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Edited Transcript of SJI earnings conference call or presentation 8-May-18 2:00pm GMT

Q1 2018 South Jersey Industries Inc Earnings Call

Folsom May 11, 2018 (Thomson StreetEvents) -- Edited Transcript of South Jersey Industries Inc earnings conference call or presentation Tuesday, May 8, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Robbins

South Jersey Energy Company, Inc. - Treasurer

* Marissa Brooks Travaline

South Jersey Industries, Inc. - Director, IR

* Michael J. Renna

South Jersey Industries, Inc. - President, CEO & Director

* Stephen H. Clark

South Jersey Industries, Inc. - Executive VP & CFO

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Conference Call Participants

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* Christopher James Turnure

JP Morgan Chase & Co, Research Division - Analyst

* Tate H. Sullivan

Sidoti & Company, LLC - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the First Quarter 2018 South Jersey Industries' Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host for today, Marissa Travaline, Vice President of Communications. Please proceed.

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Marissa Brooks Travaline, South Jersey Industries, Inc. - Director, IR [2]

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Thank you. Good morning, and welcome to South Jersey Industries' First Quarter 2018 Conference Call and Webcast. I'm joined today by Mike Renna, our President and Chief Executive Officer; Steve Clark, our Executive Vice President and Chief Financial Officer; as well as several additional members of our senior management team. Our earnings release and the slides intended to accompany our call today were issued yesterday after the close of the market and are also available on our website at www.sjindustries.com.

The release and the associated 10-Q provide an in-depth review of earnings on both the GAAP and non-GAAP basis using our non-GAAP measure of economic earnings. Reconciliations of economic earnings to the comparable GAAP measures appear in both documents. Let me note that throughout today's call, we'll be making references to future expectations, plans and opportunities for SJI. 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 Forms 10-K and 10-Q on file with the SEC.

With that said, I'll now turn the call over to our CEO, Mike Renna, to discuss our current performance and future initiatives in the context of our strategic plan.

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [3]

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Thanks, Marissa. Good morning, and thanks for being with us. I'm pleased to report that we are off to a strong start in 2018. Improved performance from both our regulated and nonregulated businesses drove economic earnings of $1.26 per share in the first quarter, up significantly compared with $0.72 last year. In fact, our first quarter results were higher than our total reported results for 2017.

On the regulated side, improvement in our gas utility business, South Jersey Gas, reflects positive impacts of our recent base rate case, solid customer growth and continued infrastructure investment intended to enhance and improve service and reliability to our customers.

On the nonregulated side, our wholesale marketing and fuel management businesses posted strong gains as well, capitalizing on favorable weather, tax reform and an additional fuel management contract.

Before I turn it over to Steve to discuss our first quarter earnings performance and guidance, I want to share with you an update on our business transformation efforts and the key priorities we are focused on for the remainder of the year.

As you recall, back in 2015, we began a planned shift into our future operating strategy towards a more regulated business mix. Our plan was driven by a desire to increase the quality of our earnings by increasing investment in utility and FERC regulated assets that provide highly visible cash flows and earnings while at the same time reducing our earnings volatility and optimizing the value of our noncore, nonregulated businesses.

As our first quarter results show, we have made significant progress toward implementing our plan since that time. In 2016, we announced cessation of new investment in solar projects, reduced our portfolio of our onsite energy production businesses and significantly strengthened our balance sheet through a successful equity offering. In 2017, we announced plans to acquire Elizabethtown Gas and Elkton Gas from Southern Company, assets ideally tailored to our strategy, which I'll discuss in a moment. And in 2018, we already completed a successful equity raise to finance these acquisitions and announced a strategic review of our remaining noncore, nonregulated businesses.

As you know a big piece of our transition is our planned acquisitions of Elizabethtown and Elkton. The transaction involved assets we know well, improves our business risk profile, leverages our strong regulatory relationships in New Jersey, enhances our path to long-term, high-quality growth and earnings accretion and provides an opportunity for enhanced utility investment through the replacement of aging infrastructure. The acquisition is progressing well, settlement discussions have commenced in New Jersey and Maryland and the transaction remains on track to close in mid-2018.

A recently completed equity financing marks an important milestone in the acquisition process. Through a highly successful offering of equity units and common stock in April, we raised net proceeds of $447 million with an additional $200 million of potential equity from our forward sale. The use of a forward-sale agreement enables us to match our capital needs with actual stock issuance and maybe adjusted to reflect any potential noncore asset sales. As previously disclosed, we are currently exploring strategic opportunities regarding our remaining nonregulated businesses that are noncore to our strategic plan. We expect to communicate additional progress on this process in the coming months.

With that, I'll turn the call over to Steve to detail our first quarter results and guidance.

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Stephen H. Clark, South Jersey Industries, Inc. - Executive VP & CFO [4]

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Thanks, Mike, and good morning, everyone. As Marissa noted earlier, both the earnings release and the slide deck we've made available provides you with detailed information regarding GAAP earnings, and I would encourage you to review that information as well.

For the purposes of this call, as we normally do, we focus our discussion on our non-GAAP measure of economic earnings, as management believes that this measure provides valuable insight into the performance of our business.

SJI's first quarter economic earnings totaled $100.4 million with economic EPS of $1.26 as compared with economic earnings of $57.6 million and economic EPS of $0.72 for 2017.

The sizable quarterly improvement reflects higher earnings at South Jersey Gas and Energy Group, partially offset by lower earnings in Midstream and Energy Services.

To give you some added color, I will now briefly review the performance drivers of each of these business segments.

South Jersey Gas contributed earnings of roughly $67 million for the quarter compared with roughly $47 million last year. The improvement in earnings reflects the impact of our base rate case settlement, roll-in of investments for infrastructure replacement and improvement and customer growth. Important to note that earnings growth was achieved with slight higher operating costs, including higher O&M driven by investments aimed at improving efficiency and productivity for the benefit of our customers at higher depreciation driven by the additions of that plan.

Customer growth remained robust with more than 8,800 customers added during the 12 months ended March 31. Roughly 3/4 of the additions came from customers converting from alternate fuels and the remainder were from new construction, reflecting a continued strengthening in our region's housing market.

On a net basis, customer growth was 1.6% over the last 12 months, well above the national average.

Results in our Midstream business which is comprised of our 20% interest in the PennEast Pipeline were $300,000 compared with $2 million last year. Comparison is skewed to the Q1 2017 results, reflecting a catchup of AFUDC related to prior periods that had not been deemed appropriate to record until receipt of the environmental impact statement FERC in April of last year.

In January 2018, PennEast received a certificate of public convenience and necessity from FERC. With this approval, we are moving to the next phase to obtain survey access and submit completed applications for water permits in New Jersey and Delaware River Basin Commission. Construction is expected to begin upon receipt of approvals from these entities, with in-service expected in late 2019.

Energy Group, which includes our wholesale and retail marketing and fuel management businesses contributed exceptionally strong results, with economic earnings of $36 million for the quarter as compared with roughly $10 million for the same period last year. Higher earnings reflect strong results from our wholesale business of roughly $33 million compared to roughly $8 million last year. This improvement was driven by portfolio optimization during cold weather in January compared with extremely warm weather in Q1 2017 and the impact of federal tax reform.

Fuel management activities contributed $2.8 million compared with $1.4 million last year driven by the -- driven by our 6 contracts going operational. We expect an additional 3 fuel supply management contracts will come online in 2018, 2 by midyear and 1 closer to Q4, providing low-risk segment growth.

Our retail gas and electric marketing business generated a slight loss compared with a slight gain last year, reflecting a continuation of increased competition and tighter margins in this business.

Energy Services, which includes our solar, CHP and landfill generation assets and our account service businesses posted a loss of $2.7 million from the first quarter compared with a loss of $2.4 million last year. Earnings from our account services businesses, South Jersey Energy Service Plus and Millennium Account Services, were actually up $400,000 compared with the prior year. Gain however was more than offset by a $700,000 decline from CHP solar and landfill activities, reflecting increased costs, higher allocated interest expense and a 1% decline in solar production. Consistent with our strategic plan, I would simply highlight that there were no investment tax credits related to renewable project development in first quarter 2018 results or the year-ago period.

Turning now to our balance sheet and cash flow. We remain committed to a strong capital structure with ample liquidity and a solid investment-grade rating. At March 31, 2018, equity to capitalization was 46.3% compared with 43.7% at December 31, 2017. For the first quarter, net cash from operating activities was roughly $95 million compared to roughly $80 million last year, reflecting strong operating performance in Energy Group.

Net cash used in investing activities were roughly $62 million compared with roughly $73 million last year, reflecting timing and utility infrastructure upgrades and investment to support customer growth. We remain on track to invest roughly $370 million in 2018 and anticipate providing an update to our longer-term spending targets following completion of our pending acquisitions of Elizabethtown and Elkton later this year.

Net cash used in financing activities was roughly $50 million compared to roughly $20 million last year, reflecting a large repayment of short-term borrowings in 2018.

Turning now to guidance. First quarter 2018 economic earnings of $100 million were exceptionally strong in both magnitude and quality. In prior years, investment tax credits contributed approximately 30% of economic earnings. However, first quarter 2018 results were instead bolstered by solid performance at South Jersey Gas and Energy Group, which successfully leveraged opportunities in our marketing and fuel management businesses. It's important to note that in less than 3 years, we have replaced nearly the entire impact of ITCs growth in our core business.

Today we are reaffirming our previous 2018 economic earnings guidance of $1.57 to $1.65 per share, with our regulated businesses generating between 65% to 72% of economic earnings in 2018. I do want to point out that this range includes approximately $0.10 per share that relates to performance of our wholesale marketing business due to the extremely cold weather experienced in early January. This business has demonstrated ability to outperform in periods of high demand for natural gas.

We are also reaffirming SJI standalone economic earnings guidance of $160 million by 2020. As a reminder, we increased our 2020 economic earnings target to $160 million from $150 million in February to reflect the impact of federal tax reform.

And finally, we are reaffirming our expectation for EPS accretion from the acquisitions of Elizabethtown and Elkton beginning in 2020. We expect to update our longer-term guidance to include these acquisitions upon receipt of final regulatory approvals and closing of the transactions.

That concludes my remarks. Now let me turn the call back over to Mike for his closing remarks.

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [5]

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Thanks, Steve. As you can see, we are making great strides in advancing our shift to a more regulated business mix. We are excited by our ongoing business transformation and remain confident in our ability to achieve our 2020 standalone economic earnings target of $160 million and postacquisition EPS accretion beginning in 2020.

As we look at the remainder of 2018, we are focused on successfully completing the acquisitions, including the review of our noncore, nonregulated businesses, gaining New Jersey regulatory approval for a multiyear extension of our storm hardening infrastructure investment program and moving forward with our BL England and PennEast pipeline projects. We look forward to updating you again in the coming months as we execute on these priorities. And finally, I want to thank our more than 700 dedicated employees for their outstanding work. They are, as always, the driving force behind our results.

That concludes my prepared remarks. Operator, we are now ready to open the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Tate Sullivan with Sidoti.

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Tate H. Sullivan, Sidoti & Company, LLC - Research Analyst [2]

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Can we just start with gas utility operations? And I mean the last 2 quarters, the annual growth has been very impressive. I mean this quarter it felt a little more than 40%. I mean what causes that to slow down for the rest of the year? Is it based on timing of AIRP investments or some other conserve rate case? Can you provide more detail there?

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David Robbins, South Jersey Energy Company, Inc. - Treasurer [3]

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Sure, this is Dave Robbins. The big driver for the utility is obviously (inaudible) significant rate case with new rates going into effect November 1. So that, coupled with continued strong customer growth and the return on our infrastructure investments has really added up to the significant growth numbers at utility.

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Tate H. Sullivan, Sidoti & Company, LLC - Research Analyst [4]

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Okay. Yes, it's been very impressive. And then I understand you're -- and it's been -- I can imagine so busy on all of the strategic fronts for you. And I mean maybe you're limited in what you talk about, what you're looking for sale, to sell in on the nonregulated side. But are there examples of sales of some of your nonregulated businesses recently that you can point to? Or is it too early to talk about it?

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [5]

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What we've been doing is we've been really focused on the businesses that are core to our strategy. And that is obviously our utility business which will ultimately include Elizabethtown and Elkton as well South Jersey Gas, our wholesale and fuel management business and our Midstream business. So those are the businesses that we consider core to our strategy. And as far as the other businesses go, right now, it's still very early in the process. And we're just exploring strategic alternatives for all those businesses that we do not consider core to our longer-term strategy.

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Tate H. Sullivan, Sidoti & Company, LLC - Research Analyst [6]

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Okay, okay. Can you talk and you can't talk -- have you given provided any pro forma like capitalization ratios post the deal or will you just prefer to wait for the pricing -- for the final timing of the deal to provide more detail on that?

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Stephen H. Clark, South Jersey Industries, Inc. - Executive VP & CFO [7]

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We will wait. I think the messaging we try to deliver is that we will look to maintain a solid investment-grade rating. Obviously, the financing is still little bit fluid. We've raised the equity that we intended to raise, but what the ultimate combination of debt and equity is going to look like, we'll have to wait until we're all done.

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Tate H. Sullivan, Sidoti & Company, LLC - Research Analyst [8]

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Okay, I understand that. And my last one, in terms of the current '18 guidance, $1.57 to $1.65 , does that include the straight equity consideration you already raised but probably not the forwarded sale of equity, is that correct?

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Stephen H. Clark, South Jersey Industries, Inc. - Executive VP & CFO [9]

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No. We haven't -- we didn't build it in for any of the equity. It was based upon where we were previously at the 80 million share range. So we'll be making adjustments as we go forward. And we've said previously that we won't do the combined number until once we've completed the acquisition.

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Operator [10]

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And our next question comes from the line of Christopher Turnure with JPMorgan.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [11]

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I was hoping you give us a little bit of color on when the next point of reassessing the PennEast timeline and budget might come given the fact that you're still waiting for 2 permits there? In other words, what's the point in time at which you guys not having received those permits would require you to reassess?

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [12]

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Well, that's really a decision that's made by the PennEast Board and they'll take into consideration all of the events that are happening now. So certainly, if there are unexpected delays in -- throughout this year in acquiring the necessary permits, that could affect ultimately the in-service date. But given how fluid the situation is right now and the progress that we are making on a lot of fronts, we still are -- we're looking at a late 2019 in-service date. But obviously, as things progress through the permitting process that could change.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [13]

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So is it fair to say that given the delay in the process so far on the back end, you've been making arrangements for construction to partially begin or tree felling to begin and basically have built yourselves in more flexibility maybe than you had originally envisioned on the timeline of the budget?

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [14]

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Yes. I mean, the leadership of PennEast, along with obviously all of their consultants and engineering partners, have certainly evaluated and made sure that our schedule has the adequate amount of flexibility in it.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [15]

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Okay. And then can you, if possible, give us a sense of the contribution by segment of weather versus normal for this quarter?

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [16]

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The only segment that would have been significantly impacted would have been wholesale. Obviously, the utility is -- it's neutral. Maybe the impact of the weather is neutralized through our various causes. It would not be significant on our energy production side simply because these are, again, that's the biggest part of our portfolio; there is solar and these are generally low production months just because there's not a lot of daylight in the first quarter, so any variance would have a minimum meaningful impact on the bottom line. So the biggest piece would have been in wholesale and I think we've assessed that at $0.10.

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Stephen H. Clark, South Jersey Industries, Inc. - Executive VP & CFO [17]

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Yes.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [18]

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Okay. $0.10 of EPS at wholesale and then when we are modeling the first quarter of next year for all the other businesses, we should basically assume pretty much in line all of this?

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [19]

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Yes, absolutely.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [20]

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Okay. And then sorry one third question briefly. Can you give us a sense as to kind of the thoughts about PennEast in your mind right now as being part of your core portfolio versus being something that might be considered for sale?

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [21]

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No. Our investment in PennEast, we view to be critical to the region, to our customers in the utility. And we remain very bullish on PennEast and the opportunities that will -- it will afford. As I said, the region in particular in New Jersey. So PennEast is part of our core business while Midstream is part of our core strategy. So there is no intention on monetizing PennEast or our investment in PennEast.

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Operator [22]

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And our next question is a follow-up from Tate Sullivan with Sidoti.

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Tate H. Sullivan, Sidoti & Company, LLC - Research Analyst [23]

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Yes, I mean just on for modeling purposes, $0.10 for the wholesale, $0.10 per share for the weather contribution from wholesale. But I mean in the Energy Group you had about $36 million of income. So does the rest, I mean $0.10 is about $9 million of net income. So is the rest more/"recurring income" in wholesale, is that fair? Am I looking at that wrong?

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [24]

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I think, Tate, what you are seeing is higher performance as a baseline in wholesale largely because a lot of the contracts that were either marginally profitable or even quite frankly at a loss that trace back to the earlier part of the decade have run their course. So it's allowing us to extract the full value of our assets. So we mention we always -- we call them legacy contracts and as they expire, again, that led to a natural uptick in our baseline wholesale business.

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Stephen H. Clark, South Jersey Industries, Inc. - Executive VP & CFO [25]

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Tate, I'll just add to that. As you kind of like look back into the frontline 2017 -- Q1 of 2017 was extremely warm. So actually, performance there was down significantly in 2017, maybe not quite as much as it was up this year, but down from kind of what you would expect under normal weather conditions.

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Tate H. Sullivan, Sidoti & Company, LLC - Research Analyst [26]

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Okay. Mike, can you talk about your fuel management business? I mean, can you -- is that core similar to what you commented on PennEast? Or can you talk about bidding opportunities there in terms of future contracts as well?

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Michael J. Renna, South Jersey Industries, Inc. - President, CEO & Director [27]

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Well, no. Yes absolutely, fuel management and wholesale are part of our core strategy. It's a business that we've had -- we've enjoyed it again I think nice amount of success. It's a niche business that has served us well. I believe at this point, we have 11 facilities under contract, 6 of which are online right now, 3 will come online throughout the course of the year and the other 2 in 2019. There continues to be opportunities as new gas-fired merchant generation facilities get built. We think that there is -- there remains, again, just given our strong performance and the reputation that we've built in this marketplace, there remains an opportunity for us to add additional fuel management contracts in the coming years. It's hard right now to put a number on how many that could be. But again, we've enjoyed a lot of success and I remain confident that, that success will continue into the future.

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Operator [28]

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And now at this time, I would like to turn the call back over to Marissa Travaline for closing remarks.

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Marissa Brooks Travaline, South Jersey Industries, Inc. - Director, IR [29]

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Great, thank you, everyone, for joining us. As a reminder, recording of the call will be available on our website. And as always, you can follow up after the call or at any time with Eric Jacobson, our Manager of Investor Relations for any questions or you can follow up with me for any media inquiries. Eric can be reached at (609) 561-9000 extension 4363 or by e-mail at ejacobson@sjindustries.com. And I can be reached at (609) 561-9000 extension 4227 or by e-mail at mtravaline@sjindustries.com. Again thanks for joining us today and for your continued interest and investment in SJI.

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Operator [30]

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