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South Jersey Industries is an energy
services holding company for South Jersey Gas, South Jersey Energy, South Jersey Resources
Group, South Jersey Energy Service Plus, and Marina Energy
Utilities
Natural Gas Utilities
(SJI-NYSE)
South Jersey Industries
1 South Jersey Plaza
Folsom, NJ 08037
Phone: 6O9-561-9000
Edward J. Graham
President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
January 13, 2004
BIO:
Edward J. Graham
Director, President and Chief Executive Officer
Edward J. Graham is director, president and chief executive officer of South Jersey
Industries. He also holds the titles of director, president and chief executive officer of
South Jersey Gas Company and president of South Jersey Resources Group, LLC and Marina
Energy LLC, all affiliates of South Jersey Industries.
Graham joined the company in 1981 and held various
professional and managerial positions prior to election as an officer of South Jersey Gas
in 1988. Most recently, he was director and president of South Jersey Energy Company, a
subsidiary of South Jersey Industries. Graham’s previous employers include the Golden
Nugget, Inc. and Midlantic Banks, Inc.
An alumnus of Drexel University, Graham holds a
Master of Business Administration in finance and investment. He serves on the boards of
directors of the New Jersey Utilities Association, the New Jersey State Chamber and the
South Jersey Healthcare Foundation. In addition, Graham is a member of the American Gas
Association’s Leadership Council, vice chairman of the Rowan University Foundation
Board and honorary chairperson of the 10th Annual Special Olympics. He also serves on the
executive committee for the 2005 American Heart Walk.
Most recently, the Rowan University chapter of the
Beta Gamma Sigma business honor society named Graham as its business honoree.
Company Profile:
South Jersey Industries (NYSE: SJI) is an energy services holding company for South Jersey
Gas, South Jersey Energy, South Jersey Resources Group, South Jersey Energy Service Plus,
and Marina Energy.
South Jersey Gas is a regulated utility that delivers
natural gas to over 311,000 retail customers in the seven southern counties of New Jersey.
SJG also sells natural gas to wholesale customers in the interstate market.
South Jersey Energy is a non-regulated energy
supplier, providing natural gas and electricity to retail customers throughout New Jersey.
It also provides energy services to commercial and industrial customers such as lighting
retrofits, chiller and boiler improvements, steam systems, air handlers, compressed air
systems, energy management controls and distributed generation.
South Jersey Resources Group is a wholesale natural
gas and risk management business that supplies retail marketers, utilities and electricity
generators in the mid-Atlantic and southern regions of the country.
South Jersey Energy Service Plus services natural gas
heaters, central air conditioners, ranges, dryers, water heaters and other gas burning
appliances and offers warranty and preventive maintenance contracts. SJESP also installs
and replaces heating and air conditioning equipment.
Marina Energy designs, builds, owns and operates
energy production facilities for commercial and industrial customers. Its largest and most
visible project is a thermal plant in Atlantic City that provides heating, chilling and
emergency electric generation services to Borgata Hotel Casino & Spa. Marina is also
engaged in the design, development and operation of behind the fence cogeneration
facilities, distributed generation projects and landfill gas to electricity projects.
CEOCFOinterviews: Mr.
Graham, what was your vision when you became CEO of South Jersey Industries, and how is it
developing?
Mr. Graham: “When I took over CEO responsibilities for
South Jersey Industries, we already had a very successful strategic plan in place and
being implemented. We continued to take advantage of the strong brand recognition that we
had in the region and the quality work force that we possessed to capitalize on the
opportunities we were beginning to see in front of us.”
CEOCFOinterviews: What
are the newer opportunities and how are you taking advantage of them?
Mr. Graham: “We are fortunate to be located in southern
New Jersey, an area experiencing strong housing and economic growth. That growth provides
us with very attractive opportunities to expand the utility part of our business, so we
are focused on capitalizing on the opportunities that growth presents. At the same time,
our utility is starting to take advantage of recently developed technologies and is
looking to those on the horizon that add to the use or need for natural gas. The
non-utility side of our business is structured to take advantage of our core competencies
in the energy arena. Because of deregulation, we see a lot of opportunity to grow our
activities in areas that include cogeneration, retail marketing, and managing and
administering industrial customer’s energy portfolios. There are a host of
opportunities around the energy business that we see our brand recognition and our
capabilities leading us to.”
CEOCFOinterviews: Will
you give us some examples of what you are actually doing?
Mr. Graham: “South Jersey Industries is an energy
holding company with two main sectors. One is South Jersey Gas, which is our utility
operation that serves the southern third of New Jersey and the other part is our
non-utility energy related businesses. A good example of what we are doing on the
non-utility side of SJI is with Marina Energy. We own and operate a thermal plant that
provides for all the heating and chilling needs for the Borgata Casino; and for all of
their electrical needs, as well. We also own and operate cogeneration facilities for large
industrial customers. We take advantage of our expertise in natural gas to serve
facilities with gas-fired equipment. In other areas, we take advantage of deregulation in
terms of selling the commodities of natural gas and electricity to retail end-users. We
make these sales as a third party marketer through various utility systems, including our
own, so it provides an incremental income stream for the company. Through our wholesale
gas business, South Jersey Resources, we manage gas supply portfolios for large
generators. As an example, we manage under a five-year contract all the gas needs to fuel
Florida Power & Light’s 750 megawatt cogeneration facility in Marcus Hook,
Pennsylvania. They are all complimentary energy related businesses that are profitable and
provide us with additional revenue streams. Also important to note is that in addition to
staying close to our knitting by focusing on energy related businesses, we also focus our
activities in our local geographic region. That permits us to capitalize on our name
recognition and reduces management control risk”
CEOCFOinterviews:
Regarding Marina Energy, do you bid on projects for companies that want a facility or do
you present them with a plan to develop a facility that could save money?
Mr. Graham: “Opportunities actually arise through both
methods, although, we are often the one who identifies the demand for the customer. For
example, as we begin to offer customers services such as supplying their energy commodity
needs at reduced costs, we actually review their facilities for opportunities to achieve
operating on the control and demand side part of the equation. Often, we see opportunities
where a separate, on-site unit will provide them the best answer to their energy needs. We
can offer design, build, own and/or operate services to support that need. In the case of
some of the cogeneration projects, that is how they evolved. In the case of the Marina
thermal plant, that was actually a bid project. The casino had already determined what
they wanted and the decision being made was whether they should own and operate a plant of
their own or outsource it to an energy expert. I think we are finding that trend happening
more often than not. Companies would rather focus on what they are expert at, such as the
gaming and entertainment business, and outsource managing their energy needs and the
related investments to energy experts.”
CEOCFOinterviews: Do you
find, given the world energy situation, that your customers are more interested in how
they manage their energy needs and how do you use that to your advantage?
Mr. Graham: “I think it has played to our advantage.
Unfortunately, in the current environment, energy costs have become a greater part of
people’s budgets and those costs have become much more volatile. No longer can the
purchasing manager for a corporation buy the energy along with the office supplies. What
they see is a need for an outsource solution. Other things that have happened with
deregulation, particularly in New Jersey, have really encouraged, if not driven, energy
consumers to seek non-utility solutions like our non-utility businesses offer.”
CEOCFOinterviews: Has
there been some change in your rate structure recently?
Mr. Graham: “Yes, we settled a rate case during the
third quarter of this year that was based on taking advantage of the enormous investment
we have made in our infrastructure over the last seven to eight years. We invested over
$300 million in building our infrastructure to serve current and future customers’
needs. It also allows us to recognize the significant steps we took to improve our balance
sheet. Over the past two years we increased our equity ratio from the high 30 percent
range to close to 50 percent. The rate case has allowed us to capitalize on both of those
events, providing a significant boost to our bottom line going forward and positioning our
utility for continued strong growth. Within the utility, another significant event that
occurred this year was the extension of our union contracts for another four years a full
two months before those contracts were due to expire. It was a great solution for giving
both the company and the workforce stability and control over healthcare and retirement
costs that have presented concerns at companies nationwide. We think this is a solution to
control and cap some of those costs for us. We have clearly taken a number of steps this
year to help the future.”
CEOCFOinterviews: How
were you able to accomplish that union agreement so early in the negotiation process?
Mr. Graham: “I think the most important thing was
education. We invested a lot more time, at all levels of our organization, educating our
workforce on what was happening in the healthcare environment. As a result, our employees
gained a greater appreciation for the high quality benefits we offer, and what solutions
we needed to put in place to continue offering a high quality benefits package in the
future. This process took well over a year. Over time, it was clear that our employees
were starting to understand what we needed to accomplish based on their feedback. They
wanted certainty in this environment. Some of the solutions we have provided them were not
necessarily just increasing the co-pay for healthcare, but changing the design of certain
benefits to give SJI the ability to better manage rising costs while continuing to provide
premium benefits. The significant outcome of the settlement was not just
economic; the mental state of the company is probably the best I have ever seen it. A very
positive work environment should provide a number of unanticipated benefits. As an added
part of the agreement, we included an incentive component for all of our work force,
including the bargaining group, where employees are rewarded for the company’s
performance and, down the road, for their individual performance as well. We have aligned
all of our interests.”
CEOCFOinterviews: How do
you encourage more people to use your company’s products?
Mr. Graham: “One thing that is clearly established in
the northeast is that natural gas is the premium fuel. Our experience is that as long as
we have facilities to reach new construction; natural gas is the energy choice. Well over
ninety percent of new construction is natural gas fueled. We are finding that customers
are not only heating with natural gas but they use it for their water heating, dryers,
cooking, gas fireplaces, and even pool and patio heaters, so it is clearly the fuel of
choice. In South Jersey, we serve just over 50% of area households with natural gas, so we
are far from saturated. We continue to see conversions as a huge growth opportunity going
forward. In terms of economics, natural gas continues to compete well with electricity and
oil. We see conversions contributing in the range of twenty to twenty five percent of our
future growth.”
CEOCFOinterviews: Where
are the various units today in making up SJI’s income, and where do you see them in
the future?
Mr. Graham: “As of the end of 2003, 23% our net income
was generated by non-utility operations and 77% was generated by the utility. As we look
at our business, we think the high point of where that could grow is maybe 30% non-utility
and 70% utility. That requires significant growth in the non-utility side because the gas
company, with the new rate case in place, is growing rapidly itself. Profitability is
split fairly evenly on the non-utility side between our retail, wholesale and on-site
energy production businesses. Finally, something that we have done most recently is that
we moved our appliance service business out of the utility. That is a separate non-utility
business unit, so we see that with great growth opportunities both in HVAC system
installation, as well as in warranty products. We see all of those businesses growing and
as we look at our future in a consolidated fashion, we expect to grow our earnings per
share in the 6 to 7% range. If you look at other utilities in the industry, our growth
expectation is a premium to the industry average of 4% growth.”
CEOCFOinterviews: Are
there other services that you might want to offer in the future?
Mr. Graham: “Because of the activity that was spurred by
deregulation, as well as improvements in technology around gas equipment, cogeneration or
onsite energy generation fueled by natural gas will move down to smaller commercial and,
at some point, residential customers. We need to stay focused on where we are successful,
so we are not looking to venture out of our target geography, which is the mid Atlantic
region for non-utility businesses and the southern third of New Jersey for the utility.
Likewise we do not see the value in straying from an energy focus, I think that is what
customers want to buy or take advantage of from us and I think that is where our greatest
profit opportunity is.”
CEOCFOinterviews: How do
you manage the growth?
Mr. Graham: “Our focus is to grow incrementally. We
expect new business to be immediately profitable and cash flow positive. The utility
industry has historically done a very bad job in this regard. If a project or business
line can’t meet that requirement, there is little likelihood that we will move
forward with it. What we have also learned to do here is take advantage of some very
talented people within our organization and also to take advantage of partners outside of
the organization that have complimentary expertise. Good examples are the excellent
development teams that we put together at both Marina Energy and in our commodities
businesses. We found that as we have a chance to display our capabilities to our
customers, that the success rate for closing sales on one, if not multiple products, is
very high.”
CEOCFOinterviews: What
should investors know that they might not realize when they first look at the company?
Mr. Graham: “One of the things they have to look at is
that we provide real products and services; we are not trading paper. What they should
draw from that is that our businesses have the staying power to continue growing
profitably well into the future. They also need to have the knowledge of our track record
over the years to help them understand that we aren’t just talking about performing
better than our industry peers, we have actually been doing it.”
CEOCFOinterviews: You
raised your dividend recently; tell us what is going on there.
Mr. Graham: “Earnings growth at our current pace
provides a lot of opportunity for dividend growth. While we have grown our earnings over
six consecutive years, at the same time we have improved the dividend and also lowered the
payout ratio. In fact our payout ratio is somewhere in the mid 50% range, which gives our
Board a lot of flexibility in terms of the dividend declared. The Board established a
dividend policy last year of growing the dividend in the range of 3 to 6% a year. The most
recent improvement to the dividend of an annualized 8 cents per share raised it to a
$1.70, equating to about a 5% dividend increase. We have told our shareholders that we
understand the importance of the dividend to them and the public announcement of our
dividend growth policy should underscore our commitment in this area.”
CEOCFOinterviews: How do
you reach potential investors?
Mr. Graham: “We have found that since we are a smaller
company, we will not get as much analyst coverage. Therefore, we work with an investor
relations firm to identify potential investors around the country. We find that when the
management team relays our story to investors it is very well received. We take it upon
ourselves to go on the road frequently to get people to know who we are.”
CEOCFOinterviews: In
closing, when people are looking for a utility-based company, why should they be looking
at South Jersey as opposed to some of the other companies that are similar to yours?
Mr. Graham: “We argue that there are not many companies
similar to ours. There are clearly not many utilities performing at the level SJI is and
we have more opportunity in front of us. We offer the stability of a utility business,
with a growth premium that is almost double what it is in the utility sector. Our
deregulated side is not typical in the utility business. Most non-utility businesses at
other companies have never generated a profit. Interestingly, we find that are business
model is more and more fashionable with each year that passes.”
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