South Jersey flags US$900m stock sale, MCB

IFR 2206 21 October to 27 October 2017
3 min read
Americas
Anthony Hughes

South Jersey Industries plans to raise US$850m-$900m from a combination of common equity and mandatory CBs to help fund its US$1.7bn acquisition of New Jersey and Maryland regulated gas assets from Southern Company Gas.

The purchase of Elizabethtown Gas and Elkton Gas announced last Monday is expected to close in mid-2018 subject to approvals from New Jersey and Maryland state energy regulators, giving the company some time to sell the merits of the deal.

On an analyst conference call, South Jersey CFO Stephen Clark said the utility expected to quickly syndicate a bridge provided by Bank of America Merrill Lynch, TD Securities, and Guggenheim Securities (the latter is lead financial adviser on the deal).

The ultimate financing package would include US$850m-$900m of South Jersey common equity and mandatory convertibles, plus about US$510m-$540m of company senior debt, another US$250m-$300m of senior unsecured notes, and cash to cover any other required funds.

“We do expect to utilise financial mitigation risk tools to reduce market exposure between now and closing,” Clark said.

“Mandatory convertible securities and common equity offerings will be sized to allow us to achieve best overall execution and pricing of our equity offering.”

“While mandatories will convert to common equity at the end of three years, assuming our share price performs in line with our anticipated earnings growth, it will convert at a premium to our share price on the date of issuance, reducing the number of shares issued.”

Clark said the financing plan would allow South Jersey to maintain its investment-grade credit rating.

NEGATIVE REACTION

Shares in the utility slumped 9.3% to US$32.00 in Monday’s session on concern about the high price paid (23 times forecast 2018 earnings) and what one analyst described as confusing guidance on earnings accretion from the deal.

South Jersey expects the deal to be accretive to earnings per share by 2020, the first full year of ownership after transaction “impacts” in 2018/2019.

The shares recovered later in the week, trading at US$33.75 early in Friday’s session.

Hilliard Lyons analyst Spencer Joyce said in a note that the acquisition was a surprise. The share price slump was likely an over-reaction reflecting uncertainty about the utility’s long-term strategy and in part reflecting “somewhat confusing accretion commentary”, he wrote.

The prospective offering also represents a large capital call for South Jersey versus its US$2.7bn market capitalisation, though the MCB will allow the company to tap a different type of investor.

Asked about the size of the MCB, Clark said “a large piece” of the offerings would be in the form of MCB that would most likely convert into equity towards the end of 2021 (implying the offering/s may not happen until 2018).

By adding Elizabethtown Gas and Elkton Gas (the two assets purchased), South Jersey will become the second largest natural gas provider in New Jersey, serving 675,000 customers. The acquisition will also extend the utility’s presence to Maryland, adding 6,000 customers there.

South Jersey is looking to increase its exposure to regulated assets. Utility earnings will grow to 80% of earnings from 70% previously as a result of the deal.