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South Jersey Industries, Inc. (NYSE:SJI)

Q1 2008 Earnings Call

May 9, 2008, 11:00 am ET

Executives

Edward Graham - Chairman and Chief Executive Officer

David Kindlick - Chief Financial Officer

Stephen Clark - Treasurer

Analysts

Daniel Fidell - Brean Murray, Carret

Ryan Rosenthal - Sidoti & Company

Kathleen Bostjancic - WFB

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 South Jersey Industries' Earnings Conference Call. My name is Judy, and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

I will now turn the call over to Ed Graham, Chairman and Chief Executive Officer. Please proceed, sir.

Edward Graham – Chairman and Chief Executive Officer

Good morning. I would like to welcome you to South Jersey Industries' first quarter 2008 earnings conference call and webcast. Joining me today on the call are Dave Kindlick, our Chief Financial Officer, and Steve Clark, our Treasurer.

During the course of this call, we may make various remarks about future expectations, plans, and prospects for South Jersey Industries. These remarks constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these statements as a result of various important factors including those discussed in the Company’s Form 10-K on file with the SEC. Further, we see no duty to update these statements should actual events differ from expectations.

Now, let’s review the first quarter. On a GAAP basis, consolidated earnings from continuing operations totaled $24.7 million and $27.2 million for the first quarters of 2008 and 2007 respectively. GAAP earnings per share from continuing operations totaled $0.83 and $0.92 for those quarters.

As we've discussed previously, when managing the company, we measure our performance based upon economic earnings. Economic earnings, which eliminates all the unrealized gains and losses on commodity derivative transactions and adjust the realized gains and losses attributed to hedges on inventory transactions, rose to $39.2 million in 2008 for the first quarter from $38.4 million for the first quarter of 2007. Economic earnings per share rose to $1.32 per share compared with $1.30 for the same period.

Based upon results from year-to-date and our expectations of the remainder of the year, we recently announced the target range for 2008 economic earnings per share growth of 6 to 10%. And it should be noted that this projection is in excess of our stated long term average annual growth target of at least 6 to 7%. It also comes on the heels of 2007 where we produced double digit earnings growth. However, the 2008/2007 comparison require some elaboration to highlight the real strength of our performance in the first quarter and how that performance supports our guidance.

First quarter 2007 economic earnings benefited from strong reported performance at our Asset Management & Marketing business, but it also produced 4.9 million of related hedge losses that were recognized between April and October of 2007. In contrast, the 2008 first quarter profits have no offsetting hedge losses affecting future period. Consequently, the first quarter of 2007 results were adjusted to reflect a net value of those marketing transactions, first quarter of 2008 results would demonstrate a 17% improvement in SJI's economic earnings performance as compared to that prior period. That improvement is equivalent to a growth in 2008 economic earnings of $0.60 per share.

Looking at the performance of our non utility businesses in total, GAAP results reflected a loss of 300,000 for the first quarter of 2008 and net income of 2.9 million for the prior period. On an economic earnings basis, non-utility income from continuing operations for the first quarter of 2008 duplicated first quarter 2007 results of $14.1 million despite the benefit 2007 results received on the Asset Management & Marketing that I discussed previously.

Performance in our Asset Management business line benefited from margins that were previously locked in on commodity transaction. This business contributed $12 million in the first quarter of 2008, slightly lower than the 13 million produced in the same quarter of 2007. As we look to the 2008/2009 winter season, this business is well positioned to continue its strong performance. Although the summer/winter price differentials have narrowed, we are fortunate to have already hedged in excess of 70% of our storage capacity. In addition, as part of our portfolio of gas supply assets, we hold 80,000 decatherms of complementary market area pipeline capacity, which has experienced a significant increase in value. In fact, 65% of that capacity has been locked in for the coming winter at attractive prices.

Asset Management & Marketing wasn't the only one of our non-utility businesses that contributed to earnings growth in 2008. Our on-site energy production subsidiary, Marina Energy delivered income of $1.2 million for the first quarter of 2008 and that compares with 800,000 for the 2007 period. Improved operating performance on a year-over-year basis at the existing thermal plant and landfill gas accounted for this quarter's improvement. Performance also reflects the addition of our Burlington County landfill facility and a third turbine at our Atlanta County facility. In fact later this quarter, we also expect or plan to begin additional or receive additional income contribution from serving Borgata's new Water Club Tower in Atlantic City.

Construction of the thermal plant serving the Echelon resort in Las Vegas is continuing ahead of schedule, and remains well positioned to meet the planned start-up date of third quarter 2010. We have a 50% equity ownership in this facility with our partner, DCO Energy. This partnership provides us security along with the security we receive from project financing. So it really limits SJI's financial exposure on this project.

Our pursuit of energy project opportunities at a substantial number of proposed gaming projects in Atlantic City, Las Vegas and tribal areas continues. We expect these projects to provide annuity like income stream under long term contracts just like Marina's current contract. Our tight credit markets are delaying development of some casino project, our most immediate opportunities, Revel and MGM's Atlantic City project are moving full steam ahead. We would expect Revel to execute a contract with an energy provider some time this quarter and we feel we are very well positioned. MGM also appears to be moving steadily forward on its $5 billion City Center East project as capital they have raised over the last year should help them avoid any financing issues. We believe we are well positioned to serve this property as well.

The contribution from our retail services business, which includes appliance repair and warranty, HVAC installation, and meter reading was $700,000 for the first quarter of 2008 and $300,000 for the same period in 2007. The drivers of this performance were a combination of sales campaigns and some realized operational efficiencies. We expect to see steady growth continue from this business.

Switching our focus over to our utility business, South Jersey Gas, it produced record net income of $25 million for the first three months of 2008 compared with $24.3 million for the same period in 2007. Customer growth, lower operating interest expense and the operation of our decoupling tariff were the drivers behind the improvement. That tariff known as the Conservation Incentive Program or CIP eliminated the link between volumetric throughput and our profitability.

The CIP adjusts our results for any reduction in actual utilization back to the higher levels contained in our 2004 rate case. The CIP added $6.2 million to South Jersey Gas company's net income in the first quarter of 2008, double its impact for the prior year period. With the CIP, Gas Company's primary profit drivers are customer growth and our ability to control operating expense. Gas company's customer base grew by almost 5,000 customer in the 12 months ended March 2008, a 1.5% increase.

In terms of financial impact, the new customers added over the last year are projected to contribute about $1.7 million to bottom line per year. That contribution continues to benefit from the strength in our commercial customer segment. Utility operating expenses were down slightly for the period excluding regulatory expenses that have a revenue offset as we remain focused on improving operating efficiency.

The decline was primarily due to the formula reduction in the reserve fund collectibles at the end of March 2008 as the accounts receivable levels was lower at that point than it was at the end of March 2007. Our goal going forward is to continue to hold our O&M expenses flat.

South Jersey Industries equity to capital ratio of 56% as of March 2008 compares favorably to the 51.1% in March of 2007. Cash generated from operations that reduce the need for borrowing to support working capital needs is a primary driver for this improvement.

Reflecting this strong performance, we converted our dividend reinvestment plan from new issue to market purchase at the end of April, eliminating the dilutive effect of that program. Our goal is for South Jersey Industries, equity to capitalization ratio to average at least 50% on an annualized basis. I want to emphasize that I believe the strength of our balance sheet positions us well to take advantage of the future business opportunities that we plan to see arise.

As I conclude, I wanted to stress that we remain very excited about the future of SJI based upon the progress of and the prospects for both our utility and non-utility businesses. Our recent establishment of our 2008 target for economic earnings per share growth of between 6 to 10% should serve to reflect our confidence in our future.

Thank you for your time today. Now I will turn the call back over to the operator for the question-and-answer portion of this call.

Question-and-Answer Session

Operator

(Operators Instructions). Your first question will be from the line of Daniel Fidell of Brean Murray, Carret. Please proceed.

Daniel Fidell

Good morning gentlemen.

Edward Graham

Good morning Dan

David Kindlick

Good morning Dan

Daniel Fidell

Just a few quick questions, I guess. First can you give us an update on the status of your Union Contract negotiations, I know that as such it expires at the end of the year?

Edward Graham

Yes. In terms of our Union Contract the expiration date is January 2009 and we are working closely with the union leadership, and we expect to really complete something before the year is out. Very good direction in terms of inclusion of performance and productivity as part of the contract. So its not only about economics, but about productivity.

Daniel Fidell

Okay. And is that something that we should look for later in the year, because some are all kind of -- period before we are likely to know something more definitive?

Edward Graham

I thinks that reasonable expectations.

Daniel Fidell

Okay, great. And then another question on the onside, can you give us a may be a little more specific in terms of he timing of the Borgata Tower coming on line and the potential incrementality to earnings that we might expect from it?

Edward Graham

The Borgata Tower is expected to come online in the beginning of June. And in terms of incrementality we expect to have a nice additions or income stream, it’s hard to layout the economic directly for you. But I will put it in this term, in terms of the two expansions that Borgata has experienced, in total the clock was at or about 25 million to service in terms of capital expenditures. 23 million of that is already in service and depreciating. So for this incremental income stream only $2 million more we are going service in terms of depreciation and other costs. So this should clearly be more profitable and I will add than our previous business.

Daniel Fidell

Alright, and thanks. And maybe just a final question on the retail business. Can you just talk a little bit about that business, you had a good quarter and you are capturing conversion customers? You talked about steady growth in the second maybe if you could just touch on it little more?

Edward Graham

In terms of retail business which is predominantly our plant, service and HBAC activities. We serve both residential and commercial markets. We are seeing an addition in both installation activity of new gas equipment, probable a good part of that deriver might be conversions from oil as well as ongoing road for our warranty business. What also was a key improvement is we did put some efficiency measures in and how we manage that business that we are seeing benefits already. So its also a much better start this year and we see bounce at the year being favorable.

Daniel Fidell

Thanks a lot for your comments.

Edward Graham

Thank you, Dan.

Operator

Your next question will be from the line Ryan Rosenthal of Sidoti & Company. Please proceed.

Ryan Rosenthal

Hi gentlemen

Edward Graham

Hi, Ryan.

David Kindlick

How are you?

Ryan Rosenthal

Yeah, points on some pretty good -- regarding your assets management and marketing segment business. I was curious about your comment earlier. You suggested that there is additional value that you are seeing recently in the pipeline transportation capacity?

Edward Graham

Yes.

Ryan Rosenthal

Could you touch on that just a little bit?

Edward Graham

Yes. One of the things that we are seeing strengthening particularly in related to what our capacity is held. The value for people is buying that capacity. So it's actually been up by -- and is moving really consistent with commodity prices being higher as well. But in our case that -- since we require that pipeline capacity much lower cost that’s a nice incremental profit for us that we are already, as I point out locking in.

Ryan Rosenthal

Okay. And how long do you have the lease on that capacity?

Edward Graham

In many cases they have been ever green position. So that -- it continues from year-to-year unless we notify the pipeline that we no longer want it one year in advance.

Ryan Rosenthal

Okay, great. And I have one question, switching over to the utility business. I know that you have seen some recent growth in your commercial margin. Do you still see that continuing, do you see more opportunities down the road with that?

Edward Graham

I think we hope that that will continue. We see that the commercial customers that we are bringing online are larger. We also have seen more and more activity starting to mobilize because of the growth of the Atlantic City activity. So we can expect that to continue to grow and particularly as we move out of some of the tougher economic housing situations right now.

Ryan Rosenthal

Okay, great. Thanks for your time gentleman.

Edward Graham

Thank you

Operator

(Operators Instruction). Your next question will be from the line of Kathleen Bostjancic of WFB. Please proceed.

Kathleen Bostjancic

Good morning.

Edward Graham

Good morning, Kathleen

Kathleen Bostjancic

You had commented that there was a potential change in rules around cogeneration. How much opportunity do you see in your market area for cogeneration applications? Thanks

Edward Graham

We see quite a bit of opportunity in terms of cogeneration. In fact, the Energy Master Plan of New Jersey has included some language that’s encouraging at around the state for the purposes of efficiency and also the deal which can strengthen some of the electric grid around the other state. So we see a lot of opportunities particularly in Atlantic City, I think the next wave of gaining growth that we are referring to will in corporate cogeneration as part of there energy solution.

Kathleen Bostjancic

Can the casino be this deem hope, does that how would work out, is that what you are looking at?

Edward Graham

Yes. I think this what we have envision in fact that Dave as also discussed that with our self in the local electric utility that they see a gas fire loop as potential solution for the growth in Atlantic City with each casino having not only a thermal plant, but a corresponding cogeneration facility attached to it. Not unlike in terms of thermal plant that we served or got away. And that business will be open to competition for third party marketers and developers like ourselves. The efficiency that’s brought between the two is that with cogeneration it will generate electricity and displace the need for the electric utility to do it, but it will capture the steam, the way steam from a cogeneration facility into the thermal plant and really displace the need to heat the water. So the combination is a great, but in terms of efficiency and economic.

Kathleen Bostjancic

Thanks.

Edward Graham

Thank you, Kathleen

Operator

(Operators instruction). And there are more questions at this time. I will turn it back to Ed Graham for closing remarks.

Edward Graham

Well again, thank you all for joining us today, and being part of our discussion. If there are any further questions arise, that you would like more information about Steve Clark, our Treasurer can be reached. Steve's phone number is area code 609-561-9000, extension 4260, or by e-mail at sclark@sjindustries.com. Again, thank you and have a great day.

Operator

Thank you for your participation in today’s conference. This concludes our presentation, and you may now disconnect. Have a great day.

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