Ed Graham - Chairman and Chief Executive Officer
David Kindlick - Chief Financial Officer
Stephen Clark - Treasurer
Kathleen Bostjancic - WFB
Dan Fidell - Brean Murray, Carret & Co.
Ryan Rosenthal - Sidoti & Company
South Jersey Industries, Inc. (SJI) Q2 2008 Earnings Call August 7, 2008 2:00 PM ET
Good day, ladies and gentlemen and welcome to the Second Quarter 2008 South Jersey Industries' Earnings Conference Call. My name is Jasmine and I will be operator for today. At this time, all attendees are in a listen-only mode. We will conduct a question-and-answer session towards the end of today’s conference. (Operator Instructions) I will now like to turn the presentation over to your host for today’s call Mr. Ed Graham, Chief Executive Officer of South Jersey Industries; you may proceed sir.
Thank you and good afternoon. I would like to welcome you to South Jersey Industries' second 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’ll make a number of forward-looking remarks or expectations or plans 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 or on file with the SEC. Further, we see no duty to update these statements should actual event differ from expectations.
Now, let’s start to review the second quarter. GAAP consolidated earnings from continuing operations reflected a loss of $13.3 million compared with earnings of $10.8 million for the second quarter of 2008 and 2007 respectively. GAAP earnings per share from continuing operations totaled a loss $0.45, an income of $0.37 for the same quarters.
For the six months South Jersey produced income from continuing operations per GAAP of $11.4 million or $0.38 per share in 2008, compared with $38.0 million or $1.29 per share for the comparable 2007 period.
GAAP results reflected the impact of unrealized gains and losses from mark-to-market accounting out of commodity asset management and marketing business that will never be recognize and in fact this non-cash loss had been virtually eliminated by July 31, 2008 due to the falling price of natural gas. As previously discussed, when managing the company we measure our performance based upon economic earnings.
Economic earnings which eliminates all unrealized gains and loss on commodity derivative transactions and adjust the realized gains and losses attributed to hedges on inventory transactions, rose to $7.6 million in 2008 second quarter, a 23% increase from the $6.2 million for the second quarter of 2007. Economic earnings per share rose to $0.26 per share from $0.21 per share for the same period.
For the six months SJI’s income from continuing operations totaled $46.8 million in 2008, up 5% from the $44.6 million of ’07. Economic earnings per share from continuing operations for the same period rose to $1.57 per share in 2008 from $1.51 per share in 2007, and remember that in 2007 SJI’s results after the second quarter were negatively impacted by a $3.3 million hedge loss on commodity transactions that were related to the extremely profitable transactions which were recognize the that third quarter.
The second half of 2008 will not be affected by any losses related to prior transaction. SJI’s economic earnings performance for the first half of 2008 will reflects the 13% improvement when compared to results of 2007 period and with the related subsequent hedge losses. The performance that I just described and opportunities ahead of us, leaves SJI well positioned to deliver economic earnings per share growth of between 6% to 10% about the 2007 level of $2.09 per share. Further we also remain committed to delivering our long-term average annual economic earnings per share growth target of at least 6% to 7%.
Looking at the performance of our non-utility businesses in total, GAAP results for 2008 reflected a loss of $16.8 million for the second quarter of 2008 and is $17.1 million for the year-to-date. The same periods in 2007 GAAP net income for our non-utility businesses were $6.9 million and $9.8 million respectively.
As I mentioned previously, GAAP results were impacted by losses related to the mark-to-market changing of commodity prices. Those losses have almost completely reversed by the end of July due to the declines in gas prices and regardless of the gas price changes would never been recognized anywhere.
On economic earnings basis, non-utility income from continuing operation for the second quarter of 2008 was $4.1 million compared to $2.3 million for the same quarter of 2007. For the six months economic earnings grew to $18.3 million in 2008 from $16.4 million in 2007. Remember that year-to-date comparison is also better than it appears because of the $3.3 million of future hedge losses related to the first quarter of 2007 performance that hadn’t yet been recognized in the six month results for that year.
Looking at our key non-utility businesses, our asset management and marketing business line added $2.7 million SJI’s economic earnings in the second quarter of 2008 compared with $1.5 million for the second quarter of 2007. The income contribution for the first six months of 2008 was $15 million compared with $14.5 million for the same of 2007. Again this comparison was affected in the same fashion as I mentioned previously.
Result for 2008 have benefited significantly from the increased value of pipeline capacity, which served to offset market conditions that produced smaller margins with storage capacity. With regards to storage, we hedged an additional profit margin on each transaction we enter into and then build on those margins by taking advantage of favorable market conditions.
As we look to the 2008-2009 winter seasons, this business is well positioned to continue its strong performance, having added to our asset portfolio this business not control an excess of 11.7 Bcf of the gas storage capacity and with 111,000 decatherms per day of pipeline capacity. For the upcoming winter season, we have already hedged 80% of our storage capacity and 90% of our transportation capacity. Those hedges have locked in $26.3 million of pre-tax profit for this business for the 2008-2009 winter seasons.
On-Site energy production also is performing very well in 2008. Our subsidiary, Marina Energy delivered income of $1.2 million for the second quarter of 2008 compared with 800,000 for 2007. For the six month to-date Marina produced $2.4 million in 2008 compared with $1.2 million in 2007. Improved operating performance and higher chilled water demand on a year-over-year basis at the existing thermal plant accounted for this quarter’s improvements and in June we began receiving additional income contribution from serving Borgata’s new Water Club Tower in Atlantic City.
As you know from last week announcements, the fourth quarter of 2010 opening a Boyd Gaming's Echelon Resort in Las Vegas has been pushed back 9 to 12 months and we have the same effect on our joint venture energy project that will serve Echelon. Based on Boyd's stated commitment to this project, we remain confident the project's ultimate completion. Boyd's attributed delays with slow economic conditions and difficult capital market.
The point to keep in mind that we had several key protections that are structured into this deal; first is that its project finance, so SJI has limited liability for this project; and second under the terms of the agreement, Echelon is required to begin making the component of the project payments, which include return on principle, interest and return on equity in December 2010 whether or not the project is operating.
Additionally, Boyd’s provided a guaranty that it will make the interest payments due on the debt service until after the project open, when we enter into these projects further note that we are very focused on protecting the company and its shareholders from risk.
SJI's fourth landfill gas-to-electricity project, a joint-venture to develop a two megawatt facility for Salem County, in New Jersey is on target to be operational during the fall of 2008. We continue to pursue energy project opportunities with a substantial number of proposed gaming projects in Atlantic City, Las Vegas and tribal areas. Marina develops, owns and operates on-site energy plants. These projects are especially attracted to us as they provide annuity-like income streams under long-term contracts.
The contribution from our retail services business, which includes appliance, repair and warranty, HVAC installation, and meter reading, was $200,000 for the second quarter of 2008 versus a breakeven for the same period in 2007. For the year-to-date 2008, retail services produced 900,000 of net income compared with 300,000 for the first six months of 2007.
As reported in the first quarter the combination of new sales campaigns and realized operational efficiencies realized operational efficiencies drove the improved performance. This business continues to provide annuity-like income contribution to SJI and positions well for the development of distributed generation at the consumer level.
Changing our focus over to our utility business South Jersey gas produce net income of $3.4 for the second three months of 2008 compared with $3.9 million for the same period in 2007. For the first six months of 2008, Gas Company reported net income of $28.5 million, up from the $28.2 million posted for the same period in 2007.
Performance drivers for the quarter and the six months for customer growth and lower interest charges, offset by lower off-system sales and higher depreciation in administrative expenses.
Our results for uncollectible customer accounts also increased slowly, but this increase was (Inaudible) and tied to the higher receivable levels. We have not seen a change from our historic pattern for the bad debt.
South Jersey Gas Company decoupling tariff noted the Conservation Incentive Program or CIP eliminate the link between volumetric throughput in our profitability. The CIP adjusts our results for any reductions in actual utilization rates, in fact there is a higher levels contained in our 2004 rate case. CIP protected $2.8 million of Gas Company’s net income in the second quarter of 2008 and a total of $9 million for the year-to-date.
With this said, Gas Company's primary profit drivers are customer growth and our ability to control operating expenses. Gas Company’s customer base grew by almost 4,600 customers in a 12-months ended June 30, 2008 a 1.4% increase.
In terms of financial impact, the new customers added over the last year projected to contribute about $1.6 million to the bottom line per year. While the new housing markets slump continued, we are encouraged by a tremendous amount of interest in converting to natural gas. We are experiencing significant increase in the number of conversion enquiries over the previous year, due to the competitive advantage natural gas enjoys in terms of price over other fuels.
Finally, moving to the balance sheet, South Jersey Industries equity to capitalization ratio of 51.8% as of June 2008, compares favorably to the 50.2% in June of 2007. Cash generated from operations that reduce the need for borrowing to support working capital needs was the primary driver for this improvement. Our goal has been for South Jersey Industries, equity to capitalization ratio to average 50% on an annualized basis. We look committed to maintaining a strong balance sheet to take advantage of future business opportunities as they arrive.
In conclusion, we believe that the future of the South Jersey Industries is very bright based upon their progress of and the prospects for our utility and non-utility businesses. Our reaffirmation of our 2008 guidance, and long-term targets for economic earnings per share growth should serve to reflect our confidence in our future.
Thank you for you time today. Now I’ll turn the call back over to the operator for the question-and-answer portion of this call.
(Operators Instructions) Your first question comes from the line of Ryan Rosenthal, you may proceed.
Ryan Rosenthal - Sidoti & Company
I noticed in your press release that you mentioned that you’ve already hedged 80% of your storage capacity for this winter and 90% of the transportation capacity; can we jump ahead to the following winter, the winter of 2009, 2010 given the storage spreads have narrowed for the seasonal opportunity, have you changed you stands in terms of how much you’d hedge in advance for that period?
Well we are working gradually. We’ve hedged a small percentage, maybe in the range of 10% on the storage spreads, but when we found an attractive opportunity. In terms of pipeline capacity we’re already about 40% hedged and quite frankly the value of pipeline capacity is almost as high next winter season or the ’09, ’10 winter season as it is currently, which is a great opportunity. So, we continue to work our way through hedging that off as well.
Ryan Rosenthal - Sidoti & Company
Okay great and I have one more question; concerning your new customer I guess your net customer growth rate, obviously we’re in a difficult housing market environment, do you think we will continue to go forward at the 1.4% rate we’ve seen in the last 12 months or did you think there’ll be a better or worse scenario from here?
Well, I think it’s hard to predict, but the new construction housing seems to be about similar at this point versus the last several months, but what’s most important is the conversion request. We’re nearing in our very first campaign, that’s unusually early. We’ve got to think about 1400 or 1500 customers looking to convert and enquiring. We tend to see a lot more activity as we get to the early fall so I’m still continuing to be hopeful that we can improve upon that because of the conversion potential.
(Operator Instructions) Your next question comes from the line of Jim Lykins, you may proceed.
Jim Lykins - Hilliard Lyons
Well let’s Echelon now in the back part for the next 9 to 12 months, are there some other projects that you’re looking at or you might be able to take on?
We currently have a number of development opportunities out there and we are exploring various sizes in the marketplace. Probably, realistically I think on the larger end, the larger projects, the timing is going to probably be delayed I would guess because of the financial markets and financing in a more favorable environment.
I think that’s just a timing delay. I think still the attractiveness of the projects continue, so we may hopefully see some smaller ones come online sooner and continue to develop the longer ones maybe in that 9 to 12 month timeline beyond what we had hoped for originally. So, when I look at the future, I would suspect that where we would have anticipated maybe some projects opening in 2010, maybe they are moved back into 2011 and 2012, but we continue to be very well positioned to serve them.
The most important thing as you could hear in our call about how we protected ourselves and continue to focus on risk. We again will only entertain those projects in a very risk adverse fashion.
Jim Lykins - Hilliard Lyons
Okay and also, could you give us an update on what's happening right now with both Revel and MGM and do you think with what's happened in Las Vegas we might see more of the same in Atlantic City?
As far as the MGM first, I don’t have any new updates on MGM, since I last spoke in terms of what their timing would be in Atlantic City. I haven’t heard any less or have been less interested in anyway. I think they still have designed out there, I can’t really predict how their timing might go. In terms of Revel, I’m sure everyone’s heard about their tragic loss of their management team in a plane crash, a series about three individuals on their operating side. It’s hard to predict how that will influence them.
I can’t tell you that we continue to have a very close working relationship with Revel and certainly want to believe that we’re very well positioned depending on whenever that project comes online and as always, as I reiterated earlier, very concerned in terms of how we ensure our risk is protected as we add to the profits of the company. So, again it wouldn’t be surprising if everything is slit a little bit.
Your next question comes from line of Dan Fidell, you may proceed.
Dan Fidell - Brean Murray, Carret & Co.
Just a couple of questions, maybe you can just provide a little bit more color in terms of some of the smaller projects you were talking about as Corbin Phillins if you will and the interim of some of the larger projects that were delayed over the next year or two and then maybe to follow-up, if you could talk just from a broader perspective in terms of be delays and how it affects the larger new construction of hotels relative to those kinds of hotels and casinos that are just going through the renovation phase and might not need the same kind of capital access. I don’t know if there is a difference there, if you could just sort of touch on both of those?
Sure, I’d be glad to. In terms of smaller projects as an example, we are currently installing solar panels at a local college campus that has a really nice attractive benefit and what’s very nice about that is there is a significant federal tax credit you realize on the front end of that. So that has two phases that we’re currently working our way through.
We continue to look at smaller applications for cogeneration around the territory, whether they’re fixed for hospitals or college campuses and we also continue to see the small rental project and some near-term items. One of the things that is very interesting in New Jersey is as the Energy Master Plan, as the draft is out and people are starting to react to it, there are also pieces of legislation that are being proposed that really improve the profitability on these cogeneration projects. So, I think that’s going enhance interest, but we do see also the potential in terms of projects where existing facilities like the one we served at Revel’s Casino, we could go in and operate and bring some value to that place as well, which is nice because these are more rapid online income streams versus the longer and larger projects.
Your next question comes from the line of Kathleen Bostjancic; you may proceed.
Kathleen Bostjancic - WFB
I was just wondering, how the new customers fold is through this SIP plan. Do they get installed into SIP right away; do they have to wait till year end? How does that whole system work for additional customers?
Every new customer immediately becomes part of the calculation and so that’s in place as they come online regardless the time of the year.
Kathleen Bostjancic - WFB
Does the new customer then pay the same fee as other costumers in the same customer class or how do you setup the revenue for that customer?
Yes, the customer immediately pays the rates that are applicable for that class and then on a monthly basis we calculate, an aggregate calculation for that whole customer class for making adjustments to recognize the book impact and then on the subsequent year that’s rolled into every customer’s rates.
There are no further questions at this time. I would like to turn the call back to Mr. Ed Graham for closing remarks.
Well thank you again everyone participating in our call today. If there are any further questions or information you’d like, please contact Steve Clark, our Treasurer and Steve can be reached at area code 609-561-9000, extension 4260 or by e-mail at firstname.lastname@example.org. I thank you and have a nice day.
Thank you for attending in today’s conference. This concludes our presentation. You may now disconnect. Good day.