Image source: South Jersey Industries.

The utility industry is full of relatively small players, and South Jersey Industries (SJI) is a typical utility focusing on a relatively concentrated service area. Coming into Monday's fourth-quarter financial report, South Jersey investors were looking to see fairly substantial increases in its earnings, but the utility's actual results fell somewhat short of what investors had hoped for. Nevertheless, South Jersey thinks that it can bounce back and produce even more income in 2016. Let's look more closely at how South Jersey Industries did to finish 2015 and what you should expect in the year ahead.

South Jersey Industries deals with "significant challenges"
South Jersey Industries fourth-quarter results showed the obstacles that the utility has had to overcome recently. Operating revenue fell 8% to $257.8 million, falling far short of the $288 million consensus forecast among investors. Yet net income climbed 16% to $50.9 million, and that produced earnings of $0.73 per share. However, using the company's favored Economic Earnings metric, earnings of $0.62 per share were $0.05 shy of what investors had expected from the utility.

Taking a closer look at South Jersey's fundamentals, the regulated utility division saw net income fall slightly, posting a 7.5% drop to $22.2 million for the quarter. The company said that higher reserves for uncollectible receivables and higher post-retirement benefit costs weighed on the division's results. However, customer counts grew by about 6,250 to more than 373,000, and conversion activity from heating oil to natural gas helped bolster the business. A fairly warm early winter likely weighed on gas demand as well, but South Jersey said that warm weather plus a rate reduction helped give residential customers some much-needed financial relief without costing the utility in terms of earnings.

South Jersey's non-utility businesses saw some interesting patterns. The SJ Energy Group saw economic earnings more than double from year-ago levels, and South Jersey said that efforts to improve efficiency within its pipeline system and to make better deals with producers in the Marcellus shale play contributed to its positive impact. SJ Energy Services overcame the negative impact of its Atlantic City facilities to triple its economic earnings for the quarter. Higher investment tax credits from the solar area helped lead the division forward, even though the CHP/Thermal and Landfill segments posted small economic losses for the quarter.

CEO Michael Renna put the results in context. "Strong operating performance across the company was mitigated by $15.7 million of write-offs and costs associated with our energy facility at the former Revel property," Renna said. He also noted that customers who were unable to pay for high heating costs last winter led to uncollectible losses that weighed on results.

Can South Jersey Industries move forward?
Even with the challenges it has faced, South Jersey seems confident. "With a focus on high quality earnings, a strong balance sheet, and minimizing risk," the CEO said, "our core businesses remain strong and are poised to deliver meaningful near-term growth."

Yet the mix of where South Jersey expects to get its earnings will likely change this year. The shift toward the regulated side of the business that many other utilities have followed appears to be in the cards at South Jersey as well, and the utility sees the share of profits from regulated operations rising from 67% in 2015 to between 70% and 74% this year. The SJ Energy Group will also rise from 2015 levels, contributing 20% to 25%. That will leave only 5% to 10% for SJ Energy Services, and South Jersey believes that solar's contribution in particular will drop considerably in 2016. Nevertheless, the utility sees all three units working well together to add up to solid profits.

South Jersey investors didn't seem satisfied with the news, bidding the shares down 2% at midday following the announcement. Nevertheless, with a dividend yield of more than 4% and reliable results from its regulated business, South Jersey Industries looks like it has plenty of potential to keep delivering the performance that investors want to see in 2016 and beyond.