partially offset by higher interest and bank fees.
 

Capital Expenditures and Cash Flow

For the nine months ended September 30, 2022:

• Net cash provided by operating activities was $374.9 million compared with $273.9 million in the prior year period, primarily reflecting improved wholesale marketing results and customer growth.

• Net cash used in investing activities was $(586.5) million compared with $(434.2) million in the prior year period, primarily reflecting utility capital expenditures and REV, fuel cell and solar investments.

• Net cash provided by financing activities was $235.7 million compared with $143.9 million in the prior year period, primarily reflecting debt and equity issuance partially offset by debt repayment.

Balance Sheet

• Equity-to-total capitalization was 35.2% at September 30, 2022 compared with 35.8% at December 31, 2021, largely reflecting debt and equity financing, and repayment of debt.

• Assuming conversion of mandatory convertible equity units and equity credit from rating agencies for long-duration debt, SJI's adjusted equity-to-total capitalization, a non-GAAP measure, was 42.8% at September 30, 2022 compared with 43.6% at December 31, 2021.

• At September 30, 2022, SJI had total credit facilities of $1.0 billion, with $787.8 million of available liquidity.

Acquisition

On February 24, 2022, SJI announced that it had entered into a definitive agreement to be acquired by IIF. The per share purchase price of $36.00 represented a 46.3% premium to SJI’s 30-day volume weighted average price (VWAP) as of February 23, 2022, the last trading day prior to the announcement of the agreement. The transaction was unanimously approved by SJI’s Board of Directors, and has been approved by SJI shareholders, the Federal Energy Regulatory Commission, the Federal Communications Commission and has cleared the waiting period under Hart-Scott-Rodino. The transaction remains subject to regulatory approval by the New Jersey Board of Public Utilities. Dividends payable to SJI shareholders are expected to continue in the ordinary course until the closing, subject to approval by SJI’s Board of Directors. Upon completion of the transaction, SJI’s shares will no longer trade on the New York Stock Exchange, and SJI will become a private company.

About SJI

SJI (NYSE: SJI), an energy infrastructure holding company based in Folsom, NJ, delivers energy services to customers through two primary subsidiaries:  SJI Utilities (SJIU) and SJI Energy Enterprises (SJIEE).  SJIU houses the company’s regulated natural gas utility operations, delivering safe, reliable and affordable natural gas to more than 700,000 residential, commercial and industrial customers across New Jersey via its South Jersey Gas and Elizabethtown Gas subsidiaries. SJIEE houses the company’s non-utility operations primarily focused on clean energy development and decarbonization via renewable energy production and energy management activities.  Visit sjindustries.com for more information about SJI and its subsidiaries.

Forward-Looking Statements and Risk Factors

This news release, including information incorporated by reference, contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, expected sources of incremental margin, strategy, financing needs, future capital expenditures and the outcome or effect of ongoing litigation, are forward-looking.  This Quarterly Report uses words such as "anticipate," "believe," "expect," "estimate," "forecast," "goal," "intend," "objective," "plan," "project," "seek," "strategy," "target," "will" and similar expressions are intended to identify forward-looking statements.  These forward-looking statements are based on the beliefs and assumptions of management at the time that these statements were prepared and are inherently uncertain.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.  These risks and uncertainties include, but are not limited to, general economic conditions on an international, national, state and local level; weather conditions in SJI’s marketing areas; changes in commodity costs; changes in the availability of natural gas; “non-routine” or “extraordinary” disruptions in SJI’s distribution system; cybersecurity incidents and related disruptions; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; changes in business strategies; failure to satisfy the conditions to closing of the Merger; the diversion of management time on Merger-related issues; and public health crises and epidemics or pandemics, such as the COVID-19 pandemic. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements, are described in greater detail in Part II, Item 1A in this Quarterly Report, and Part I, Item 1A in SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021, as they may be supplemented from time to time by other SEC filings made by SJI or SJG.  earnings release. Also refer to the additional risk factor described below:

Explanation of Non-GAAP Financial Measures

Management uses the non-GAAP financial measures of Economic Earnings and Economic Earnings per share when evaluating its results of operations. These non-GAAP financial measures should not be considered as an alternative to GAAP measures, such as net income, operating income, earnings per share from continuing operations or any other GAAP measure of financial performance. We define Economic Earnings as: Income from Continuing Operations, (i) less the change in unrealized gains and plus the change in unrealized losses on non-utility derivative transactions; (ii) less income and plus losses attributable to noncontrolling interests; and (iii) less the impact of transactions, contractual arrangements or other events where management believes period to period comparisons of SJI's operations could be difficult or potentially confusing. With respect to part (iii) of the definition of Economic Earnings, items excluded from Economic Earnings for the three and nine months ended September 30, 2022 and 2021, are described in (A)-(F) in the table below.  Economic Earnings is a significant financial measure used by our management to indicate the amount and timing of income from continuing operations that we expect to earn after taking into account the impact of the items described above. Management uses Economic Earnings to manage its business and to determine such items as incentive/compensation arrangements and allocation of resources. Specifically regarding derivatives, we believe that this financial measure indicates to investors the profitability of the entire derivative-related transaction and not just the portion that is subject to mark-to-market valuation under GAAP. We believe that considering only the change in market value on the derivative side of the transaction can produce a false sense as to the ultimate profitability of the total transaction as no change in value is reflected for the non-derivative portion of the transaction.
 

Reconciliation of Non-GAAP Financial Measures

The following table presents a reconciliation of our income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share (in thousands, except per share data):

(A) Represents other-than-temporary impairment charges taken on the Company’s equity method investments in Energenic (2022) and PennEast (2021).
(B) Represents charges on property, plant & equipment and on a regulatory asset which consisted of certain property, plant & equipment that were deemed unrecoverable at SJG and ETG, respectively.
(C) In 2022, represents costs incurred related to the Merger Agreement and to finalize the transactions related to acquiring Bronx Midco and solar projects, partially offset with amounts included in continuing operations related to PennEast partnership distributions. In 2021, represents costs incurred to finalize acquisitions of solar projects, along with the final working capital payment on the sale of Elkton.  
(D) For 2021, represents a gain recognized by ETG from a UTUA settlement agreement.
(E) The income taxes were determined using a combined average statutory tax rate.
(F) Represents state and federal deferred tax asset valuation allowances taken in 2022 and 2021, respectively.

 

Summary of Utility Margin

The following tables summarize Utility Margin for SJG and ETG (in thousands):

*Represents pass-through expenses for which there is a corresponding credit in operating revenues.  Therefore, such recoveries have no impact on financial results.
**Utility Margin is a non-GAAP financial measure and is further defined on page 2 under SJG performance. The definition of Utility Margin is the same for SJG and ETG gas utility operations.