Christopher Edmonds - TSC

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Bottom of the Barrel: Putting South Jersey on the Map

Christopher Edmonds

Sometimes boring can be good for a portfolio. For South Jersey Industries(SJI), a mundane business has provided powerful results for shareholders.

This Folsom, N.J., company provides natural-gas services to nearly 300,000 customers in -- guess where -- southern New Jersey, including Atlantic City. Its customer mix provides stability to its earnings flow -- 31% are residential customers with highly predictable bills.

Yet the company also benefits from a commercial and industrial base that makes up more than 10% of its base. The balance of South Jersey's earnings comes from wholesale marketing of natural gas and power generation. In short, the company has a solid base of customers with a meaningful portion of business able to generate growth.

Generating Profits

South Jersey's business mix is firing on all cylinders. The company's regulated natural-gas distribution business -- South Jersey Gas -- had a great first quarter, aided by a cold winter and high demand for natural gas. The company saw demand surge as temperatures were 6% colder than average. While part of the profit potential was mitigated by a temperature adjustment feature in the company's rate plan, revenue and earnings still increased nearly 13% from a year ago.

Earnings also were helped by the company's nonregulated businesses, primarily its retail gas marketing operations. In the first quarter, South Jersey posted a 21% increase in profits in its unregulated business unit.

All told, the company's performance in the first quarter was better than any in its history and the company appears poised to continue its growth rate that is well above a traditional natural gas distribution utility.

Powering Forward

South Jersey's success has been largely a result of a progressive management team. Led by Chairman and CEO Charles Biscieglia, the company has been focused on providing quality service to traditional customers, while at the same time looking for ways to think outside the box that often restricts the growth potential for traditional natural gas utilities. While balance is critically important, the ability to find niche areas that provide additional growth can often mean the difference between a stodgy utility and one that is attractive to investors.

South Jersey's development of a new thermal generating plant to serve an Atlantic City casino is a good example. The company is now operating the Marina Energy power plant under a 20-year contract to serve the Borgata Casino and Hotel in Atlantic City. This unique project represents management's forward thinking.

Dividend Stability

While finding a natural-gas local distribution utility that has the ability to post consistent growth -- South Jersey's earnings should grow at a 8% to 10% clip this year and next -- it's even more important that a company like South Jersey maintain a dividend policy that provides for growth of current income.

South Jersey Industries (SJI:NYSE)
Current Price	$36.90
52-week range	$39.00-$28.20
P/E Ratio*	13.6
Market Cap	$452.2 million
Average Daily Volume	20,136
Inst. Ownership	36%
Dividend Yield	4.20%
Beta	0.21
Company Web site	www.sjindustries.com
*Based on 2003 estimates. Source: Value Line, company reports, TSC research

The company has done just that. Since 1999, the company has increased its dividend by nearly 10% and appears committed to continuing the tradition. The dividend was increased in the first quarter and it wouldn't be surprising -- especially if the company continues to grow earnings like the first quarter -- to see another modest bump later this year, no later than early 2004. With a payout ratio of just 58% of 2003 estimated earnings, the company can easily afford to make a move later this year.

While a solid story, South Jersey is not without risk. Its nonregulated business subjects the company to market and economic risks above those experienced by a pure play, regulated natural gas utility. With more than 50% of the company's revenue coming from nonretail regulated customers, there is a chance for more volatility in earnings. In addition, the company is always subject to review by state utility regulators. While New Jersey regulators have been accommodating, there are no guarantees regarding future actions.

I like South Jersey. While the stock has had a nice move -- a result of solid operating metrics and a focus on dividend stocks due to the new dividend tax scheme -- and I might wait for a slightly better entry point, longer-term, income-oriented investors can own South Jersey and sleep well at night. Given today's somewhat dicey utility landscape, that says a lot. The company loses a half-barrel based on valuation; I give it two-and-a-half barrels.

(For an explanation of our barrel rating system, see our description.)