South Jersey Industries, Inc.
Q4 2008 Earnings Call Transcript

Published: 27 Feb 2009

[Operator:]

Good day, ladies and gentlemen, and welcome to the South Jersey Industries Fourth Quarter 2008 Earnings Conference Call. My name is Mary and I will be your coordinator for today. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call Mr. Ed Graham, Chairman and the CEO of South Jersey Industries. Please proceed, sir.

[Ed Graham:]

Good afternoon. I would like to welcome you to South Jersey Industries year-end 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 filed with the SEC. Further, we assume no duty to update these statements should actual events differ from expectations. Now let’s review the 2008 results. GAAP consolidated earnings from continuing operations reflected net income of $77.2 million or $2.59 per share compared with earnings of $62.7 million or $2.12 per share for the full year of 2008 and 2007, respectively. For the fourth quarter on a GAAP basis, SJI produced income from continuing operations of $21.9 million or $0.73 per share in 2008 compared with $16.1 million or $0.54 per share in 2007. GAAP results reflect the impact of unrealized gains from mark-to-market accounting at our commodity asset management and marketing business as well as portions of certain interest rate swaps that we used in our energy production business, which had deemed ineffective at this time. As discussed previously, when managing the company we measure performance based on economic earnings. Economic earnings eliminates unrealized gains and losses on both commodity and ineffective portions of interest rate derivative transactions and adjust for realized gains and losses attributed to hedges on inventory transactions. This definition was clarified at year-end. To address the ineffective portion of interest rate hedges, we view the requirement to an impact of marking-to-market, our interest derivatives as very similar to the adjustments we have been making for commodity derivatives. Having given consideration to these items, economic earnings were $67.9 million or $2.27 per share in 2008, a 9% increase in earnings per share, as compared to $61.8 million or $2.09 per share in 2007. For the fourth quarter, SJI’s 2008 economic earnings totaled $20 million or a $0.67 per share, up over 6% from $18.8 million or $0.63 per share in 2007. Now, let’s discuss the performance of our businesses in detail. As I begin, I do want to note that the performance at every one of our business lines was up in 2008. Looking at our non-utility businesses in total, GAAP results for 2008 reflect income of $37.8 million for the full year of 2008 and $9.3 million in the fourth quarter. In the same period in 2007, GAAP net income from our non-utility businesses was $24.6 million and $4.5 million respectively. As we’ve told you on previous calls, 2008 GAAP results were positively impacted by gains related to marking-to-market changes in our commodity prices. On economic earnings basis, non-utility income from continuing operations was $28.5 million for 2008 and $7.4 million in the fourth quarter, up from $23.7 million and $7.2 million during the same periods in 2007. The increase in economic earnings was primarily due to strong performance at our asset management and marketing, on-site energy production and appliance service business lines. Looking at our key non-utility businesses, economic earnings in our Asset Management and Marketing business rose to $21.6 million for 2008, compared with $18.9 million last year. For the fourth quarter, the income contribution from this business was $6.5 million, compared to $6 million for the same period of 2007, an increase of 8%. Results for 2008 have benefited significantly from the increased value of pipeline capacity, which served to offset market conditions that produced tighter margins for storage capacity. We hedge our initial profit margin on each transaction we enter into, then we seek to build up on those margins by taking advantage of painful market conditions. As we look that in to complete the 2008-2009 winter season and then beyond to the 2009-2010 winter season, this business is well positioned to continue its strong performance. Over the past year, we’ve increased our storage capacity from 10 Bcf to 12.2 Bcf. We have also significantly increased our pipeline capacity from 65,000 decatherms per day for 2007 to 124,000 decatherms per day for 2008. This increase storage and pipeline capacity created opportunities for this business to lock in attractive margins resulting from volatility in market pricing. For the 2008-2009 winter seasons, we hedge when 100% of both our storage and transportation capacity. Those hedges locked in $34 million of pretax operating margin for this business, a 17% improvement over the $29 million we reported on the third quarter earnings call last November. By comparison, 2007-2008 winter season totaled $23 million of pretax margins. For the 2009, 2010 winter season, our total gas supply portfolio currently holds $37.5 million in pretax market value and we’ve already hedged approximately 66%. The 2009-2010 portfolio reflects the improved value of storage as well as additional 30,500 decatherms of pipeline capacity that we acquired in early 2009. As we did during the 2008-2009 winter season, we continue to optimize the 2009-2010 portfolio to further enhance the value of these assets. In December, we entered into an agreement with St. Mary’s Exploration and Production company to monetize our investment in 21,000 contiguous acres in the Marcellus Shale. We hold a 30% interest on the deep mineral rights on this process. The up front lease payment we received as an estimated $0.02 earnings per share annually over the seven year life of the lease. The lease includes certain royalties and carried working interest rights that present the potential for significant income contributions based upon the productivity of this property. As highlighted in our previous press release, Penn State geologist Terry Engelder had noted authority on the Marcellus, estimated that the recoverable natural gas on our acreage could range from 275 Bcf to 725 Bcf. Production and natural gas anywhere within that range could produce a significant future royalty and working interest income strength to SJI. On-Site Energy Production also performed very well in 2008. A subsidiary Marina energy contributed $5 million in 2008 compared with $3.6 million in 2007, an increase of 38%. For the fourth quarter, Marina produced $500,000 of net income compared with $700,000 last year. 2008 results reflect, improved the overall operating performance and higher chilled water throughput on our year-over-year basis at the existing Atlantic City thermal plant. This was driven by increased cooling demand and the opening of Borgata’s new Water Club Tower in Atlantic City in June. Regarding our Las Vegas property we don’t yet have a firm date when Boyd Gaming will resume construction of its Echelon Resort in Las Vegas due to uncertainty in market conditions, but we do remain confident that Boyd’s facility and our thermal energy plant that will serve that facility will be completed. SJI’s fourth landfill gas-to-electricity project, a joint-venture to develop a two megawatt facility for Salem County, New Jersey commenced operation in December 2008. Also Phase 1 of a multimillion dollar solar project for an educational facility, that we’ve told you about before went online last month. And we expect Phase 2 to commence operations by the end of the first quarter of 2009. The New Jersey Energy Master Plan and the recently announced initiative at the federal level present significant opportunities for SJI in general and especially Marina Energy. A cornerstone of both the state and the federal initiatives is combined heat and power also known as CHP or co-generation. We continued to pursue energy project opportunities similar to those I described earlier that supports the concepts laid on the Energy Master Plan. In particular Medical, educational and government facilities are especially well suited for these types of applications. Marina develops, owns and operates on-site energy plants. These projects are especially attractive to us as they provide annuity-like income streams under long-term contracts. The contribution from our retail services businesses, which include appliance, repair and warranty, HVAC installation, and meter reading, was $1.9 million in 2008 compared with $1.3 million in 2007, an increase of 46%. For the fourth quarter, retail services produced $400,000 of net income in 2008 compared with $500,000 in 2007. This business continues to provide a nice income contribution for SJI and it positions us well for opportunities that may arise as a result of the state of New Jersey’s Energy Master Plan. Changing our focus over to our Utility business, South Jersey Gas reported net income of $39.4 million in 2008, compared with $38 million in 2007. In the fourth quarter of 2008, Gas Company reported net income of $12.8 million, up from a $11.6 million posted for the same period in 2007. Performance drivers for the year, include increased customer conversions from other heating fuel sources to natural gas, higher margins earned on off-system sales, and lower interest expense. During the 12 month period ended December 31st 2008, we added 4500 new customers, an increase of 1.3%. While the new housing markets slump continues, we are encouraged by tremendous amount of interest in converting to natural gas. We continue to experience a high level of conversion enquiries, due to natural gases competitive advantage over other fuels. Historically, conversion tended to account for about 20% to 25% of new customers added. However, conversion interest increased significantly in 2008, adding almost 2700 customers as compared with an average of 1700 conversion customers annually, during the previous five years. A topic that everyone is interested now is the impact of the economy on our accounts receivables. In 2008, our reserve for uncollectible accounts increased slightly, but the increase was primarily formulaic. Although, through the end of 2008, we’ve not seen a significant change from historical patterns for bad debt. But, we continue to monitor that situation very carefully. South Jersey Gas Company, decoupling tower, known as the Conversation Incentive Plan or CIP, eliminated the link between volumetric throughput and our profitability. The CIP adjusts our results for any reductions and actual utilization rates back to the higher levels contained in our 2004 rate case. Our customers have saved approximately $50 million with Gas Company’s CIP, since the inception in October of 2006. In turn, also $22.9 million of South Jersey Gas net income has been projected under the CIP. The CIP enabled Gas Company to actively promote energy conservation in our service territory helping our customers lower their energy bills. We believe the operating success of the CIP and the prominence of decoupling mechanisms in both the New Jersey Energy Master Plan and the recently announced Federal Energy initiatives, like a strong case that decoupling cost will be made permanent. I would like to discuss some 2009 events that we are very excited about. Gas Company recently filed two petitions with the Board of Public Utilities that advanced the economic stimulus plans proposed by Governor Corzine. The first accelerates into 2009 and 2010 approximately $100 million of capital spending on various utility infrastructure projects. We anticipated the BPU will approve a Capital Investment Recovery Tracker that will allow for a return on and the return off, the incremental $100 million in capital spending through rates. $40 million of this incremental spend is to extend our existing mains by 15 miles to support the current needs of our customers as well to accommodate future long-term growth in Atlanta County. The second petition proposes an energy efficiency tracker again providing a return on and a return off the proposed $17 million to be spent under this program. This program complements our existing CIP program and incentivizes customers to conserve energy. We have developed a series of programs that target all of our customer classes; residential, small business, commercial and large industrial. These programs combine rebates, free financing, energy efficiency audits and green power alternatives to benefit the customers be a lower consumption and just importantly, as importantly create jobs in New Jersey. We have also announced plans to file a base rate case by early 2010, which will reflect an estimated $380 million in capital investments since our last rate case, not including the accelerated $100 million of infrastructure spending. Approximately 45% of the $380 million in capital will have been spent on revenue-producing plant, which is recovered in rates. Further New Jersey has recently awarded a 10.3% return on equity which compares favorably to our current ROE of 10%. Any boost in our ROE would be positive given our projected rate base of almost $1 billion. Turning to the balance sheet, SJI’s equity to capitalization ratio was 48% as of December 31, 2008 as compared to 50% at the end of 2007, a higher short-term debt balance primarily due to under-recoveries of certain regulatory close balances at the utility is a driver for the slight decrease. The New Jersey board of public utilities approved rate changes last November and December that will enable the company to collect those under recoveries during 2009. For calendar year 2008, the equity to capitalization ratio averaged 51%. Our goal has been to maintain on an average basis, equity to cap ratio of at least 50%. We are committed to maintaining a strong balance sheet to take advantage of the future business opportunities as they arise. I also want to note the strength of our balance sheet and the relatively lower pay out ratio we enjoy, provide room for future dividend increases for our policy. Given the uncertainty in the markets over the past few months, it is even more gratifying to tell you that Moody’s Investor Services recently upgraded South Jersey Gas’s senior secured rating from “Baa1” to “A3” with a positive outlook. We should only further enhance our ability to access the capital markets and to allow us to take advantage of opportunities as they arise. I would also like to emphasize that SJI has had more than adequate access to liquidity across all of our businesses. The extended period of turmoil that we have seen in the market has at no time interrupted our ability to fund our operations. In fact, our short-term volume rates have averaged approximately 1% during 2009. 2008 was a solid year for SJI. In the fourth quarter, the Board authorized a dividend increase of $0.11 or increase of 10% to $1.19 per share on an annualized basis. 2008 was the tenth consecutive year during, which we raised the dividend. Despite the challenging economic environment, the Board felt confident improving a dividend increase based upon 2008 results and our future prospects. Long-term investors have certainly been rewarded for investing in SJI. If you had invested in SJI at the end of 2003, you would have enjoyed an annualized total return of 18% over the five years. Thank you for your time today. Now, I’ll turn the call back over to the operator to answer any questions you may have.

[Operator:]

(Operator Instructions) Our first question comes from Ryan Rosenthal - Sidoti & Company LLC.

[Ryan Rosenthal:]

Now, my question concerns the $100 million proposed accelerated infrastructure investments? In particular, the tentative timing of when you would make those expenditures if it’s approved, if you have a time line on that at this point, I know it’s still a proposal?

[Ed Graham:]

Yes. We are hoping for approval in early April, we obviously have to go through a process, but from that point forward, we would hope to spend as much as $70 million in 2009, and a balance of $30 million in 2010.

[Ryan Rosenthal:]

Okay, great. And in terms of the portfolio of your Asset Management division, do you have a tentative idea of how much you hedged this year at this time, compared to what you hedged last year at this time, in terms of what’s remaining.

[Ed Graham:]

Quite frankly, I don’t recall. I think, we’re actually probably more greater hedged this year, if I had to make a guess, but I really don’t recall. It’s been a great opportunity, as you look at the 2009-2010 season, very unusual versus history as this spreads on storage or averaging as much as $2 per decatherm for the commodity and likewise the value of pipeline capacity is greater than it’s been in a while and that combined with the other part of benefit that goes along with pipeline capacity, is there is normally of fuel cost. And with low commodity prices that is also the lowest number we’ve experienced in a long time. So, right now, we’re actively hedging as much as we can on both the pipeline, capacity and storage side because it’s so attractive.

[Ryan Rosenthal:]

Okay. And along those lines, is there anything preventing you from hedging the entire amount of your portfolio. If you do see as track over this time?

[Ed Graham:]

I think, we want to be measured and do it in a fashion that we don’t disturb the market by in any one period affecting liquidity. Secondarily, I think we want to keep as much flexibility as we can as an example, some times its really attractive to take advantage of injections in a cash market versus going out and hedging some are injection [months]. Because of it’s a mild weaken in terms of a whether, the spreads could even open up wider. So, we want to do it in a very systematic manner, but also to take advantage of opportunities as they arise.

[Ryan Rosenthal:]

And one final question concerning the Marina division, if you will. Obviously, we are all seeing tight credit markets currently and there are certainly loose up a bit, but could you discuss the best and worst case scenarios for both Echelon and MGM, at this time?

[Ed Graham:]

Well, I can’t really speak to MGM, I really don’t know, I guess as for as the Atlantic City property goes. They have been delayed in terms, they have announced a delay at the site in Atlantic City, but that continues to be a very attractive parcel. So, I think at some point in the future, either MGM or someone else will develop that site. In terms of Echelon, I think we see our partner gaining very healthy in terms of their financial capability, but wisely waiting for the right opportunity as well. We believe that’s an incredibly attractive site. So, I think our issue is more just timing than anything else.

[Operator:]

Your next question comes from Jim Lykins - Hilliard Lyons.

[James Lykins:]

Follow-up to the $100 million stimulus, I am wondering if that has to be allocated in some way between regulated or a non-regulated, if you guys are free to do with that, what you want and also may be if you could talk about some other projects you might be taking along with that.

[Ed Graham:]

Sure the $100 million is solely a utility initiative and just the step back for a minute. We have planned a pipeline improvement project on our system that we look out on a series of up to 5 years to bolster our system for current and future needs. What this enables us to do is accelerate those projects to the benefit of our system while creating jobs and earning on those. Contained in the $100 million is a $40 million project diluted to my presentation. That is an improvement to a central transmission line in our utility infrastructure. That really creates a back-bone to serve all of South Jersey, but more importantly, when market conditions improve particularly in Atlantic City, we’ll be positioned well to serve gas for both heating needs as well as generate electricity through for CHP projects.

[James Lykins:]

Okay. We had Echelon and MGM, both mentioned, so far what about Revel, has there been any news there?

[Ed Graham:]

With Revel, we continue to do with that, we prepaid for any of the work we provide like I’d say with the eventual execution of a contract at a point Revel finalizes all of its financing. Right now, Revel has announced that it’s current plan is to continue to fund with the Morgan Stanley investments somewhere at or about $1.2 billion to completely enclose the structure and in interim time will continue to look at the right opportunity to permanently finance the balance of the project, which I think it’s about $1 billion to $1.2 billion to finish out its interiors. So, if you go into Atlantic City right now it’s rising up to almost the height of our Showboat and that you probably see as much as 5 to 7 cranes still working. So, clearly they have delayed the timing of their opening but they continue to work at the site.

[James Lykins:]

Okay. What about the conversions, you talked about those little bit, I am wondering if the levels you are at right now are sustainable and if so for how long?

[Ed Graham:]

Well, it’s hard to guess as to how long certainly, we have been attracted in terms of economics. And, the one of the things that we’ll hopefully bolster even further is some of the stimulus package on efficiency and clean energy, they will be rebate dollars targeted at installation of high efficiency gas equipment. So, I think there’s going to be some more support to further help the economics. Our forecast through ‘09 is very strong with based on the number of requests for our conversions, we have in the queue. It’s hard for me to predict really much further than that.

[Operator:]

Your next question comes from Kathleen Vuchetich - W. H Reaves. Kathleen Vuchetich - W. H Reaves I was just wondering when you looked at combined heat and power, is that a project where you would own the equipment or where the customer would own the equipment. And are there state funds available to put that kind of energy efficiency equipment in place or does it have to be financed completely privately?

[Ed Graham:]

I guess the first point is that we have and would continue to do design/build projects that we find very attractive design/build own and operate projects. And in terms of support, there is a lot of sources now coming in that really will support the economics of CHP. At the state level, there is legislation in the Senate to be approved right now that would provide grant money that would subsidize at least 30% of the capital cost to put these plans in place. In addition, I think as part of the Federal Stimulus Package there are money earmarked that will support renewable energy and CHP. So there are several sources that really enhance the economics in projects more than ever before.

[Operator:]

(Operator Instructions). Your next question comes from Chris Ellinghaus - Shields & Company.

[Christopher Ellinghaus:]

Ed, you mentioned something about ‘09-’10 hedge margin, can you just review what that was?

[Ed Graham:]

Sure. We have 12.2 Bcf of storage capacity. And I think we are approximately 154,000 decatherms per day of pipeline capacity. We have already hedged 66% of that. The total value of that hedged and un-hedged capacity is in the range of $37.5 million. So, it far exceeds any anything that we’ve ever had in terms of value, at the completion of a season. So, where this positions us is the ability to continue to hedge the existing value, but also to optimize all the way through the balance of that winter season. So, we are fortunate to have some very valuable assets to take advantage of.

[Christopher Ellinghaus:]

And so what you were describing as a pretty robust margin environment right now for hedging, that’s really since you largely hedged for the current season that you’re talking about the ‘09-’10 season for forward hedging.

[Ed Graham:]

Yes. We were very active early on with pipeline capacity, this value has been up for that ‘09- ‘10 season. And as we so on the recent weeks, a strengthening up the spread on storage, we’ve aggressively started to hedge that and as I point out that on both capacity, for pipeline and stores were both at about 66%.

[Christopher Ellinghaus:]

Okay. In terms of the stimulus proposal, I just want to make sure that I am clear on this; your proposal is to get to earning current return on equipped as it’s investing, correct?

[Ed Graham:]

Yes.

[Christopher Ellinghaus:]

Okay. And if you got any push back from any level on that it, on that proposal?

[Ed Graham:]

No, we’re actually following through with what the governor’s stimulus package proposes. So, we do go through the normal process of exploring to make sure they all are viable projects that we’re doing and they do enhance the value of our system, which is prudent on all the party’s plots and that’s moving along nicely.

[Christopher Ellinghaus:]

Have you got any detail that you can pass along on St. Mary’s development plan or a schedule?

[Ed Graham:]

As much as we know, I know that St. Mary’s is already looking at running a line and setting a meter and I think I’m certain with in the first half of the year they will be seeking to drill a well.

[Christopher Ellinghaus:]

Okay. And then I suppose depending upon the initial results that will greatly determine the subsequent plan?

[Ed Graham:]

Yes. They probably will plan few drill on several locations throughout the acreage and then that will really start to dictate where they concentrate post those initial drillings.

[Christopher Ellinghaus:]

Okay. And as far as combined heat and power, are things moving along given the stimulus in sort of where New Jersey is with its energy plan. Is any thing going to happen in the next 12 months to move that opportunity along?

[Ed Graham:]

I expect that it will. We’re already in active discussions with a number of customers and as a great deal of interest in, not only as we’ve always talked about the attractiveness of the economics, but the reliability factor as well. And, we still have to decide for more clearly, how the Federal stimulus package comes into play. But, the Federal stimulus package has at least $5 billion allocated to efficiency programs. There is, I think as much as $20 billion targeted at renewables in CHP. And another interesting feature that is included in the packages, it states that our decoupling friendly moving in the direction of having all those utilities decoupled has access to an incremental $33 billion of added cost to stimulate some of these efficiency projects.

[Christopher Ellinghaus:]

Okay. Given your discussions with some customers have you got any kind of general guidelines for what kind of scale or capital a typical project would look like?

[Ed Graham:]

I think we’ve looked that and we see projects ranging from 5 megawatts to 15 megawatts and again with the attractive subsidies from the state level and hopefully continuing from the federal, we would expect and they look very much like our traditional projects that the Marina side were we invest equity and expect the return at least 20% on that equity.

[Operator:]

Your next question comes from Darren Conti - Wachovia.

[Darren Conti:]

Hi, I know in the past you guys have indicated your goal of 6%,7% average annual economic earnings per share growth, is that I know that you didn’t mention anything about that in the press release is that still the case.

[Ed Graham:]

Well, I think we haven’t given guidance for 2009, we expect to do that at our first quarter call. But as you can see some of the forward-looking things I have been talking about, we feel very optimistic about our opportunities in ‘09. And of course you start to look at between what you’re doing and on our non-rate side and also the programs and utility there is really good prospects for 2010 and even 2011.

[Darren Conti:]

Would ‘09 be depending on this BPU ruling on the infrastructure acceleration?

[Ed Graham:]

I think that will be part of the consideration. But also I have to make reference to our profits already locked in resources group our non-rate side is far above what anything we’ve ever experience before, so I’m not ready to give guidance today, but I feel very good about how 2009 is shaping up.

[Darren Conti:]

Okay, just two other quick things. I want to make sure I have this right, on the infrastructure did you say that the $100 million would breakout at $70 million in ‘09 and the balance in 2010.

[Ed Graham:]

Yes.

[Darren Conti:]

Okay. And have you started to, I guess to spend that money out or will you until BPU?

[Ed Graham:]

We’ve done some preliminary engineering design work, but we really won’t start to put any physical infrastructure in the ground and spend the lions’ share of the dollars until we have an approval from the Board of Public Utilities.

[Darren Conti:]

Okay fair enough. And then just wanted to see what you’re seeing as far bad debt on the utility side?

[Ed Graham:]

I mentioned that year-end that it hadn’t changed much, we continue to watch it and again there is nothing out there that’s making us uncomfortable at the moment. But we’re not going to relax, but we are very careful and constantly monitoring all of our customers at varying sizes. But so far, it’s been not that difference in our past experiences.

[Darren Conti:]

Okay. And in turn of your regulatory trackers for recovering gas, your bad-debt cost for gas cost.

[Ed Graham:]

No, there isn’t so. In the current year, we wouldn’t benefit obviously, if we did have any accelerated bad debt experience that would be part of the test year for the rate case filling in 2010.

[Operator:]

Your next question comes from Randell Lee - Zimmer Lucas Partners.

[Igor Grinman:]

Hi, guys, it’s Igor Grinman, congratulations on a good year. One of my questions have been answered, we’ll just jump to the other one. What’s the forecasted 2009 CapEx, for South Jersey Gas?

[Ed Graham:]

Well, South Jersey Gas, we’re looking at the traditional level where we would spend $50 million to $55 million. So, we are now looking at somewhere in the $120 to $125 million range. Subject to approval from the Board of Public Utilities for the recovery mechanism.

[Igor Grinman:]

So, it’s up 50 to 55 close to 70 from total rate.

[Ed Graham:]

Yes.

[Igor Grinman:]

And just what texture would you use in your 2010 rate case filling?

[Ed Graham:]

Well, it’s probably going to include some latter part of 2009 and go into 2010. I don’t know an exact break down on months, right now.

[Igor Grinman:]

And that the billion dollar rate base that you quoted earlier was that as of today or you enter ‘08 or is that was a forecasted amount?

[Ed Graham:]

That’s really forecasted, what we think will be included in our filling.

[Operator:]

Your next question comes from [Peter Hawk] - Cowen Capital

[Peter Hawk:]

Just a couple of question regarding 2009 and make sure did I understand this you are saying it locked in at the asset management and marketing about 34 million, for this heating season?

[Ed Graham:]

Yes.

[Peter Hawk:]

And so a portion of that would have fallen into the fourth quarter of ‘08. Is that correct?

[Ed Graham:]

Yes.

[Peter Hawk:]

And so one of then we’re looking it 9 and 10 to 37.5. So, a portion of that of obviously fallen to ‘09. So if we took the average of 34 and 37.5 and then after tax that you can through about $21 million, which is about what you earn for the full year in ‘08. Is that kind of the way to look at it?

[Ed Graham:]

Well, I think there is a think to point out as that this is only part of resources portfolio it doesn’t consider its asset management activities. As well as it doesn’t consider a lot of the day-to-day opportunity to takes advantage of, as an example of because of our presence in Marcellus Shale, we become a marketer for a number of the producers that are currently are producing in Marcellus. So we have a number of other sources of income. So, the other thing to highlight is, if you look at this current winter season, just this past November, the value locked in was $29 million, we done some different movement in terms of optimizing to enhance that value to 34. So, likewise we would expect between now and this time next year to have enhanced that $37.5 million margin.

[Peter Hawk:]

But I think you mentioned $2 spreads. If you were able to lock in those type of spreads on the one-third of the book that’s un-hedged. What that would add to the pre-tax lock hedge profits?

[Ed Graham:]

Well that $37.5 million would assume that, not only the 66% that has been hedged, but if I locked in the balance right now.

[Peter Hawk:]

So it’s inclusive of the making the additional hedging at these kinds of spreads

[Ed Graham:]

Yes.

[Peter Hawk:]

And then you talked about Marcellus adding $0.02 on an annual, but you are suggesting there is something more than that, as you move gas out of the shale.

[Ed Graham:]

Well, I think the upside or the real upside to the deal was nice to get a lease payment upfront, but we obviously are recognizing over the life of at least of seven years, but the real upside is success at the site by St. Mary’s and our opportunity to not only earn royalties, but working interest of profits on both parts.

[Peter Hawk:]

Okay, perfect. And so just conceptually if you look at 2008 and you did 227, right and about $1.32 of that was from the utility, right? I think you broke it out, and then about $0.96 of share from non-utility of which $0.72 comes out of asset management and marketing. So out of asset management and marketing, that’s roughly generated about a third of your 2008 earnings, would it be fair to guess that whatever you do for ‘09 the percentage is going to increase out of AM&M.

[Ed Graham:]

I think a couple of places where it looks like there’s probably a good likelihood that there could be a percentage improvement within the gas company, and it wouldn’t be unlikely that also there would be a strengthening in terms of contribution from the asset management side as well.

[Peter Hawk:]

Okay. You jumped a head from the utility question because, it sound if you put a $1.30 in ‘08, it sounds like whatever you get done here in ‘09 is kind of depended on what the BPU can do for you on your filings, or not I mean do you have the potential that those earnings contributions go up anyway absent any regulatory rulings.

[Ed Graham:]

Well we don’t again, we don’t have guidance out yet for ‘09 but things that are favorably affecting utility are very attractive borrowing rates as well as we see a number of opportunities on the conversion front. So to some things that, out of our normal business are very attractive and of course we can see that’s has been incremental premium for Gas Company, if we can complete these transactions.

[Peter Hawk:]

The utility earned return for 2008, this $1.30 or $1.32, what does is that equates to in ROE, for the full year?

[Ed Graham:]

I think, I don’t have an exact number. But I think it’s a probably in a 10.3 to 10.5 range because if you recall, we also have incentive clauses between selling off-system as well as managing storage within the utility that we are allowed to keep over and above our 10% ROE.

[Peter Hawk:]

Are there any recent gas rulings that may set some precedence for what ROE limits might be set for you?

[Ed Graham:]

Yes. The most recent that we’ve seen within New Jersey Resources and New Jersey Natural received a 10.3 return on equity in their case.

[Peter Hawk:]

Kind of consistent with where you are, but you’ve got the additional capital spending coming?

[Ed Graham:]

We are at 10%, right now.

[Peter Hawk:]

Okay at 10’s. So as you have other opportunity may be 30 basis point pick up or something like that?

[Ed Graham:]

And I don’t argue the environment probably appears more risky today than it did six months ago. But I am supposed to argue that.

[Peter Hawk:]

And then, just jumping back to the non-regulatory, I just want to make sure. Have collateral posting requirements changed materially?

[Ed Graham:]

No.

[Peter Hawk:]

And what’s the book value at the non-utility now?

[Ed Graham:]

I don’t have that off the top of my head, that’s something we can get back to you, Steve Clark can reach out and give you that one.

[Peter Hawk:]

Yes, I can catch up with Steve on that, and thanks for your time, I appreciate it. Thanks, Ed.

[Ed Graham:]

Thank you.

[Operator:]

Sir, there are no other questions at this time. So I turn the call over to you for closing remarks.

[Ed Graham:]

Thank you very much. Well, again thank you for your participation on the call and your questions and your interest continuing in South Jersey Industries. But if you have any further questions please contact Steve Clark, our Treasurer and he can be reached at area code 609-561-9000, extension 4260 or by e-mail at [e-mail]. Again thank you and have a nice day.

[Operator:]

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