South Jersey Industries' (SJI) CEO Ed Graham on Q1 2014 Results - Earnings Call Transcript

| About: South Jersey (SJI)

South Jersey Industries, Inc. (NYSE:SJI)

Q1 2014 Results Earnings Conference Call

May 9, 2014 11:00 AM ET


Ann Anthony, Treasurer

Ed Graham - Chairman and CEO

Steve Clark - Chief Financial Officer

Mike Renna - President and COO

Jeff DuBois - President, South Jersey Gas

Marissa Travaline - General Manager, Investor Relations


Spencer Joyce - Hilliard Lyons

Dan Fidell - U.S. Capital Advisors


Good day, ladies and gentlemen. And welcome to the First 2014 South Jersey Industries Earnings Conference Call. My name is Glenn, and I'll be your moderator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Ann Anthony, Treasurer, South Jersey Industries. Please proceed, Ms. Anthony.

Ann Anthony

Thank you. Good morning. And welcome to the conference call for SJI's first quarter fiscal 2014 results. I'm Ann Anthony, Treasurer for SJI and I'm joined today by Ed Graham, Chairman and CEO; Steve Clark, our CFO; Mike Renna, President and COO for SJI; Jeff DuBois, President of South Jersey Gas; and Marissa Travaline, our General Manager of Investor Relations.

We issued a news release this morning announcing the results we will be discussing on the call today, which includes an in-depth review of earnings on both a GAAP and non-GAAP basis, using our non-GAAP measure of Economic Earnings. You can access that release on our website at in the Newsroom section.

Before we get started today, I'd like to remind you that throughout the call we will be making references to future expectations, plans and opportunities for South Jersey Industries. These remarks constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual future results may differ materially from those indicated by these statements as a result of various important factors, including those discussed on the company's Form 10-Q on file with the SEC. We assume no duty to update today's statements should actual events differ from expectations.

With that said, I'd like to turn the call over to our CFO, Steve Clark, to present our first quarter 2014 results.

Steve Clark

Thank you, Ann, and thanks everyone for joining us. I'd like to start by framing the discussion of how we will present results today. You may recall that we recently realigned our nonutility businesses to better group those with the similar focus. In addition to the synergies this allowed in managing these businesses, we think it also facilitates reporting that more clearly reflects the results of our operations.

So on our call today, utility results will be reported as the first segment of our business as they have always been, but our nonutility results will be presented in the context of the following two business lines, South Jersey Energy Group and South Jersey Energy Services.

Energy Group reflects our activities related to the supply, storage and transportation of natural gas in and around the Marcellus. This includes our retail, gas and electric commodity business lines, our wholesale gas business line, as well as our royalty rights on shale acreage.

Energy Services will largely reflect our energy production assets within Marina Energy and Energenic. This includes our CHP and thermal facilities, as well as solar and landfill gas-to-energy generation projects. Energy Services will also reflect the performance of our smaller HVAC and meter-reading subsidiaries.

Across our business lines, the measure we use to assess SJI’s performance is economic earnings. This measure eliminates all unrealized gains and losses on commodity and on the ineffective portion of interest rate derivative transactions. It also adjusts for realized gains and losses attributed to hedges on inventory transactions and for the impact of transactions for contractual arrangements with the true economic impact will be realized in the future period.

For the first quarter of 2014, SJI saw economic earnings per share increased 33% over the same period in 2013. Income from continuing operations on an economic earnings basis was $66.2 million or $2.02 per share, as compared with income of $48.4 million or $1.52 per share for the same period last year.

This growth was driven by extremely strong performance in our wholesale commodity business, as well as by material contributions from our retail commodity business, our CHP projects and our utility.

As compared to the first quarter of 2013, our wholesale commodity business produced an incremental $15.5 million, retail commodity added nearly $700,000, CHP projects added $1.5 million and our utility added $2.1 million. I’ll review these contributions by walking through our businesses starting with South Jersey Gas.

Utility earnings growth was strong in the first quarter just over 6%. Net income rose to $37.6 million in the first quarter 2014 from $35.5 million in the first quarter of 2013. That growth came from two key places.

First, we continue to add customers particularly conversion customers at a rapid space. For the 12-month period ended March 31, 2014, utility added nearly 5,000 customers, bringing our total customer count to 364,424. This 1.4% increase adds roughly $1.7 million in incremental net margin on an annualized basis. This increase came despite weather that hampered both new housing construction and work needed to convert customers during the winter months.

The second key contributor for the first quarter came from our accelerated infrastructure programs. In the first quarter of 2014, we saw an incremental benefit of $2 million related to our accelerated infrastructure investments as compared to the same period last year. We expect to complete full year accelerated infrastructure investments under our AIRP program of $35.3 million and we expect these investments to generate incremental net income of $2.2 million for 2014.

It is important to remember that our AIRP is design to remove all of the old cast iron and bare steel pipe from our system. At a $35 million annual investment rate we expect it will take almost the decade to complete this effort. That means we would expect to add some more increment annually to net income for the entire period. This will be true for other similar programs such as our proposed short program that Mike will speak to you later.

Turning to our non-utility results, the two areas of this business, Energy Group and Energy Services combined to post economic earnings of $28.5 million for the first quarter of 2014, as compared with economic earnings of $12.9 million in the fourth quarter of 2013.

South Jersey Energy Group added $18.2 million in economic earnings in the quarter, driven by the $16.7 million contribution from the wholesale group that complemented nicely by $1.5 million in economic earnings from the retail side of our commodity business. For the first quarter of 2013, in comparison, the wholesale retail business lines contributed $1.2 million and $876,000 respectively.

South Jersey Energy Services provided $10.3 million in economic earnings for the first quarter, down slightly from $10.8 million in the prior year. This variance was the result of a reduction in the contribution from renewal projects as weather impacted output from solar and landfill generation. Solar contributed $7.8 million in Q1 2014 compared to $9.1 million in Q1 2013, although we are already seeing improvements with April’s production at those facilities.

Those results were inclusive of ITC’s, totaling $10.5 million in Q1 ‘14 and $10.8 million in Q1 ‘13. Our CHP thermal project portfolio remains a reliable driver of earnings in our non-utility business, contributing $3.3 million in the first quarter of 2014 as compared to $1.8 million in the first quarter of 2013.

These projects benefited from the extremely cold weather during the first quarter, which drove higher demand for hot water production and electricity sales from these projects. They were also able to opportunistically switch between our operating fuels and take advantage of volatile commodity prices.

Now, before I turn over the call to Mike, I just want to provide a brief update on the balance sheet. As noted in the release, our quarter end equity-to-cap ratio was 45% as compared to 47% in the prior year period. While we continue to make significant infrastructure and energy project investments, the increased working capital demand associated with the extremely cold weather winter accounted for most of the change.

Our goal remains for SJI’s equity-to-capital ratio to average approximately 50% on an annualized basis. For dividend reinvestment and optional cash purchases within our dividend reinvestment plan, SJI raised equity capital of $13.6 million through April 30th of this year.

While we anticipate raising additional equity in 2014 for the plan, the impacts of this equity have been factored into the guidance that we have provided. And we expect that our accumulated deferred tax assets from ITC and bonus depreciation will reduce future tax payments, resulting in available capital support future business investments.

Now, I would like to turn the call over the Mike to discuss what we expect to see for the remainder of 2014.

Mike Renna

Thanks, Steve. Good morning. As we look at our first quarter and beyond, we cannot be happier with the company’s performance. While the volatility in natural gas pricing created significant upside for our wholesale business, the depth and breadth of our portfolio businesses allowed us to maximize that opportunity.

Pipeline capacity added to support our fuel supply and management contracts became increasingly more valuable as cold weather dramatically increased natural gas prices. The opportunity afforded us by our growing portfolio of energy production assets to resell natural gas and electricity to premium markets, while operating our plants on alternative fuels for back-up generation was a nice complement to an already strong quarter.

And aggressive investment in our distribution system over the last five years positioned us well to capitalize on the natural gas conversion opportunities and follow a winner like the one we just had. The benefits we have recognized to the bottom line in the first quarter from our utility and non-utility investments provide a solid foundation for future growth and support our expectation and economic earnings per share growth for 2014 will be at the top end of our 6% to 12% guidance range.

Beyond 2014, our accelerated infrastructure investments, full year impacts on the base rate case, continued CHP and solar project development and increasing contributions from our fuel manager activities will support continuing economic EPS growth, expected to average at least 6% to 7% per year.

Within South Jersey Gas, strong customer growth and significant infrastructure investments remained the core of our utility business. On a year-over-year basis, South Jersey Gas grew its customer base by almost 5,000 customers to over 364,000. This growth is driven largely by conversions. We're starting to see some life in the new construction market as well.

Although still a small portion of our customer growth targets, new construction additions were much higher in the first quarter than anticipated at 751% versus 483 last year. On a full-year basis, this uptick in new construction could be a nice compliment to the universe of over a 150,000 potential conversion customers remaining within our service area, were using heating fuel other than natural gas.

Also driving the potential for long-term growth in our utility is the advancement of compressed natural gas vehicle fueling infrastructure. As noted in an earlier release, last month, we announced an exciting joint project with Wawa that will introduce compressed natural gas fueling at its Logan Township, New Jersey, Superstition, in the Pureland Industrial Complex, just off Interstate 295.

We are excited about this first of a kind project in our region, and the potential it brings for adding CNG stations to expand the CNG vehicle market. This project is expected to be part of a 3-station pilot program with Wawa in Southern New Jersey.

We are also in active discussions with another station operator about adding CNG to their existing stations. While the impacts of CNG to the bottomline has been minimal to date for South Jersey Gas, increasing access to fueling infrastructure will help mainstream the technology over the longer term, expanding its customer base and increasing the possible benefit to the bottomline.

Our service area remains right for home and business conversions to natural gas, CNG provides a way for us to continue adding customers well beyond that number. Considering that every trash truck that converted to CNG is equivalent of three households converting, we intend to continue pursuing the expansion of CNG projects.

As we look forward in 2014 and beyond, significant capital investment in our infrastructure continue to be a major driver of performance. Although weather conditions hampered construction investments during the first quarter, we expect to complete full year accelerated infrastructure business under our AIRP program of $35.3 million.

Based on the timing of investments and subsequent recovery, we expect this critical program to generate incremental net income of $2.2 million for 2014. Additionally, with the onset of warmer weather, we renewed efforts to replace low-pressure distribution lines along the barrier islands. We’re optimistic that this type of work will continue under our SHARP slightly, which we hope to see approved by the fall.

SHARP proposal reflects the importance of fortifying our distribution system against future significant weather events. This seven-year $218 million program will complement our existing full year accelerating infrastructure replacement plan. And if approved as proposed, we extend the ability to make and earn on system reliability investments through 2021, having incremental net income of roughly $2 million per year.

With PSE&G having just reached agreement with the BPU on its storm hardening program, we expect our filing to move along quickly. As you know, we are working towards the settlement of our base rate case and very optimistic about the potential for a settlement in time to benefit our fourth quarter results.

As filed, the case represents $553 million in investments made since our last rate case was settled September 2010. It requests incremental net operating income of up to $27.1 million. While we anticipate net settlement negotiations will slightly reduce our net operating income request, the base rate case remains the key part of our 2014 and 2015 net earnings projections.

We are optimistic about the prospect of adding a liquefaction plant in our McKee City site. We remain committed to the construction of 22 mile natural gas pipeline to the B.L. England generating facility in Upper Township, Cape May County. Bolstered by the bipartisan support of elected officials and by feedback from many local residents, we intend to continue working diligently to see that project move forward.

The region truly needs the critical support to electric generation capabilities and enhance reliability of our gas distribution system that the B.L. England project can provide. On the non-utility side, by optimizing assets across our business lines, we were able to maximize the benefit to our bottomline of natural gas volatility associated with the severe winter weather.

The first quarter saw significant contributions from our wholesale commodity business, contributing $60.7 million for the first quarter. These impacts were further supported by strong performance from our CHP thermal projects, ITC contributions from solar project development and the success of our retail commodity business win.

Focusing first on our wholesale business, within South Jersey Energy group, the transportation capacity acquired in 2013 coupled with existing transportation and storage assets provided additional benefits throughout the recent winter as severe weather drove the value of those assets. Looking ahead, capacity will be vital to the growth of our fuel supply management portfolio serving the gas-fire generation market.

Our position in this niche market will enable us to continue layering in fuel management contracts with the three announced in 2013, which will provide a multi-year fee based stream of income. These gas-fired generation facilities are expected to come online over the next two years starting with LS Power facility that is expected to begin taking test gas in the second quarter in the operation by year end.

Adding one or two of these contracts per year clearly supports the incremental growth we expect from this business over the longer term. Also within energy group, our retail commodity margin business delivered significantly improved results in the first quarter of 2014 as compared to the prior year.

The new contracts coming online and aggressive marketing to help grow this business, we expect to see ongoing contributions from both our commodity marketing businesses throughout 2014 and beyond. Shifting to South Jersey Energy Services, steady annuity-like income streams from CHP and thermal facilities at the core of this business are enhanced by the contributions from solar development.

As our Montclair State facility progresses through its first year of operation, we view the successful operation of this facility as a platform on which to model future projects. If the state pursues incentives to fund asset hardening projects and critical facilities throughout the state, we expect to see some activity later this month around the proposed U.S.

Department of Housing and Urban Development $210 million Block Grant for the New Jersey Energy and Resilience Bank. This loan will provide loans and incentives for CHP, solar and fuel cell projects at critical public facilities around the state. These opportunities come in addition to strong existing queue potential projects in front of us, totaling $510 million of development opportunities. The $71 million of these opportunities considered advanced stage. Solar development remains the other key driver of Energy Services’ performance.

As we've said many times, we intend to continue targeting solar development that has the potential to benefit long-term earnings growth. In addition to the ITC associated with these projects, as Steve mentioned earlier, we are in various stages of development on solar projects that could result in additional 22 million of ITC. That ITC will benefit either 2014 or 2015 depending on when the projects are complete.

As we forward at the remainder of 2014 and into 2015, the support for our earnings projections is evidenced by the performance of initiatives across our business lines. From the core contributions of our utility’s customer and infrastructure growth to the upside potential offered by our energy production assets, each piece of our business is strategically positioned for earnings growth. We remain confident in our assessment that growth will near the high end of our guidance range of 6% and 12% and are equally confident the prospects for achieving our targeted growth of 6% to 7% per year beyond 2014.

Thank you. And now, I will turn the call over to Ed.

Ed Graham

To close our discussion, we would like to highlight a few of the key points Mike mentioned that I see having a significant value beyond 2014. First, we are well-positioned to continue achieving the above average customer growth that we have historically demonstrated in South Jersey Gas. With the price advantage as high as 74% over other fuels for heating, residential and commercial markets are right for conversion in our territory and the potential offered by an expansion of CNG technology, customer additions will continue to be a major driver of success for the utility, and ultimately, SJI.

Our operating performance is also bolstered by the strength of a rate case, that reflects our commitment to prudent customer focus investments and enhance the safety and reliability of our natural gas distribution system. From our pending rate case to infrastructure filings, we believe our commitment to strengthening our utility infrastructure to serve our customers, our community and our investors well. The strength of our non-utility businesses lie in the breadth and diversity of opportunities afforded by these business lines.

With businesses focused on some of the most dynamic and profitable initiatives in energy, including activities around the sale of Marcellus gas, combined heat and power, and solar project development, we believe the groundwork for continuing earnings were in a near and the longer terms from our energy group and our energy service business areas.

So stepping off the guidance of up to 12% right now in 2014, we expect to average economic earnings per share growth in 2015 and beyond of at least 6% to 7%. The core of this growth will continue to be our utility, and of course we expect the major uplift in 2015 with the many regulatory and customer growth opportunities we see coming online. Also looking at the non-utility side, we think we have a number of repeatable and income streams that will again complement a nice growth in the utility.

At this time, I would like to turn the call back over to the operator for the question-and-answer portion of our call.

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Spencer Joyce, Hilliard Lyons. Please proceed.

Spencer Joyce - Hilliard Lyons

Good morning, guys. Thanks for the color on the call, and thanks for taking my questions.

Ed Graham

Good morning.

Steve Clark

Good morning.

Spencer Joyce - Hilliard Lyons

Steve, the first question might be for you in here, just kind of a housekeeping item. On the income statement we have about $2.3 million of income from equity and affiliated companies. Refresh us on what was the major driver there, and if it was a one-time or recurring?

Steve Clark

Equity is income through -- affiliated companies, Spencer, is the equity that we get from our Energenic partnerships primarily. Remember that’s carried as a 50-50 joint venture. So when we talk in the body of the script about what’s happening with our individual businesses and when we talk about what’s happening with CHP and so on, in particular with CHP, that’s kind of covering both aspects. It’s dealing with what we’re marking at not only what is a wholly-owned subsidiary, but what’s happening in that JV.

Spencer Joyce - Hilliard Lyons

Okay. So most of that number there is pretty clean there, there is no special or one-time items there.

Steve Clark

Yes. That’s correct.

Spencer Joyce - Hilliard Lyons

Okay, great. Also, you guys have been pretty forward with this over the past couple of years that you do want to move that equity ratio back up towards 50%. I guess my question here is, with it dipping down to 45% in what’s typically a pretty good cash flow quarter for you guys, is there a number that maybe we can key on that may induce you all to do more of an overnight style deal?

Ed Graham

I’ll answer that one, Spencer. So I guess, the first thing is our target of an average of 50%, factors in the periods where we completed storage and have less cash tied up as well and also under normal weather conditions. Those are two factors that would be in play. In our case -- I think Steve alluded to it at the some degree. Certainly, we were drawing gas out of storage and a lot of that cash benefit will be recognized in the second quarter with the depleted storage. But the second part is the cost of gas is extremely high. And as we collect on those bills over the balance of this quarter and then into the rest of the year under an equal payment program.

And the gas company will see a lot of that cash flow. And so I think the expectations is that we’re not had our target of averaging 50% this year but I think we’re moving. We continue to move in that direction.

On a positive note, some of the reason that we’re unable to get there as quickly as we target is we’re making some great investments either in utility side on assets that we earned on immediately or on the non-utility side that are generating some income. And I think the final thing that affected in particular related to weather, our recovery this year is that the gas builds are much higher for our utility and that’s something that we’ll collect overtime through our normal clauses.

Spencer Joyce - Hilliard Lyons


Ed Graham

So I think the other thing to highlight is that as we move forward in the coming years, we have an access of $200 million of tax benefits from either our ITC benefits that haven’t been utilized yet or from bonus depreciation which really that hasn’t been extended forward. So we’ll see in many instances, minimal tax requirements over the next five to seven years.

Spencer Joyce - Hilliard Lyons

Okay. You noted that it had been an increasing CapEx due to a real long list of projects that have presented themselves that has sort of gotten the equity ratio a little bit lower than maybe we’d like to see. With it -- with that being the case, why -- again going back to the overnight deal, we’ve seen Atmos do one very successfully recently, Laclede has done one that was real well received. Why don’t you just go ahead and kind of get that conversation off the table?

Ed Graham

Well, I guess from our advantage point, we have a dividend reinvestment program that we have a great capacity to bring it in a more steady stream. And I think our cost continue to be lower than doing a one-time issue. So if we saw that the functioning of our dividend reinvestment plan changed than we weren’t able to raise the capital that way and certainly something we would entertain. But right now I think, we’re picking the least impactful on the trading of our stock as well as the least impactful on cost.

Spencer Joyce - Hilliard Lyons

Okay. Fair enough. Moving over to the Energy Group -- first off, congratulations on a great quarter there. But $16.7 million versus $1.2 million, looking strictly at the wholesale segment, I have to think that really, a big chunk of that was either driven by the weather or those opportunities were derivative of the weather. Can you give us any color or clarity there what maybe a more natural run rate for that business might be? Say, given average weather and average operating environment?

Steve Clark

Well, I guess, clearly the weather was a benefiting factor to the performance, but also the activities that we undertook in the last year in particular to add attractive pipeline capacity to move this gas to the right markets. And I think all those companies that benefited this quarter that was the key positioning. What is clearly identified is disconnects between getting gas from the Marcellus to key markets.

We’ve made huge strives and positioned ourselves well. So it’s hard to say that we’re going to experience the same weather and have prices run up to the extremes that they did this first quarter. But clearly in the next three to five years, there is not evidence that there will be sufficient pipeline capacity either, whenever we have these periods of cold weather to move into markets. So, I think we’ll continue to benefit from that. It would probably be misleading to say that the prices are going to run up as high as they did in every year.

But the other thing that we’re doing to complement that within that business are these contracts that we’re providing where we’re managing the supply needs of merchant generators and actually creating a more annuity like income stream from those investments. So, I have great optimism about this area growing in the future. But I can’t predict that we’re going to have that spike up every first quarter to the same magnitude. Is that fair, Mike?

Mike Renna

Yeah. I guess that’s right.

Spencer Joyce - Hilliard Lyons

Okay. So in any case, the $1.2 million from Q1 of 2013, given some of the steps that you have taken to add assets and expand the producer side of things, it’s safe to say that’s a little bit below what you would expect to see on kind of a year-by-year basis?

Steve Clark

Absolutely, probably more than a little bit. I think that that’s clearly going to be below what we would expect to happen in future first quarters.

Spencer Joyce - Hilliard Lyons

Okay. One final question here. Kind of another pseudo-housekeeping one. If we look at the tables in the 8-K, we have $6.9 million of economic earnings from renewables and then dropping down and looking at CHP and solar, those were little over $3 and a little under $8, respectively, so closer to $11 million. My question is what would be the offset to those, where was the $4 million or so loss?

Ed Graham

Well, I guess, I don't remember the exact differential. But two things happened in the first quarter that affected output from our facilities. One sounds very simplistic, but very true in the solar side, number of facilities constantly had ice freeze-ups or snow blocking ability to generate capacity -- output from the solar facility.

So operating income that we would have expected in the first quarter, we didn't receive and I guess, that's where, in the speech we alluded to the fact that now as weather has got more normalized, the output has been much better.

The other is within, the landfill generating facilities that we experienced again some issues with extreme weather that impeded their ability to operate, but we're again seeing -- in some cases, it actually caused the units to go down and so we're seeing performance better on those fronts as well.

So weather had a good visibility and being frank on the landfill generating side, we continue to improve those operations. We've had different issues that prevented maintenance, who will help us for, so I think both those areas as we get towards the heating or the cooling season should be beneficial to us.

Spencer Joyce - Hilliard Lyons

Okay. So taking it for granted that weather definitely impacted a little on the landfill side, did those facilities lose money? Do you have kind of a dollar value there?

Steve Clark

Yes, yeah, they…

Ed Graham

It's about $900,000, that's it.

Spencer Joyce - Hilliard Lyons

Okay. All right. That's all I had.

Steve Clark

Yeah. It’s just about $900,000.


(Operator Instructions) Your next question comes from the line of Dan Fidell, U.S. Capital Advisors. Please proceed.

Dan Fidell - U.S. Capital Advisors

Good morning, guys.

Steve Clark

Hi, Dan.

Ed Graham

Good morning.

Dan Fidell - U.S. Capital Advisors

Just two really quick questions from me, first B.L. England, if you could maybe kind of give us a little bit of an idea on the next steps forward and trying to advance that cause, what should we be looking for in the next several periods.

And then, secondarily separate question, interested in the CNG venture that you guys have just kind of announced here in the last several weeks? And interested in kind of what you see as a longer term opportunity set in CNG, maybe a bigger macro question, maybe best say for AGA? But if you can give us, maybe just a little bit of flavor in terms of how big -- how impactful you think CNG can become in the future that'd be helpful? Thanks.

Ed Graham

Sure, Dan, I'll start with the B.L. England question, obviously as we talked about in January, 7-7 vote, stall the project. We're seeing an enormous grounds swell starting at the governor's office, including the Head of the Senate -- Senator Sweeny, and actually quite frankly, the biggest and most vocal leader has been Senator Van Drew who's area was most impacted. And Senator Van Drew is looking at it from a number of advantage points.

Clearly, better for the environment if we're operating with gas versus coal, he's very concerned about the impact of jobs and also about the safety and reliability of energy in South Jersey. So, having said that as a backdrop, that's created a lot of support.

So we're going to be responsive to some of the suggestions that those that voted against this site and we'll look at coming back with some modifications to our filing that address issues they raised that concern.

And I -- we are incredibly optimistic about the outcome and in fact, I think, it's realistic in our minds that to think that we're going to start to spend money on this project of this magnitude during 2015. So I think we'll see some benefit in 2015 from the AFUDC associated with it and I would very much hope before 2016 end that would be in service. So very optimistic about that.

In terms of CNG, I'm going to ask Jeff DuBois, our President of the gas company since he negotiated the deal with Wawa and working with others to give his view of the future of CNG in South Jersey.

Jeff DuBois

Sure. I'd be glad to. Hi, Dan.

Dan Fidell - U.S. Capital Advisors

Hi, Jeff.

Jeff DuBois

One, obviously, there's a -- we know there is a huge potential within our territory. Just within our territory, we know there's about 90,000 fleet vehicles. But obviously the big hurdle for most fleets that we have talked with is, the availability of where to refuel.

So the fact that we are able to put this deal together with Wawa, it's going to raise the visibility of CNG unbelievably. This particular location is very close to a major industrial park and it's right off of a major interstate that runs through New Jersey. So the potential goes well beyond the 90,000 fleets that are located here, it will also go to the fleets that travel north and south through the state.

Wawa has indicated that they wanted immediately start to work on two more locations for a total of three stations a pilot and then there's another local gas station operator that's also looking to do the same type of thing. So the network of CNG stations in South Jersey particularly is growing quickly and the interest continues to grow on various fleet operators.

We're still looking at potential ways that we can have incentives for fleets to convert their vehicles. We're working with the BPU on those types of projects, which would really help us to take off.

But I know that -- just to give you an idea of the potential impact, I know, Mike, during his comments, he threw out a number that for every trash truck we get converted, it's equivalent to adding three homes to our system from the net income standpoint.

So we're anxious to go after it, not only do we have sales people on the ground that are out there marketing to fleet owners, but Wawa will as well. So we're excited about the potential of it, if that could bring to the company.

Dan Fidell - U.S. Capital Advisors

Initially is there -- thanks for that color. Initially assuming that you stay regional with the relationship with Wawa expanding through that or should we expect that maybe you take on additional partners, just how should we be thinking in terms of the growth in the current play?

Ed Graham

I guess, if that from our vantage point, we could see within a very short period of time the number of stations grow by at least 10 and that would be within a three year timeframe and be -- and so our mindset is a combination of those that we own ourselves for our fleets, but also strategically throughout South Jersey, where we're partnering with others, so that is accessible to other fleets. So I would be disappointed in the next three to five years if we didn't see this grow to be a meaningful part of the business.

Jeff DuBois

Yeah. And I think, one other things that we struggle a little bit to try to figure out the potential is that, there are things happening that South Jersey Gas really has nothing to do with. We've had townships and counties that are in the process of building their own station that we're not part of. So the increase in the stations that we're part of, we sort of have a handle on where we're going, but it continues to happen throughout our territory, even when we're not involved in it.

Dan Fidell - U.S. Capital Advisors

Thank you very much for the color. Certainly and interesting and pretty exciting opportunities set for you guys. So, thanks, we'll see you guys down in Miami.

Ed Graham

Thanks, Dan.


Thank you, Mr. Fidell. I will now turn the call over to Mr. Ed Graham for closing remarks.

Ed Graham

Well, if there's no other questions at this time, I'll remind you it's always, please feel free to contact Marissa Travaline, our General Manager of Investor Relations or Ann Anthony our Treasurer regarding any inquiries that may arise later. Marissa can be reached at (609) 561-9000, extension 4227, or by an e-mail Ann can be reached at extension 4143 or by e-mail at aanthony@sjindustries.corm and again thank you for joining us on the call and enjoy the rest of your weekend.


Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great weekend.

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