South Jersey Industries, Inc.
Q3 2009 Earnings Call Transcript

Published: 5 Nov 2009

[Operator:]

Welcome to the third quarter 2009 South Jersey Industries earnings conference call. (Operator instructions) I would now like to turn the presentation over to 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’ third quarter 2009 earnings conference call and webcast. Joining me today 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 and our 10-Q as well. Further, we assume no duty to update these statements should actual events differ from expectations. Before we review our results I would like to refer you to our third quarter 2009 earnings release which was issued earlier today for an in-depth discussion of our results on both a GAAP basis and economic earnings basis. As discussed previously in managing the company we measure our performance based upon economic earnings. Economic earnings eliminate all unrealized gains and losses on both commodities and the ineffective portion of interest rate derivative transactions and adjusts for realized gains and losses attributed to hedges on our inventory transactions. Income from continuing operations on an economic earnings basis for the first nine months of 2009 was $46.5 million or $1.56 per share as compared to $47.9 million or $1.60 per share for the same period last year. On a year-to-date basis the increase in economic earnings was primarily due to the general impact of weak economic conditions which offset our strong performance in our asset management and marketing business. Despite the uncertainty in the economy we have many opportunities for growth which we will discuss with you momentarily in both our utility and our non-regulated side of our business. First I would like to provide you with an update on our 2009 guidance. We previously announced a targeted growth range of 5-8% over 2008 economic earnings per share. This translates into a range of $2.38 to $2.45 per share for the full year 2009. Due to the timing of certain transactions we had expected to benefit fourth quarter and it is less likely our growth rate will come in at the higher end of the guidance range. The good news, however, is we expect to realize the benefits from these transactions in 2010. We also expect that in 2010 we will start to see the benefit from our initial investment in the Marcellus Shale as well as the capital investment initiatives in our utility which we will discuss in more detail in a moment. Now let’s discuss the performance of our businesses. Looking at our non-utility businesses in total on an economic earnings basis non-utility income from continuing operations for the first nine months of 2009 was $20.5 million as compared to $21.1 million in 2008. Looking at our key non-utility businesses, economic earnings in our asset management and marketing business for the nine months were $16.2 million as compared to $15.1 million in 2008. We have currently totaled gas storage capacity of 12.2 billion cubic feet under management and 153 MDth per day of pipeline capacity which creates opportunities for this business to lock in attractive margins resulting from the volatility of marketing pricing. For the upcoming 2009/2010 winter season storage and transportation assets for this business are fully hedged. Our portfolio of assets reflect a pre-tax value margin of $32.7 million for the winter season. As we have done in many other winter seasons we seek opportunities to further improve the value by trading around market spreads to optimize the value of these assets. Looking forward we also expect this business to continue to grow particularly when you consider our Marcellus Shale investment. As you may recall last December we entered into an agreement with St. Mary’s Land and Exploration Company to monetize our investment in 21,000 contiguous acres located in McKean County, Pennsylvania. We hold a 30% interest on the deep mineral rights on this parcel. The upfront lease payment we receive has an estimated $0.02 per share to earnings annually over the 7 year life of the lease. The lease with St. Mary’s also includes royalty payments and carries working interest rights. Collectively the three components of the deal represent the opportunity for significant income growth if the property proves to be as productive as we hope. As highlighted in our previous press release, Penn State University geoscientist Terry Engelder, a noted authority on the Marcellus, estimates the recoverable natural gas on our acreage could range from 275 billion cubic feet to 725 billion cubic feet of gas. Several other major producers have also recently indicated that their early results are very promising. Even if we see production at the midpoint of this range, assuming a market price of $6 for natural gas, that translates into around $3 billion of gross revenue from the sale of that gas. Plus this gas is already located in the market areas so it holds much greater value. While only a small portion of that revenue stream would come to SJI through royalty and working interest, the impact on our future performance could be significant. I am pleased to tell you that St. Mary’s has drilled two horizontal wells and they were encouraged enough by the results to start construction on a gathering line to connect the first wells into the sales pipeline. [Sell through] at the industry will begin recognizing both a royalty and working interest revenue stream from these wells when the tie-in is complete and sales commence and that should happen hopefully within the next few months. In addition to the production opportunities in Marcellus we are seeing marketing opportunities not only for our own book of interest but for other producers that don’t have their own marketing operations. We are currently actively marketing approximately 210 MDth per day from a number of producers up from 125 MDth per day just a quarter ago. As one of the largest third party marketers in the Marcellus we view marketing as a significant opportunity as it provides us with competitively priced gas to utilize for our own asset management book as well as to provide us with downstream arbitrage opportunities to earn margins commensurate with the many services we provide as a gas marketer. On top of this we are expanding the retail markets we serve in Pennsylvania for both gas and electricity and into New England for electricity. Finally, the bid we won earlier this year to provide electricity to 400 New Jersey School Districts is back-end loaded so we will see most of the benefit in terms of net income associated with the deal in 2010. Our onsite energy production subsidiary, Marina Energy, contributed economic earnings of $3.4 million on a year-to-date basis as compared to $4.4 million last year. Overall, lower air conditioning demand from our energy facility because of milder summer temperatures and interest expense incurred related to our investment in Las Vegas were the primary drivers for the decrease in earnings. We expect earnings growth in the business if we simply experience normal temperatures next summer as compared to the very cool and wet summer we experienced this year. Over and above that we have great expectations in terms of our opportunities in solar and the generation of electricity from landfill gas. Our fifth landfill gas electricity project, a joint venture to develop a facility for eight jurisdictions in northeastern Maryland is in the design and permitting stage. We anticipate that facility will commence operations sometime during the second quarter of 2010. We have also made operating improvements at our four other existing landfill projects and expect to see income benefits from those going forward. On our first and second quarter calls we told you we had completed work on a multi-phase, multi-million dollar solar project that we own and operate for Stockton College in southern New Jersey. Phase III was recently completed and is now operational. We are also installing two solar projects for our own use; first a multi-phase project in our McKee City facility for South Jersey Gas will generate about 610 kW of electricity in Phase I. We are also installing solar panels at our headquarters located in Folsom, New Jersey. This installation will produce approximately 50 kW of electricity for our own use and it is expected to be operational by the end of 2009. Given our demonstrated experience in the solar market we are well positioned to take advantage of further solar development opportunities as they arise. We continue to pursue energy project opportunities similar to these as well as other combined power or co-generation projects in light of the recently announced New Jersey Energy Master Plan and energy initiatives at the federal level. We are currently in advanced discussions with an organization in Pennsylvania for potential thermal projects as well as several other parties for a new CHP and landfill generation project. Medical, educational and certain governmental facilities are perfectly suited for applications of this type. The state of New Jersey and the federal government have put forth incentives designed to stimulate interest in these projects. We normally look for returns on our equity investment in these types of projects of about 20% but the value of the state and federal grants averaged about 40%. Translates into a significant reduction in capital costs to potentially boost our equity returns to over 30%. Coupled with low to zero interest rate loans available under the regional greenhouse gas initiative, otherwise known as RGGI, 10% investment tax credits from the federal government and proposed elimination of New Jersey sales and use tax currently being considered by the state legislature, these projects become extremely attractive to us. In addition, renewable energy projects such as solar are eligible for 30% investment tax credits. Finally, the contribution from our retail services business which includes appliance repair and warranty, HVAC installation, energy audits and meter reading was $900,000 compared with $1.5 million last year. While certainly impacted by the general economy and consumer’s choice to delay major expenditures and nonessential repair work, with the first cold snap we have seen a significant increase in demand for HVAC repair and replacement work. This business continues to be a nice income contribution to SJI but it also provides as well for other opportunities that may arise as a result of the Energy Master Plan or the other federal stimulus initiatives. Changing or focus over to our utility business, the first nine months of 2009 South Jersey Gas reported net income of $25.9 million as compared to $26.6 million last year. Performance drivers include higher net margins and lower interest expense offset by significantly higher pension and other post-retirement benefit costs. During the 12-month period ended September 30, 2009 we added almost 3,900 new customers, an increase of 1.2% to approximately 340,000 customers. While the new housing slump continues we are encouraged by the tremendous amount of interest in converting to natural gas. We continue to experience a high level of conversion inquiries due to natural gas’ competitive advantage over other fuels. Earlier in the year we began an intense marketing campaign in Cape May County as a result of some of the recent main extensions. There are now over 5,000 potential customer conversions in this area alone. We are also expanding our marketing efforts in other areas within our service territories that currently do not have natural gas. We anticipate adding over 3,000 customers annually in both 2009 and 2010 as a result of conversion efforts. We are also encouraged by recent news that indicates residential building permits in New Jersey increased by 26% in September as compared to the August level. To put this in perspective residential permits are still 6% below September of 2008 but the big jump in September marks the first increase in permits in more than a year and it is certainly positive news. Now I would like to spend a moment talking about our regulatory initiatives and the benefits they provide to the company. As you all know we received approval earlier in the year for our Capital Investment Recovery Tracker (CIRT) for short. The CIRT accelerates approximately $103 million of capital spending into 2009 and 2010 by allowing sell through of gas to earn a return on and a return of dollars spent immediately through rates. On an annualized basis assuming our current 10% return on equity and a 50% equity to capitalization ratio we could realize an additional $5.2 million at the bottom line in 2011. We will also realize some portion of that benefit in 2009 and more significantly in 2010. At this point it appears we may be a little below our targeted spend under the CIRT program in 2009. However that spend will just roll into 2010. A key reason for the shortfall is the price competition due to the weak economy is actually allowing us to do projects less expensively. The second regulatory initiative approved was the $17 million Energy Efficiency Tracker or EET. These five programs allow South Jersey Gas to incent its customers to become energy efficient and will run for the next two years. Gas companies again earn a return on and a return of dollars spent immediately through rates. On an annualized basis assuming our current 10% return on equity and a 50% equity to cap ratio we could realize an additional $800,000 to the bottom line. We are also required to file base rate case by 2011 as part of the approval of our regulatory initiatives. Since we settled our last rate case in 2004 we have added approximately $380 million of new assets to our rate base, 55% of which are nonrevenue producing. Again, assuming our current return on equity of 10% and our capitalization ratio of 50% equity to total cap we could realize an additional $10.5 million to the bottom line in 2011. So the combined net income benefit of these three items alone is in excess of $16 million to South Jersey Gas, an increase of over 40% when compared to 2008 utility net income. Before I wrap up I would like to mention the balance sheet. SJI equity to cap ratio was 51% as of September 30, 2009, up slightly from the 50% at the end of the third quarter last year. Our goal has been for SJI’s equity to cap ratio to average 50% on an annualized basis. We are committed to maintaining a strong balance sheet to take advantage of the many business opportunities available to us. I also want to note the strength of our balance sheet and the relatively low payout ratio we enjoy to provide room for future dividend increases per our policy. Our board will review the dividend later this month and has approved increases aggregating $0.29 since the end of 2005. Even with the significant increase during the past three years; 9% in 2006, 10.2 % in both 2007 and 2008, we are still in the low end of our targeted payout range of 50-60%. We think our board still has a lot of room to continue to increase the dividend and that is something not many companies are in a position to do today. All in all when you look at our projected opportunities on the non-regulated side of the business, our passive investment in the Marcellus Shale, market expansion, growth in solar, landfill and CHP businesses and opportunities to trade around our asset book combined with the regulatory initiatives and growth at our utility the future is very bright for SJI. Thank you for your time today. Now I will turn it back over to the operator for the question and answer portion of the call.

[Operator:]

(Operator instructions) The first question comes from the line of Robert Lee – Zimmer Lucas.

[Robert Lee:]

I had a question about your Marcellus Shale opportunity and I just wanted to clarify some of the numbers. Is that 30% of 21,000 so your net is 6.3?

[Ed Graham:]

Yes.

[Robert Lee:]

So of that 6.3 you effectively pay $2 million to get the 6.3?

[Ed Graham:]

Yes.

[Robert Lee:]

That 6.3 was sold to St. Mary’s?

[Ed Graham:]

To be clear there, we have 30% of the whole 21,000 acres. It is not a specific acreage of the 21,000. We, along with our partners, own the whole 21,000 acres and lease it to St. Mary’s for the next 7 years.

[Robert Lee:]

So basically 21,000 gross acres was leased to St. Mary’s.

[Ed Graham:]

Yes.

[Robert Lee:]

But you receive a lease payment from St. Mary’s for your 30% of the 21 acres?

[Ed Graham:]

Yes. We received an upfront bonus payment that we are recognizing over the life of the lease and have an opportunity to earn royalties and working interest.

[Robert Lee:]

What is the life of the lease? Is it like 5 years or something?

[Ed Graham:]

The lease is 7 years and there are points throughout the lease they are required to do a certain amount of drilling. It can be extended beyond 7 years.

[Robert Lee:]

So it is a 7 year lease with an option for renewal?

[Ed Graham:]

Yes.

[Robert Lee:]

Within those 7 years how many wells need to be drilled?

[Ed Graham:]

That is something that is not publicly disclosed by St. Mary’s so I am not allowed to say.

[Robert Lee:]

Did you publicly say how much you received in the upfront lease payment?

[Ed Graham:]

The upfront payment our portion I believe was $7.5 million.

[Robert Lee:]

7.5 on 6,300 acres?

[Ed Graham:]

Yes.

[Robert Lee:]

Right now you are getting overriding royalty interest from the production?

[Ed Graham:]

We hope to as they start to bring on wells.

[Robert Lee:]

Have you publicly disclosed what that royalty percentage is?

[Ed Graham:]

No. that is another thing that St. Mary’s wants to remain confidential.

[Robert Lee:]

But you also get a working interest?

[Ed Graham:]

Yes.

[Robert Lee:]

What is your working interest?

[Ed Graham:]

Unfortunately the same story. We also have to keep that confidential.

[Robert Lee:]

Of this 275 to 725 BCF of potential is that on a gross basis or a net basis to SJI?

[Ed Graham:]

SJI in terms of royalty payment would be on the gross component.

[Robert Lee:]

So this 500 BCF is a gross number and you get a percentage royalty and working interest from.

[David Kindlick:]

Is that question asked about the amount of gas that can come out of the ground or for the contract?

[Robert Lee:]

My question is the 500 BCF the midpoint range? Is that the total amount of gas that could come from the 21,000 acres?

[David Kindlick:]

No that is what they believe can be extracted.

[Robert Lee:]

So this is a gross number, not net to you.

[Ed Graham:]

Yes.

[Robert Lee:]

On the working interest do you have to pay for the CapEx associated with the wells?

[Ed Graham:]

We have a certain amount that we have a carried interest we don’t have to pay. At some point in the future on an individual well basis we can elect to participate or not.

[Robert Lee:]

So the working interest is the election to participate?

[Ed Graham:]

Well there are a certain number of wells up front that we automatically participate for free. Beyond that….

[Robert Lee:]

So you are basically like carried for several wells and then going forward you have to pay your working interest?

[Ed Graham:]

That is right.

[Robert Lee:]

The revenue you see from it, how will it be shown on the income statement? As equity interest? The proceeds that you receive from the gas sales, how is that flow through?

[Ed Graham:]

It will obviously be in our nonregulated side of our business as a subsidiary investment of South Jersey Resources Group.

[Operator:]

The next question comes from the line of Christopher Ellinghaus - Shields & Company.

[Christopher Ellinghaus:]

I am a little bit confused on the guidance in terms of on one side you didn’t reduce the range but to get to the lower end of the range is a pretty high imputed fourth quarter and you are also suggesting some transactions you were expecting for the year were postponed until next year. Can you elaborate on that a bit?

[Ed Graham:]

We still think we are within that range and an opportunity at any level within the 5-8% generated in earnings, I think realistically particularly some of the transactions in our wholesale business really timing wise probably won’t benefit this year so we wanted to gear people towards the fact the likelihood of the 8% is not as high as the 5-6%.

[Christopher Ellinghaus:]

Can you elaborate at all on some of the negotiations for CHP, landfill gas and things like that?

[Ed Graham:]

We are in a number of conversations at various levels. At this point we haven’t executed contracts so we can’t publicly disclose who they are and the terms but we feel very confident of the number of opportunities over the next several [quarters].

[Christopher Ellinghaus:]

Other than the thermal plant you said was in Pennsylvania are many of these things in New Jersey?

[Ed Graham:]

They are but there are also opportunities outside of both Pennsylvania and New Jersey. We are certainly pursuing around the landfill projects, as we mentioned one in Maryland and there are other states where we see opportunities we are working on as well.

[Stephen Clark:]

Also just to give you a sense of scale when we talk about thermal facility, we are not talking about something of the size we did in Atlantic City previously or in Vegas. These are smaller, more incremental type properties.

[Christopher Ellinghaus:]

Any update on Revel?

[Ed Graham:]

Revel the last update we have is that they supposedly are in negotiations with a Chinese bank to finance the balance of a project over and above what Morgan Stanley has put in. From our vantage point obviously we still are working on the design and some work on the ground of the plan itself and have been fully paid for any of the work we have done. Any interest in us going forward is going to have to meet the risk profile our management team and our board are comfortable with. Clearly the source of the financing, the certainty of it, the certainty of the project completion and our ability to finance all weigh heavily on a go-forward for us. We are in position if it is something we want to do.

[Christopher Ellinghaus:]

It didn’t seem as if any of the CIRT was particularly meaningful in the third quarter. Was that more than offset by some higher expenses or can you characterize where you stand on the CIRT so far?

[Ed Graham:]

The CIRT we expect to spend I think we have a targeted spend on the CIRT of about $70 million this year. I think we are going to come in the mid 60’s and then finish out some projects early next year. We do fully expect to do the full $103 million over the two-year life. It did not have that significant an impact on earnings currently. We didn’t expect that it would but also the biggest part of the CIRT is our $40 million major pipeline installation and because of weather that has moved back a little bit further so we will complete that probably in early January but we didn’t get all that much benefit from the CIRT this year. We will get the full year benefit next year.

[Operator:]

The next question comes from the line of Ryan Rosenthal - Sidoti & Co.

[Ryan Rosenthal:]

Regarding the timing of the asset management hedging gains, in terms of any weakness experienced this quarter due to low volatility in natural gas prices, is there any impact of that versus just a timing difference going forward?

[Ed Graham:]

In the quarter I don’t think that had all that much an impact on the South Jersey Resources Group. The only thing that did impact them a little bit is our asset management deal with Florida Power. They were down for a period of time so they didn’t use as much gas as they would have otherwise and we profit from their incremental usage. In terms of the timing between years on South Jersey Resource it really is a function of whether or not storage decisions on withdrawals or also decisions around pipeline capacity with respect to one year versus the next and also there are some cost issues that could be beneficial related to pipeline capacity and storage and may probably be recognized in the first quarter of next year rather than this year.

[Ryan Rosenthal:]

It seems like the fourth quarter also I would think [inaudible] would have to be pretty strong to reach even the low end of your guidance. Looking year-over-year at the asset management division can we expect a stronger fourth quarter than we had in the fourth quarter of 2008?

[Ed Graham:]

We expect a strong fourth quarter. Despite pointing out there are some positives that might not fall in the fourth quarter of this year, they have already locked in some pretty significant profit for the fourth quarter of this year.

[Ryan Rosenthal:]

Turning to the facility, in terms of the CIRT and also customer growth and in terms of your outlook for the utility prior to any rate case implementation, can we expect that earnings will be flat or in terms of directionally? Is the CIRT and customer growth enough to offset any increase in operating expenses up until rate case?

[Ed Graham:]

Are you referring to 2010?

[Ryan Rosenthal:]

Right, up to any new rate case would be implemented.

[Ed Graham:]

We haven’t really offered forward guidance but the one thing I can highlight that would support growth is we start to fully earn on our investment in the CIRT and as I said we will have invested probably in the ballpark of $65 million this year in the CIRT and we will be spending dollars heavily in the first quarter of next year. That alone is a big incremental plus to us. In terms of customer growth I think we would expect 2010 to be similar to 2009 right now.

[Ryan Rosenthal:]

Jumping over to the Marina division, I know the weather was a factor in the weaker year-over-year performance in the third quarter. Can you discuss the effect of the interest payment to Echelon and remind us how that contract works as well?

[Ed Graham:]

If you recall with Echelon first of all as pointed out the project has been suspended. They did announce in their earnings call they really expected to be delayed for 3-5 years. So they have no immediate plans to start back up construction. Having said that, the design of our contract is we begin to get paid in November of next year. Some of the costs that we incur currently is really because of the accounting rules in terms of some of the carrying costs we have to recognize currently. That we would still hope to recover that through the contract it is just the recognition of expense currently versus capitalized.

[Operator:]

The next question comes from the line of James Lykins - Hilliard Lyons.

[James Lykins:]

Can you give us any more of a feel for when you plan on filing your base rate case?

[Ed Graham:]

First of all we saw the governor’s election has been completed so that was certainly something we did not want to time near. I think we continue to hope that certainly by the earlier part of next year we would like to go ahead and file a case.

[James Lykins:]

I know it might be a little early to be asking this question but you just mentioned Chris Christie getting elected. Do you have any initial thoughts on how that could potentially impact the Commission in New Jersey?

[Ed Graham:]

Certainly some changes have to happen at the President level. [Gene] Fox is Democratic and appointed by the governor so therefore, that seat would have to change. I’m not certain if [Gene] would stay and serve on the Commission but certainly a new President will have to take place. As far as how to measure the rest of them, maybe Dave has a comment.

[David Kindlick:]

The other thing that happens is the New Jersey Commission is always set up as three seats for the party in power and two for the other. So that one democratic seat would be moving over to the Republican side. I don’t know which one that would be. I can tell you that right now Fred Butler is on an extension of his committed term so that could very well be the one that moves from the D side over to the R.

[James Lykins:]

Are the commissioners appointed or elected?

[Ed Graham:]

Appointed.

[James Lykins:]

You mentioned how much your hedge for the current winter heating season, but are you hedged at all into 2010 or 2011?

[Ed Graham:]

We do have hedges in 2010 and 2011. Not a significant level but we are already working on that.

[James Lykins:]

There was a question earlier about Revel. I know that Echelon got moved back 3-5 years. I am just wondering if you are seeing anything at all happening in Atlantic City right now or with the whole casino facilities, if we are going to see something similar to Vegas or if you are hopeful that Atlantic City might pick up a little faster than what you are seeing in Vegas?

[Ed Graham:]

If I had to make a guess I think that Revel is really the only new project that will be completed in the next few years. I think you will see some delay and see Atlantic City absorb that and we do really believe that Revel is continuing to be built and I guess they target opening in 2011. They continue to build so I believe they are probably tracking towards that. I don’t see any other new casinos being built in Atlantic City on the horizon. I think what will be interesting is as Revel opens how that affects Atlantic City. Will that give it another boost like Regata did. So we will have to see. Certainly it is going to be an impressive facility.

[Operator:]

The next question comes from the line of Dan Fidell – Brean Murray Carret & Co.

[Dan Fidell:]

Maybe fleshing out a bit on the timing and impact of the new potential thermal projects and landfill projects, if you were to [income] here pretty soon are we looking at more of a 2011 impact or is there a chance some of that could fall into 2010?

[Ed Graham:]

Yes. There is a chance some of it could fall into 2010 but certainly by 2011.

[Dan Fidell:]

Can you give us a bit more color on operating costs? Can you give us the O&M for the quarter versus last year and talk a little bit…I know you talked about pension expense being up. A little bit more color you can give us on the O&M side.

[Ed Graham:]

I will see if Dave can help me. Certainly the post-retirement healthcare and pension are up.

[David Kindlick:]

Post-retirement healthcare and pension numbers obviously salaries were up last year and on the non-reg side we had some decent charges to repair and maintenance at the landfill. I am glad to report now those repairs have worked well and we are seeing some pretty high output on there. That is probably the other biggest number; R&M on the landfills.

[Dan Fidell:]

Will you be giving 2010 earnings guidance on the next call or potentially sometime before that?

[Ed Graham:]

Maybe. I think our pattern in the past has been either in March or May to give guidance. That is probably what we are tracking towards. Next discussion I think queued up for us would be whatever decision our board makes concerning dividends.

[Operator:]

The next question comes from the line of Jonathan Lefebvre – Wells Fargo.

[Jonathan Lefebvre:]

On the marketing activity in the Marcellus it sounds like you have a pretty good opportunity there and I wanted to get a sense for one how would you think about that in 2010? It looks like you had a big jump from the summer from 125 Dth per day to about 210. Where should we be thinking about that going next year and can you remind us how you get paid on that?

[Ed Graham:]

I can’t get specific of the deal but typically the profitability is somewhere between $0.05 and $0.10 per Dth. It has the potential to be higher because we really are dealing with a lot of swing buy from producers. So it adds greatly to our profitability. What it really allows us to take advantage of is the storage capacity and pipeline capacity we hold right there in the Marcellus. In terms of growth I don’t have an absolute number but there is a lot of gas continuing to be found and coming online so there is a lot of upside. It will be really a limitation on how much we can move will be really the confiner versus how much opportunity is there. This certainly could change, but there are not a lot of competitors that have the same assets that we have and can offer the same services to producers.

[Jonathan Lefebvre:]

But it is only limited by your storage if I understand you correct? The size of your storage and pipeline capacity?

[Ed Graham:]

And the market to deliver the gas to. We don’t want to get into a risky situation where we are facing responsibility for gas and don’t have a home for it.

[Jonathan Lefebvre:]

Does that then marry up with your asset management business and you start having to hedge excess gas on top of what you are already doing?

[Ed Graham:]

It really ties well with our asset management. In fact some of the home besides the storage and pipeline capacity we manage is we also have retail customers in Pennsylvania, New Jersey and actually other parts of other states nearby so it starts to serve our end use markets as well.

[Operator:]

The next question comes from the line of Heike Doerr – Janney Montgomery Scott.

[Heike Doerr:]

A quick follow-up on one of Jim’s questions. Part of the solar push that New Jersey has enjoyed had been spearheaded by Governor Corzine. Christie has been less clear on what his intentions are. Is there any concern that you lose some momentum as far as the opportunities that are there or do the federal incentives buoy that market?

[Ed Graham:]

Actually the real driver of solar is the federal credits. The investment tax credit of 30% is the real driver. It is nice some of the other added features from time to time we recognize from Jersey and also I don’t think we will see the solar rec market that is being created go away. I’m not seeing a change in Governor having that significant an impact on the solar business right now.

[Heike Doerr:]

He couldn’t unwind the Energy Master Plan or that would be unlikely correct?

[Ed Graham:]

I think that is unlikely. There may be changes in emphasis or putting his own thumbprint on it but no, I think we are moving down the path. In fact, at least from the rhetoric of the campaign, Governor Christie was talking more about a more aggressive renewable program than was in place.

[Operator:]

Ladies and gentlemen this concludes today’s question and answer session. I would now like to turn the call over to Mr. Ed Graham for closing remarks.

[Ed Graham:]

Again I want to thank everyone for joining us on the call today. If there are any other questions that you would like answered please contact Stephen Clark, our Treasurer, and he can be reached at 609-561-9000 ext. 4260 or by email at [e-mail]. As a further note if anyone would like further information about St. Mary’s comments on the Marcellus Shale, they have their website www.stmaryland.com. You can see their transcript or replay their conference call. So that is there for your benefit as well. Thank you again and have a nice day.

[Operator:]

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.