Utility companies are well known for being solid and dependable companies that pay relatively high dividends. The trade-off for investors is that most utilities have relatively limited growth potential. For South Jersey Industries (NYSE:SJI), the natural-gas utility business forms the core of the company's operations, but it has also branched out into non-utility businesses in an effort to find new sources of growth. Coming into Friday morning's first-quarter financial report, South Jersey investors had typical concerns about the impact of rising rates on the utility's prospects, and its results confirm the somewhat mixed prospects for the company in the recent past and the near future. Let's take a closer look at South Jersey Industries and how it fared last quarter.
South Jersey Industries gasses up its revenue
South Jersey Industries posted respectable growth in the first quarter, with revenue climbing 9% to $383 million. On a GAAP basis, net income growth of 12% was even more impressive, but the adjusted figures that South Jersey looks at posted year-over-year declines of about 15%, bringing what the company calls "economic earnings per share" down to $0.86. The reason for the disparity came from the unrealized changes in the value of the company's derivative hedging positions. After incorporating the impact of its recent 2-for-1 stock split, South Jersey's results were about $0.02 per share lower than investors had hoped to see.
Looking more closely at South Jersey's results, the regulated utility business saw net income rise 13%, with benefits coming from a favorable resolution of the utility's 2014 rate case and from a 2,100 customer increase in its service scope. Conversion activity continues to bring in more customers, as many of South Jersey's customers used to use heating oil or propane to heat their homes but have converted to natural gas due to cost savings.
The unregulated side of South Jersey's business wasn't as universally strong. The harsh winter in 2014 made it hard for the company's SJ Energy Group commodity marketing business to match that performance this year, with almost a 60% drop in economic earnings. Similarly, the company's Combined Heat/Power and Thermal business saw a 40% decline in economic earnings due to better weather conditions, and the renewables division saw roughly flat performance compared to the year-ago quarter.
CEO Michael Renna was still pleased with the overall company's results, which he said "reflect strong performance and steady growth in our utility, as well as in our key wholesale and retail commodity marketing business lines." Renna has high hopes that continued strength will help South Jersey Industries grow further this year.
What's next for South Jersey Industries?
Specifically, South Jersey believes that the regulated utility business will be the key driver of the company's overall success in the long run. The advantage to the regulated utility business is that its results are relatively stable and predictable, with the potential to pass through the costs of internal investments in improved infrastructure on to customers in the form of rate hikes. By contrast, unregulated businesses have results that can be extremely volatile, with this quarter's performance showing the impact that changing weather can have on year-over-year revenue and profits.
One ongoing issue, though, involves the bankruptcy of the Revel casino in Atlantic City. South Jersey's ACR Energy unit had a complex agreement with Revel that involved monthly fees to cover both financing costs and energy used from a power plant located right next to the casino. Now that Revel has been sold in bankruptcy to a new owner, a potential conflict has arisen, with the new owner having threatened to evict the energy company. South Jersey merely referred to "some near term uncertainty around the future of the ACR facility at the site of the former Revel casino" without further comment.
South Jersey Industries shareholders appeared largely unaffected by the results, with shares falling a bit more than 1% in the first half-hour of trading following the announcement. In the long run, South Jersey appears committed to emphasizing the safer part of its business, and that will make the company's stock more susceptible to the macroeconomic issues that affect utilities and minimize the potential impact of its nonregulated businesses -- for good or for ill.
Dan Caplinger 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.