South Jersey Industries Form 10-Q for June 30, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
one)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June
30, 2006
OR
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ________________ to __________________
Commission
File Number 1-6364
SOUTH
JERSEY INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
New
Jersey
|
22-1901645
|
(State
of incorporation)
|
(IRS
employer identification no.)
|
1
South Jersey Plaza, Folsom, NJ 08037
(Address
of principal executive offices, including zip code)
(609)
561-9000
(Registrant’s
telephone number, including area code)
Common
Stock
|
|
($1.25
par value per share)
|
New
York Stock Exchange
|
(Title
of each class)
|
(Name
of exchange on which registered)
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated
filer [X]
Accelerated filer [ ] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
As
of August 1, 2006, there were 29,232,801 shares of the registrant’s common stock
outstanding.
PART
I — FINANCIAL INFORMATION
Item
1. Financial Statements — See Pages 2 through 24
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
(In
Thousands Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
Utility
|
|
$
|
95,107
|
|
$
|
84,759
|
|
Nonutility
|
|
|
60,425
|
|
|
69,280
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
|
155,532
|
|
|
154,039
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Cost
of
Sales - Utility
|
|
|
66,141
|
|
|
53,787
|
|
Cost
of
Sales - Nonutility
|
|
|
47,484
|
|
|
57,114
|
|
Operations
|
|
|
14,742
|
|
|
16,131
|
|
Maintenance
|
|
|
1,365
|
|
|
1,511
|
|
Depreciation
|
|
|
6,396
|
|
|
5,971
|
|
Energy
and Other Taxes
|
|
|
1,891
|
|
|
2,117
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
138,019
|
|
|
136,631
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
17,513
|
|
|
17,408
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
646
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
Interest
Charges
|
|
|
(6,217
|
)
|
|
(4,922
|
)
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
11,942
|
|
|
12,431
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(5,044
|
)
|
|
(5,091
|
)
|
|
|
|
|
|
|
|
|
Equity
in Affiliated Companies
|
|
|
331
|
|
|
215
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
7,229
|
|
|
7,555
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations - Net
|
|
|
(63
|
)
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
7,166
|
|
$
|
7,373
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share:
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
0.248
|
|
$
|
0.270
|
|
Discontinued
Operations - Net
|
|
$
|
(0.002
|
)
|
$
|
(0.006
|
)
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$
|
0.246
|
|
$
|
0.264
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Basic
|
|
|
29,162
|
|
|
27,953
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share:
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
0.247
|
|
$
|
0.268
|
|
Discontinued
Operations - Net
|
|
$
|
(0.002
|
)
|
$
|
(0.006
|
)
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$
|
0.245
|
|
$
|
0.262
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Diluted
|
|
|
29,226
|
|
|
28,180
|
|
|
|
|
|
|
|
|
|
Dividends
Declared per Common Share
|
|
$
|
0.2250
|
|
$
|
0.2125
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
(In
Thousands Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
Utility
|
|
$
|
364,628
|
|
$
|
296,926
|
|
Nonutility
|
|
|
155,880
|
|
|
185,683
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
|
520,508
|
|
|
482,609
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Cost
of
Sales - Utility
|
|
|
267,201
|
|
|
195,762
|
|
Cost
of
Sales - Nonutility
|
|
|
129,540
|
|
|
160,255
|
|
Operations
|
|
|
32,409
|
|
|
36,328
|
|
Maintenance
|
|
|
2,770
|
|
|
3,004
|
|
Depreciation
|
|
|
12,738
|
|
|
11,844
|
|
Energy
and Other Taxes
|
|
|
6,622
|
|
|
7,275
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
451,280
|
|
|
414,468
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
69,228
|
|
|
68,141
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
794
|
|
|
329
|
|
|
|
|
|
|
|
|
|
Interest
Charges
|
|
|
(12,583
|
)
|
|
(10,227
|
)
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
57,439
|
|
|
58,243
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(23,854
|
)
|
|
(24,205
|
)
|
|
|
|
|
|
|
|
|
Equity
in Affiliated Companies
|
|
|
710
|
|
|
409
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
34,295
|
|
|
34,447
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations - Net
|
|
|
(229
|
)
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
34,066
|
|
$
|
34,121
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share:
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
1.179
|
|
$
|
1.236
|
|
Discontinued
Operations - Net
|
|
$
|
(0.008
|
)
|
$
|
(0.012
|
)
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$
|
1.171
|
|
$
|
1.224
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Basic
|
|
|
29,097
|
|
|
27,876
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share:
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
1.176
|
|
$
|
1.226
|
|
Discontinued
Operations - Net
|
|
$
|
(0.008
|
)
|
$
|
(0.012
|
)
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$
|
1.168
|
|
$
|
1.214
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Diluted
|
|
|
29,163
|
|
|
28,102
|
|
|
|
|
|
|
|
|
|
Dividends
Declared per Common Share
|
|
$
|
0.4500
|
|
$
|
0.4250
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
7,166
|
|
$
|
7,373
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net of Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Fair Value of Investments
|
|
|
(67
|
)
|
|
121
|
|
Change
in Fair Value of Derivatives - Other
|
|
|
879
|
|
|
(1,271
|
)
|
Change
in Fair Value of Derivatives - Energy Related
|
|
|
(832
|
)
|
|
(4,538
|
)
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss) - Net of Tax
|
|
|
(20
|
)
|
|
(5,688
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
7,146
|
|
$
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
34,066
|
|
$
|
34,121
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net of Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Fair Value of Investments
|
|
|
90
|
|
|
78
|
|
Change
in Fair Value of Derivatives - Other
|
|
|
2,103
|
|
|
(886
|
)
|
Change
in Fair Value of Derivatives - Energy Related
|
|
|
3,665
|
|
|
(4,581
|
)
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss) - Net of Tax
|
|
|
5,858
|
|
|
(5,389
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
39,924
|
|
$
|
28,732
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
Income
from Continuing
Operations
|
|
$
|
34,295
|
|
$
|
34,447
|
|
Adjustments to Reconcile Income from Continuing Operations
|
|
|
|
|
|
|
|
to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
13,684
|
|
|
13,287
|
|
Unrealized
Gain
on Derivatives - Energy Related
|
|
|
(3,761
|
)
|
|
(2,117
|
)
|
Provision
for
Losses on Accounts Receivable
|
|
|
335
|
|
|
1,925
|
|
Stock-Based
Compensation Charge
|
|
|
468
|
|
|
745
|
|
Revenues
and
Fuel Costs Deferred - Net
|
|
|
4,844
|
|
|
(4,943
|
)
|
Deferred
and
Noncurrent Income Taxes and Credits - Net
|
|
|
258
|
|
|
6,208
|
|
Environmental
Remediation Costs - Net
|
|
|
(3,513
|
)
|
|
(797
|
)
|
Gas
Plant Cost of Removal
|
|
|
(670
|
)
|
|
(443
|
)
|
Changes
in:
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
78,259
|
|
|
49,594
|
|
Inventories
|
|
|
4,243
|
|
|
9,988
|
|
Other
Prepayments and Current Assets
|
|
|
(625
|
)
|
|
(1,389
|
)
|
Prepaid
and Accrued Taxes - Net
|
|
|
(5,529
|
)
|
|
(1,972
|
)
|
Accounts
Payable and Other Accrued Liabilities
|
|
|
(90,114
|
)
|
|
(24,682
|
)
|
Other
Assets
|
|
|
(1,008
|
)
|
|
6,858
|
|
Other
Liabilities
|
|
|
10,562
|
|
|
461
|
|
Discontinued
Operations
|
|
|
12
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
|
41,740
|
|
|
86,708
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Net
(Purchase of) Proceeds from Sale of Restricted Investments
|
|
|
(21,284
|
)
|
|
12,041
|
|
Capital
Expenditures
|
|
|
(42,253
|
)
|
|
(38,802
|
)
|
Net
Other
|
|
|
(650
|
)
|
|
395
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(64,187
|
)
|
|
(26,366
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
Net
Repayments of Lines of Credit
|
|
|
(2,700
|
)
|
|
(38,775
|
)
|
Proceeds
from
Issuance of Long-Term Debt
|
|
|
41,400
|
|
|
-
|
|
Principal
Repayments of Long-Term Debt
|
|
|
(2,334
|
)
|
|
(12,788
|
)
|
Dividends
on
Common Stock
|
|
|
(13,116
|
)
|
|
(12,127
|
)
|
Proceeds
from
Sale of Common Stock
|
|
|
2,535
|
|
|
4,683
|
|
Payments
for
Issuance of Long-Term Debt
|
|
|
(1,286
|
)
|
|
(100
|
)
|
Premium
for Early Retirement of Long-Term Debt
|
|
|
-
|
|
|
(184
|
)
|
Redemption
of
Preferred Stock
|
|
|
-
|
|
|
(1,690
|
)
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
24,499
|
|
|
(60,981
|
)
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
2,052
|
|
|
(639
|
)
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
4,884
|
|
|
5,272
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
|
$
|
6,936
|
|
$
|
4,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Non-Cash Investing Activities:
|
|
|
|
|
|
|
|
Capital
Expenditures acquired on account but unpaid as of June 30
|
|
$
|
7,419
|
|
$
|
9,710
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
|
Utility
Plant, at original cost
|
|
$
|
1,055,207
|
|
$
|
1,030,028
|
|
Accumulated Depreciation
|
|
|
(248,236
|
)
|
|
(241,242
|
)
|
Nonutility
Property and Equipment, at cost
|
|
|
104,609
|
|
|
94,623
|
|
Accumulated Depreciation
|
|
|
(7,033
|
)
|
|
(6,061
|
)
|
|
|
|
|
|
|
|
|
Property,
Plant
and Equipment - Net
|
|
|
904,547
|
|
|
877,348
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
|
5,817
|
|
|
5,642
|
|
Restricted
|
|
|
29,518
|
|
|
8,234
|
|
Investment
in
Affiliates
|
|
|
1,473
|
|
|
2,094
|
|
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
36,808
|
|
|
15,970
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
6,936
|
|
|
4,884
|
|
Accounts
Receivable
|
|
|
106,357
|
|
|
139,142
|
|
Unbilled
Revenues
|
|
|
12,756
|
|
|
59,066
|
|
Provision
for
Uncollectibles
|
|
|
(5,370
|
)
|
|
(5,871
|
)
|
Natural
Gas in Storage, average cost
|
|
|
128,492
|
|
|
117,542
|
|
Materials
and
Supplies, average cost
|
|
|
2,989
|
|
|
4,758
|
|
Deferred
Income
Taxes - Net
|
|
|
-
|
|
|
624
|
|
Prepaid
Taxes
|
|
|
17,781
|
|
|
13,061
|
|
Derivatives
-
Energy Related Assets
|
|
|
19,758
|
|
|
24,408
|
|
Other
Prepayments and Current Assets
|
|
|
6,054
|
|
|
5,415
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
295,753
|
|
|
363,029
|
|
|
|
|
|
|
|
|
|
Regulatory
and Other Noncurrent Assets:
|
|
|
|
|
|
|
|
Regulatory
Assets
|
|
|
119,382
|
|
|
121,483
|
|
Prepaid
Pension
|
|
|
28,920
|
|
|
30,075
|
|
Derivatives
-
Energy Related Assets
|
|
|
8,145
|
|
|
5,080
|
|
Derivatives
-
Other
|
|
|
3,041
|
|
|
-
|
|
Unamortized
Debt Issuance Costs
|
|
|
8,181
|
|
|
7,147
|
|
Contract
Receivables
|
|
|
13,920
|
|
|
14,766
|
|
Other
|
|
|
6,692
|
|
|
6,814
|
|
|
|
|
|
|
|
|
|
Total
Regulatory and Other Noncurrent Assets
|
|
|
188,281
|
|
|
185,365
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,425,389
|
|
$
|
1,441,712
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Capitalization
and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Equity:
|
|
|
|
|
|
|
|
Common
Stock
|
|
$
|
36,471
|
|
$
|
36,228
|
|
Premium
on Common Stock
|
|
|
234,939
|
|
|
231,861
|
|
Accumulated
Other Comprehensive Loss
|
|
|
(2,942
|
)
|
|
(8,801
|
)
|
Retained
Earnings
|
|
|
155,306
|
|
|
134,357
|
|
|
|
|
|
|
|
|
|
Total
Common Equity
|
|
|
423,774
|
|
|
393,645
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
358,133
|
|
|
319,066
|
|
|
|
|
|
|
|
|
|
Total
Capitalization
|
|
|
781,907
|
|
|
712,711
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
458
|
|
|
394
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Notes
Payable
|
|
|
144,600
|
|
|
147,300
|
|
Current
Maturities of Long-Term Debt
|
|
|
2,363
|
|
|
2,364
|
|
Accounts
Payable
|
|
|
74,811
|
|
|
179,023
|
|
Customer
Deposits and Credit Balances
|
|
|
21,144
|
|
|
12,534
|
|
Environmental
Remediation Costs
|
|
|
24,418
|
|
|
18,165
|
|
Taxes
Accrued
|
|
|
6,725
|
|
|
7,456
|
|
Derivatives
-
Energy Related Liabilities
|
|
|
28,375
|
|
|
21,957
|
|
Deferred
Income
Taxes - Net
|
|
|
4,529
|
|
|
-
|
|
Deferred
Contract Revenues
|
|
|
3,886
|
|
|
5,077
|
|
Dividends
Payable
|
|
|
6,565
|
|
|
-
|
|
Interest
Accrued
|
|
|
6,260
|
|
|
6,258
|
|
Other
Current Liabilities
|
|
|
3,359
|
|
|
6,078
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
327,035
|
|
|
406,212
|
|
|
|
|
|
|
|
|
|
Deferred
Credits and Other Noncurrent Liabilities:
|
|
|
|
|
|
|
|
Deferred
Income
Taxes - Net
|
|
|
168,642
|
|
|
169,423
|
|
Investment
Tax
Credits
|
|
|
2,633
|
|
|
2,795
|
|
Pension
and Other Postretirement Benefits
|
|
|
18,263
|
|
|
18,941
|
|
Asset
Retirement Obligations
|
|
|
23,363
|
|
|
22,588
|
|
Environmental
Remediation Costs
|
|
|
32,368
|
|
|
42,489
|
|
Derivatives
-
Energy Related Liabilities
|
|
|
9,206
|
|
|
4,895
|
|
Derivatives
-
Other
|
|
|
-
|
|
|
491
|
|
Regulatory
Liabilities
|
|
|
55,159
|
|
|
54,002
|
|
Other
|
|
|
6,355
|
|
|
6,771
|
|
|
|
|
|
|
|
|
|
Total
Deferred
Credits
|
|
|
|
|
|
|
|
and Other Noncurrent Liabilities
|
|
|
315,989
|
|
|
322,395
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities
|
|
$
|
1,425,389
|
|
$
|
1,441,712
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation—
The
consolidated financial statements include the accounts of South Jersey
Industries, Inc. (SJI), its wholly owned subsidiaries and subsidiaries in which
we have a controlling interest. We eliminate all significant intercompany
accounts and transactions. In our opinion, the consolidated financial statements
reflect all normal and recurring adjustments needed to fairly present SJI’s
financial position and operating results at the dates and for the periods
presented. Our businesses are subject to seasonal fluctuations and, accordingly,
this interim financial information should not be the basis for estimating the
full year’s operating results. These financial statements should be read in
conjunction with SJI’s 2005 Form 10-K and annual report.
Equity
Investments—
We
classify marketable equity investments purchased as long-term investments as
Available-for-Sale
Securities
on our
consolidated balance sheets and carry them at their fair value. Any unrealized
gains or losses are included in Accumulated
Other Comprehensive Loss.
SJI,
through a wholly owned subsidiary, currently holds a 50% non-controlling
interest in one affiliated company and accounts for the investment under the
equity method. We include the operations of this affiliated company on a pre-tax
basis in the statements of consolidated income under Equity
in Affiliated Companies.
Estimates
and Assumptions—
We
prepare our consolidated financial statements to conform with accounting
principles generally accepted in the United States of America. Management makes
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and related disclosures. Therefore, actual results could
differ from those estimates. Significant estimates include amounts related
to
regulatory accounting, energy derivatives, environmental remediation costs,
pension and other postretirement benefit costs, and revenue
recognition.
Regulation—
South
Jersey Gas Company (SJG) is subject to the rules and regulations of the New
Jersey Board of Public Utilities (BPU). SJG maintains its accounts according
to
the BPU's prescribed Uniform System of Accounts. SJG follows the accounting
for
regulated enterprises prescribed by the Financial Accounting Standards Board
(FASB) Statement No. 71, “Accounting for the Effects of Certain Types of
Regulation.” In general, Statement No. 71 allows deferral of certain costs and
creation of certain obligations when it is probable that these items will be
recovered from or refunded to customers in future periods.
Revenues—
Gas
and
electric revenues are recognized in the period the commodity is delivered and
customers are billed monthly. For SJG and South Jersey Energy Company (SJE)
retail customers not billed at the end of each month, we record an estimate
to
recognize unbilled revenues for gas and electricity delivered from the date
of
the last meter reading to the end of the month. South Jersey Resources Group,
LLC’s (SJRG) gas revenues are recognized in the period the commodity is
delivered and customers are billed monthly. We defer and recognize revenues
related to South Jersey Energy Service Plus, LLC (SJESP) appliance service
contracts seasonally over the full 12-month terms of the contracts. Revenue
related to services provided on a time and materials basis is recognized on a
monthly basis as the jobs are completed. Marina Energy LLC (Marina) recognizes
revenue on a monthly basis as services are provided and for on-site energy
production that is delivered to its customers.
The
BPU
allows SJG to recover all prudently incurred gas costs through the Basic Gas
Supply Service clause (BGSS). SJG collects these costs on a forecasted basis
upon BPU order. SJG defers over/under-recoveries of gas costs and includes
them
in the following year's BGSS filing. SJG pays interest on the net overcollected
BGSS balances at the rate of return on rate base utilized by the BPU to set
rates in its last base rate proceeding.
SJG's
tariff also includes a Temperature Adjustment Clause (TAC) and a Societal
Benefits Clause (SBC). Within the SBC are a Remediation Adjustment Clause (RAC),
a New Jersey Clean Energy Program (NJCEP), a Universal Service Fund (USF)
program, and a Consumer Education Program (CEP) which was terminated in April
2006. The TAC provides stability to SJG’s earnings and its customers’ bills by
normalizing the impact of extreme winter temperatures. The RAC recovers
environmental remediation costs of former gas manufacturing plants and the
NJCEP
recovers costs associated with our energy efficiency and renewable energy
programs. The USF is a statewide customer assistance program that utilizes
utilities as a collection agent. The CEP recovered costs associated with
providing education to the public concerning customer choice. TAC adjustments
affect revenue, earnings and cash flows since colder-than-normal weather can
generate credits to customers, while warmer-than-normal weather can result
in
additional billings. RAC adjustments affect revenue and cash flows but do not
directly affect earnings because SJG defers and recovers related costs through
rates over 7-year amortization periods. NJCEP, CEP and USF adjustments also
affect revenue and cash flows but do not directly affect earnings, as related
costs are deferred and customer credits are recovered through rates on an
ongoing basis.
Accounts
Receivable and Provision for Uncollectible Accounts—
Accounts receivable are carried at the amount owed by customers. A provision
for
uncollectible accounts is established based on our collection experience and
an
assessment of the collectibility of specific accounts.
Property,
Plant and Equipment—
For
regulatory purposes, utility plant is stated at original cost, which may be
different than SJG’s cost if the assets were acquired from another regulated
entity. Nonutility plant is stated at cost. The cost of adding, replacing and
renewing property is charged to the appropriate plant account.
Depreciation—
SJG
depreciates utility plant on a straight-line basis over the estimated remaining
lives of the various property classes. These estimates are periodically reviewed
and adjusted as required after BPU approval. The composite annual rate for
all
depreciable utility property was approximately 2.4% in 2005 and 2.3% for the
first six months of 2006. Except for retirements outside the normal course
of
business, accumulated depreciation is charged with the cost of depreciable
utility property retired, less salvage. Nonutility property depreciation is
computed on a straight-line basis over the estimated useful lives of the
property, ranging up to 50 years. Gain or loss on the disposition of nonutility
property is recognized in net income.
Capitalized
Interest—
SJG
capitalizes interest on construction at the rate of return on rate base utilized
by the BPU to set rates in its last base rate proceeding. Marina capitalizes
interest on construction projects in progress based on the actual cost of
borrowed funds. SJG’s amounts are included in Utility
Plant
and
Marina’s amounts are included in Nonutility
Property and Equipment
on the
consolidated balance sheets. Interest
Charges
are
presented net of capitalized interest on the consolidated statements of income.
SJI capitalized interest as follows (in thousands):
|
|
June
30,
2006
|
|
June
30,
2005
|
|
|
|
|
|
|
|
|
|
Quarter
Ended:
|
|
|
|
|
|
|
|
SJG
|
|
$
|
109
|
|
$
|
253
|
|
Marina
|
|
|
302
|
|
|
48
|
|
Total
|
|
$
|
411
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
Six
Months Ended:
|
|
|
|
|
|
|
|
SJG
|
|
$
|
208
|
|
$
|
543
|
|
Marina
|
|
|
616
|
|
|
69
|
|
Total
|
|
$
|
824
|
|
$
|
612
|
|
Impairment
of Long-Lived Assets—
We
review the carrying amount of long-lived assets for possible impairment whenever
events or changes in circumstances indicate that such amounts may not be
recoverable. For the six months ended June 30, 2006 and the year ended December
31, 2005, no significant impairments were identified.
Derivative
Instruments—
Certain
SJI subsidiaries are involved in buying, selling, transporting and storing
natural gas and buying and selling retail electricity for their own accounts
as
well as managing these activities for other third parties. These subsidiaries
are subject to market risk due to commodity price fluctuations. To manage this
risk, our companies enter into a variety of physical and financial transactions
including forward contracts, swap agreements, options contracts and futures
contracts.
SJI
structured its subsidiaries so that SJG and SJE transact commodities on a
physical basis and typically do not directly enter into positions that
financially settle. SJRG performs this risk management function for these
entities and enters into the types of financial transactions noted above. As
part of its gas purchasing strategy, SJG uses financial contracts to hedge
against forward price risk. The costs or benefits of these contracts are
included in SJG’s BGSS, subject to BPU approval. As of June 30, 2006 and
December 31, 2005, SJG had $18.3 million and $(0.5) million of costs (benefits),
respectively, included in its BGSS related to open financial contracts (See
Regulatory Assets & Liabilities).
Management
takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions
to
assist in identifying, assessing and controlling various risks. Management
reviews any open positions in accordance with strict policies to limit exposure
to market risk.
SJI
accounts for derivative instruments in accordance with FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” as amended. We
record all derivatives, whether designated in hedging relationships or not,
on
the consolidated balance sheets at fair value unless the derivative contracts
qualify for the normal purchase and sale exemption. In general, if the
derivative is designated as a fair value hedge, we recognize the changes in
the
fair value of the derivative and of the hedged item attributable to the hedged
risk in earnings. We currently have no fair value hedges. If the derivative
is
designated as a cash flow hedge, we record the effective portion of the hedge
in
Other
Comprehensive Income (Loss)
and
recognize it in the income statement when the hedged item affects earnings.
However, due to the application of regulatory accounting principles under FASB
Statement No. 71, derivatives related to SJG’s gas purchases are recorded
through the BGSS rather than Other
Comprehensive Income (Loss).
We
recognize ineffective portions of cash flow hedges immediately in earnings.
For
the three and six months ended June 30, 2006, and 2005, the ineffective portions
of the derivatives designated as cash flow hedges were not material. We formally
document all relationships between hedging instruments and hedged items, as
well
as our risk management objectives, strategies for undertaking various hedge
transactions and our methods for assessing and testing correlation and hedge
ineffectiveness. All hedging instruments are linked to the hedged asset,
liability, firm commitment or forecasted transaction.
We
also
assess whether these derivatives are highly effective in offsetting changes
in
cash flows or fair values of the hedged items. We discontinue hedge accounting
prospectively if we decide: to discontinue the hedging relationship; determine
that the anticipated transaction is no longer likely to occur; or, if we
determine that a derivative is no longer highly effective as a hedge. In the
event that hedge accounting is discontinued, we will continue to carry the
derivative on the balance sheet at its current fair value and recognize
subsequent changes in fair value in current period earnings. Unrealized gains
and losses on the discontinued hedges that were previously included in
Accumulated
Other Comprehensive Loss
will be
reclassified into earnings when the forecasted transaction occurs, or when
it is
not probable that it will occur. During the six months ended June 30, 2005,
$1.3
million of unrealized gain on derivatives previously designated as cash flow
hedges, was reclassified into Operating
Revenues - Nonutility
because
we determined that the anticipated hedged transaction was no longer likely
to
occur. SJI has elected to designate certain energy-related derivative
instruments as cash flow hedges, which protect against the price variability
of
our forecasted sales and purchases of natural gas. Based on the amount recorded
in Accumulated
Other Comprehensive Loss
at June
30, 2006, we expect $0.3 million to be recorded as a decrease in revenues in
the
next twelve months. As of June 30, 2006, hedges for future forecasted
transactions exist into 2007.
SJRG
manages its portfolio of purchases and sales, as well as natural gas in storage,
using a variety of instruments that include forward contracts, swap agreements,
options contracts and futures contracts. SJI measures the fair value of the
contracts and records these as Derivatives
— Energy Related Assets
or
Derivatives
— Energy Related Liabilities
on our
consolidated balance sheets. For those derivatives not designated as hedges,
we
recorded the net unrealized pre-tax loss of $(1.2) million, and $(2.0) million
in earnings during the three months ended June 30, 2006 and 2005, respectively,
which are included with realized gains and losses in Operating
Revenues — Nonutility.
For the
six months ended June 30, 2006 and 2005, we recorded the net unrealized pre-tax
gain of $3.8 and $2.1 million, respectively which are included with realized
gains and losses in Operating Revenues —
Nonutility.
SJI
presents revenues and expenses related to its energy trading activities on
a net
basis in Operating
Revenues — Nonutility
in our
consolidated statements of income consistent with Emerging Issues Task Force
(EITF) Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy Trading and Risk
Management Activities.” There is no effect on operating income or net income
from the above presentation.
From
time
to time we enter into interest rate derivatives and similar agreements to hedge
exposure to increasing interest rates with respect to our variable-rate debt.
We
have designated and account for these interest rate derivatives as cash flow
hedges. As of June 30, 2006, SJI’s active interest rate swaps were as follows:
Amount
|
|
|
Fixed
Interest
Rate
|
|
|
Start
Date
|
|
|
Maturity
|
|
|
Type
|
|
|
Obligor
|
|
$ 6,000,000
|
*
|
|
4.550
|
%
|
|
|
11/19/2001
|
|
|
12/01/2007
|
|
|
Taxable
|
|
|
Marina
|
|
$
3,900,000
|
|
|
4.795
|
%
|
|
|
12/01/2004
|
|
|
12/01/2014
|
|
|
Taxable
|
|
|
Marina
|
|
$ 8,000,000
|
|
|
4.775
|
%
|
|
|
11/12/2004
|
|
|
11/12/2014
|
|
|
Taxable
|
|
|
Marina
|
|
$ 20,000,000
|
|
|
4.080
|
%
|
|
|
11/19/2001
|
|
|
12/01/2011
|
|
|
Tax-exempt
|
|
|
Marina
|
|
$ 14,500,000
|
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
|
01/15/2026
|
|
|
Tax-exempt
|
|
|
Marina
|
|
$
500,000
|
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
|
01/15/2026
|
|
|
Tax-exempt
|
|
|
Marina
|
|
$
330,000
|
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
|
01/15/2026
|
|
|
Tax-exempt
|
|
|
Marina
|
|
$ 12,500,000
|
**
|
|
3.430
|
%
|
|
|
12/01/2006
|
|
|
02/01/2036
|
|
|
Tax-exempt
|
|
|
SJG
|
|
$ 12,500,000
|
**
|
|
3.430
|
%
|
|
|
12/01/2006
|
|
|
02/01/2036
|
|
|
Tax-exempt
|
|
|
SJG
|
|
$ 7,100,000
|
|
|
4.895
|
%
|
|
|
02/01/2006
|
|
|
02/01/2016
|
|
|
Taxable
|
|
|
Marina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Amount
reduced to $6.0 million on 12/01/05, and further reduces to $3.0
million
on 12/01/06
|
**
|
SJG
entered into these forward-starting swaps in anticipation of the
issuance
of $25.0 million of auction-rate bonds that were issued in April
2006.
|
|
|
The
differential to be paid or received as a result of these swap agreements is
accrued as interest rates change and is recognized as an adjustment to interest
expense. As of June 30, 2006 and December 31, 2005, the market values of these
swaps were $3.0 million and $(0.5) million, respectively, which represent the
amounts we would receive from (have to pay to) the counterparties to terminate
these contracts as of those dates. We include these balances on the consolidated
balance sheets under Derivatives
— Other.
As of
June 30, 2006 and December 31, 2005, we determined that the swaps were highly
effective; therefore, we recorded the changes in fair value of the swaps along
with the cumulative unamortized costs, net of taxes, in Accumulated
Other Comprehensive Loss.
We
determined the fair value of derivative instruments by reference to quoted
market prices of listed contracts, published quotations or quotations from
unrelated third parties.
Stock-Based
Compensation Plans—Under
the Amended and Restated 1997 Stock-Based Compensation Plan that was amended
and
restated by our Board of Directors and approved by our shareholders in April
2005, no more than 1,000,000 shares in the aggregate may be issued to SJI's
officers, non-employee directors and other key employees. The plan will
terminate on January 26, 2015, unless terminated earlier by the Board of
Directors. No options were granted or outstanding during the six months ended
June 30, 2006, and 2005. No stock appreciation rights have been issued under
the
plan. In the first six months of 2006, and 2005, we granted 42,982 and 38,316
restricted shares, respectively. Restricted shares vest over a 3-year period
and
are subject to SJI achieving certain performance targets as compared to a peer
group average. The actual amount of shares that are ultimately awarded is
dependent upon the final peer group average and may range from between 0% to
150% of the original share units granted.
On
January 1, 2006, SJI adopted FASB Statement No. 123(R), “Share-Based Payment”,
which revised FASB Statement No. 123, and superseded Accounting Principles
Board
(APB) Opinion No. 25, “Accounting for Stock Issued to Employees”. Statement No.
123(R) requires SJI to measure and recognize stock-based compensation expense
in
its financial statements based on the fair value at the date of grant for its
share-based awards, which currently include restricted stock awards containing
market and service conditions. In accordance with Statement No. 123(R), SJI
is
recognizing compensation expense over the requisite service period for: (i)
awards granted on, or after, January 1, 2006 and (ii) unvested awards previously
granted and outstanding as of January 1, 2006. In addition, SJI is estimating
forfeitures over the requisite service period when recognizing compensation
expense. These estimates can be adjusted to the extent to which actual
forfeitures differ, or are expected to materially differ, from such estimates.
As
permitted by Statement No. 123(R), SJI chose the modified prospective method
of
adoption; accordingly, financial results for the prior period presented were
not
retroactively adjusted to reflect the effects of this Statement. Under the
modified prospective application, this Statement applies to new awards and
to
awards modified, repurchased, or cancelled after the required effective date.
Compensation costs for the portion of awards for which the requisite service
has
not been rendered that are outstanding as of the required effective date shall
be recognized as the requisite service is rendered based on the grant-date
fair
value.
The
Company measures compensation expense related to restricted stock awards based
on the fair value of the awards at their date of grant. Compensation expense
is
recognized on a straight-line basis over the requisite three-year service period
for awards that ultimately vest, and is not adjusted based on the actual
achievement of performance goals. The Company estimated the fair value of
officers’ restricted stock awards on the date of grant using a Monte Carlo
simulation model.
The
following table summarizes the nonvested restricted stock awards outstanding
at
June 30, 2006 and the assumptions used to estimate the fair value of the awards
(adjusted for the June 2005 two-for-one stock split):
|
|
|
Grant
|
|
|
Shares
|
|
|
Fair
Value
|
|
|
Expected
|
|
|
Risk-Free
|
|
|
|
|
Date
|
|
|
Outstanding
|
|
|
Per
Share
|
|
|
Volatility
|
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
-
|
|
|
Jan. 2004
|
|
|
42,135
|
|
$
|
20.105
|
|
|
16.4%
|
|
|
2.4%
|
|
|
|
|
Jan.
2005
|
|
|
35,221
|
|
$
|
25.155
|
|
|
15.5%
|
|
|
3.4%
|
|
|
|
|
Jan.
2006
|
|
|
39,076
|
|
$
|
27.950
|
|
|
16.9%
|
|
|
4.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
-
|
|
|
Dec. 2003
|
|
|
4,560
|
|
$
|
19.738
|
|
|
-
|
|
|
-
|
|
|
|
|
Dec.
2004
|
|
|
5,220
|
|
$
|
24.955
|
|
|
-
|
|
|
-
|
|
|
|
|
Dec.
2005
|
|
|
6,340
|
|
$
|
29.970
|
|
|
-
|
|
|
-
|
|
Expected
volatility is based on the actual daily volatility of SJI’s share price over the
preceding 3-year period as of the valuation date. The risk-free interest rate
is
based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year
term of the Officers’ restricted shares. As notional dividend equivalents are
credited to the holders, which are reinvested during the three-year service
period, no reduction to the fair value of the award is required. As the
Directors’ restricted stock awards contain no performance conditions and
notional dividend equivalents are credited to the holder, which are reinvested
during the three-year service period, the fair value of these awards are equal
to the market value of shares on the date of grant.
The
following table summarizes the total compensation cost for the six months ended
June 30, 2006 and 2005 (in thousands):
|
|
2006
|
|
2005
|
|
Officers
|
|
|
|
$
|
459
|
|
$
|
936
|
|
|
|
Directors
|
|
|
|
|
66
|
|
|
50
|
|
|
|
Total
Cost
|
|
|
|
$
|
525
|
|
$
|
986
|
|
|
|
Capitalized
|
|
|
|
|
(57
|
)
|
|
(241
|
)
|
|
|
Net
Expense
|
|
|
|
$
|
468
|
|
$
|
745
|
|
|
|
As
of
June 30, 2006, there was $1.6 million of total unrecognized compensation cost
related to nonvested share-based compensation awards granted under the
restricted stock plans. That cost is expected to be recognized over a weighted
average period of 1.7 years.
Prior
to
the adoption of Statement No. 123 (R), SJI applied Statement No. 123, as
amended, which permitted the application of APB No. 25. In accordance with
APB
No. 25, SJI recorded compensation expense over the requisite service period
for
restricted stock based on the probable number of shares expected to be issued
and the market value of the Company’s common stock at the end of each reporting
period. As a result of SJI’s previous accounting treatment, there have been no
excess tax benefits recognized since the inception of the Plans.
The
adoption of Statement No. 123(R) resulted in a decrease in stock-based
compensation expense of $$14,654 for the six months ended June 30, 2006. This
change in expense would have had no impact on SJI’s Earnings Per Share or cash
flows for the year ended December 31, 2006.
The
following table summarizes information regarding restricted stock award activity
during the six months ended June 30, 2006:
|
|
Officers
*
|
|
Directors
*
|
|
|
|
|
|
Nonvested
Shares Outstanding, January 1, 2006
|
|
143,734
|
|
16,120
|
|
|
|
|
|
Granted
|
|
42,983
|
|
-
|
Vested**
|
|
(61,620
|
)
|
-
|
Cancelled/Forfeited
|
|
(8,665
|
)
|
-
|
|
|
|
|
|
Nonvested
Shares Outstanding, June 30, 2006
|
|
116,432
|
|
16,120
|
|
|
|
|
|
*
excludes accrued dividend equivalents.
|
|
|
|
|
**
actual shares awarded upon vesting, including dividend equivalents
and
|
adjustments for performance measures, totaled 101,009
shares.
|
During
the six months ended June 30, 2006 and 2005, SJI awarded 101,009 shares at
a
market value of $2.9 million and 74,574 shares at a market value of $2.0
million, respectively. The Company has a policy of issuing new shares to satisfy
its obligations under these plans (See Note 3); therefore, there are no cash
payment requirements resulting from the normal operation of this plan. However,
a change in control could result in such shares becoming nonforefeitable or
immediately payable in cash.
New
Accounting Pronouncement —
In
July
2006, the FASB issued Interpretation No. 48 “Uncertainty in Income Taxes” (FIN
48). This Interpretation provides guidance on the recognition and measurement
of
uncertain tax positions in the financial statements. The effective date of
FIN
48 is January 1, 2007; however, we do not anticipate its adoption to materially
affect SJI’s consolidated financial statements.
Regulatory
Assets & Liabilities—
Regulatory
Assets
at June
30, 2006 and December 31, 2005, consisted of the following items (in
thousands):
|
|
|
Years
Remaining
as
of
June
30, 2006
|
|
|
June
30,
2006
|
|
|
December
31,
2005
|
Environmental
Remediation Costs:
|
|
|
|
|
|
|
|
|
|
Expended
— Net
|
|
|
Various
|
|
$
|
12,860
|
|
$
|
9,350
|
Liability
for Future Expenditures
|
|
|
Not
Applicable
|
|
|
52,863
|
|
|
56,717
|
Income
Taxes — Flowthrough
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5
|
|
|
5,174
|
|
|
5,663
|
Deferred
Fuel Costs — Net
|
|
|
Various
|
|
|
18,562
|
|
|
21,237
|
Deferred
Asset Retirement Obligation Costs
|
|
|
Not
Applicable
|
|
|
20,498
|
|
|
19,986
|
Deferred
Postretirement Benefit Costs
|
|
|
7
|
|
|
2,457
|
|
|
2,646
|
Societal
Benefit Costs
|
|
|
Various
|
|
|
4,000
|
|
|
2,691
|
Premium
for Early Retirement of Debt
|
|
|
Various
|
|
|
1,613
|
|
|
1,694
|
Other
|
|
|
Not
Applicable
|
|
|
1,355
|
|
|
1,499
|
Total
Regulatory Assets
|
|
|
|
|
$
|
119,382
|
|
$
|
121,483
|
All
significant regulatory assets are separately identified above and are being
recovered through utility rate charges. SJG is currently permitted to recover
interest on its Environmental Remediation Costs and Societal Benefit Costs
while
the other assets are being recovered without a return on investment over the
period indicated. Some of the assets reflected within the above caption “Other”
are currently being recovered from ratepayers as approved by the BPU. Management
believes the remaining deferred costs are probable of recovery from ratepayers
through future utility rates.
Over/under
collections of gas costs are monitored through SJG’s BGSS mechanism. Net
undercollected gas costs are classified as a Regulatory
Asset and
net
overcollected gas costs are classified as a Regulatory
Liability.
Derivative contracts used to hedge our natural gas purchases are included in
the
BGSS, subject to BPU approval. The offset to the change in fair value of these
contracts is recorded as a component of the regulatory asset, Deferred Fuel
Costs - Net, if we are in a net undercollected position, or as a component
of
the regulatory liability, Deferred Gas Revenues - Net, if we are in a net
overcollected position. As of June 30, 2006, costs related to derivative
contracts increased Deferred Fuel Costs - Net by $18.3million. As of December
31, 2005, benefits related to derivative contracts reduced Deferred Fuel Costs
-
Net by $0.5 million.
Regulatory
Liabilities at June 30, 2006 and December 31, 2005 consisted of the following
items (in thousands):
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Excess
Plant Removal Costs
|
|
$
|
48,271
|
|
$
|
48,071
|
|
Overcollected
State Taxes
|
|
|
4,111
|
|
|
4,025
|
|
Other
|
|
|
2,777
|
|
|
1,906
|
|
Total
Regulatory Liabilities
|
|
$
|
55,159
|
|
$
|
54,002
|
|
Excess
Plant Removal Costs represent amounts accrued in excess of actual utility plant
removal costs incurred to date, which SJG has an obligation to either expend
or
return to ratepayers in future periods. All other regulatory liabilities are
subject to being returned to ratepayers in future rate proceedings.
Cash
and Cash Equivalents—
For
purposes of reporting cash flows, highly liquid investments with original
maturities of three months or less are considered cash
equivalents.
Reclassifications—
SJI
reclassified some previously reported amounts to conform with current period
classifications. We determined that certain realized hedge gains related to
our natural gas purchases were recorded as an offset to our inventory costs
as
of December 31, 2005. Accordingly, we increased Natural
Gas in Storage, average cost
by $4.2
million, decreased Deferred
Income Taxes — Net
in
Current Assets by $1.7 million and increased Accumulated
Other Comprehensive Loss
by $2.5
million as of December 31, 2005. We determined that certain customer accounts
receivable were in a credit position and accordingly, reclassified $3.1 million
included in Accounts
Receivable
as of
December 31, 2005 to Customer
Deposits and Credit Balances.
We also
determined that certain acquisitions of property and equipment made on account
were reflected as cash capital expenditures in the statement of cash flows,
and
have reduced cash flows used in investing activities with a corresponding
reduction in cash provided by operating activities of approximately $4.6 million
for the six months ended June 30, 2005. These amounts are considered immaterial
to the overall presentation of our consolidated financial
statements.
2. DISCONTINUED
OPERATIONS, AFFILIATIONS AND CONTROLLING INTERESTS:
DISCONTINUED
OPERATIONS — In 1996, Energy & Minerals, Inc. (EMI), an SJI subsidiary, sold
the common stock of The Morie Company, Inc. (Morie), its sand mining and
processing subsidiary. SJI conducts tests annually to estimate the environmental
remediation costs for properties owned by South Jersey Fuel, Inc. (SJF), an
EMI
subsidiary, from its previously operated fuel oil business. SJI reports the
environmental remediation activity related to these properties as discontinued
operations.
Summarized
operating results of the discontinued operations for the three and six months
ended June 30, were (in thousands):
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Loss
before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sand
Mining
|
$
|
(86
|
)
|
$
|
(259
|
)
|
|
$
|
(229
|
)
|
$
|
(471
|
)
|
Fuel
Oil
|
|
(11
|
)
|
|
(20
|
)
|
|
|
(123
|
)
|
|
(30
|
)
|
Income
Tax Benefits
|
|
34
|
|
|
97
|
|
|
|
123
|
|
|
175
|
|
Loss
from Discontinued Operations — Net
|
$
|
(63
|
)
|
$
|
(182
|
)
|
|
$
|
(229
|
)
|
$
|
(326
|
)
|
Earnings
Per Common Share from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations — Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
$
|
(0.002
|
)
|
$
|
(0.006
|
)
|
|
$
|
(0.008
|
)
|
$
|
(0.012
|
)
|
Affiliations—
SJI
and
Conectiv Solutions, LLC formed Millennium Account Services, LLC to provide
meter
reading services in southern New Jersey. SJE and GZA GeoEnvironmental, Inc
(GZA). formed AirLogics, LLC (AirLogics) to market a jointly developed air
monitoring system designed to assist companies involved in environmental cleanup
activities. On June 30, 2006, SJE sold its entire interest in AirLogics for
$1,450,000, resulting in an after-tax gain of $219,000. We account for our
investment in these affiliated companies under the equity method.
Controlling
Interests—
Marina
and DCO Energy, LLC (DCO) formed AC Landfill Energy, LLC (ACLE) to develop
and
install a 1,600-kilowatt methane-to-electric power generation system at a
county-owned landfill in Egg Harbor Township, NJ. Marina owns a 51% interest
in
ACLE and accounts for ACLE as a consolidated subsidiary. Commercial operation
of
the initial system began in March 2005. An additional 1,900-kilowatt system
is
under construction at the site and is expected to be operational in the third
quarter of 2006.
In
March
2005, Marina and DCO formed WC Landfill Energy, LLC (WCLE) to develop and
install a 3,800-kilowatt methane-to-electric power generation system at a
county-owned landfill in White Township, NJ. Marina owns a 51% interest in
WCLE
and accounts for WCLE as a consolidated subsidiary. Commercial operation of
the
plant is targeted to begin in the fall of 2006.
3. COMMON
STOCK:
SJI
has
60,000,000 shares of common stock authorized. Share-related information for
prior periods is reported on a retroactive basis reflecting the stock split,
which was completed on June 30, 2005, throughout this Report.
The
following shares were issued and outstanding:
|
|
|
June
30,
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
|
|
2005
|
|
Beginning
Balance, January 1
|
|
|
28,982,440
|
|
Beginning
Balance, January 1
|
|
|
27,759,936
|
|
New
Issues During Period:
|
|
|
|
|
New
Issues During Year:
|
|
|
|
|
Dividend
Reinvestment Plan
|
|
|
93,222
|
|
Dividend
Reinvestment Plan
|
|
|
1,141,590
|
|
Stock-Based
Compensation Plan
|
|
|
101,009
|
|
Stock-Based
Compensation Plan
|
|
|
80,914
|
|
Ending
Balance, June 30
|
|
|
29,176,671
|
|
Ending
Balance, December 31
|
|
|
28,982,440
|
|
We
credited the par value ($1.25 per share) of stock issued during the six months
ended June 30, 2006 and the year ended December 31, 2005 to Common
Stock.
We
credited the net excess over par value of approximately $3.1 million and $34.1
million, respectively, to Premium
on Common Stock.
Earnings
Per Common Share—
We
present basic EPS based on the weighted-average number of common shares
outstanding. EPS is presented in accordance with FASB Statement No. 128,
“Earnings Per Share,” which establishes standards for computing and presenting
basic and diluted EPS. The incremental shares required for inclusion in the
denominator for the diluted EPS calculation were 64,427 and 227,016 shares
for
the three months, and 65,938 and 226,215 shares for the six months ended June
30, 2006 and 2005, respectively. These shares relate to SJI’s restricted stock
as discussed below.
Dividend
Reinvestment Plan (DRP)—
Newly
issued shares of common stock offered through the DRP are issued directly by
SJI. As of June 30, 2006, SJI reserved 1,502,800 shares of authorized, but
unissued, common stock for future issuance to the DRP.
4. LONG-TERM
DEBT:
In
March
2006, Marina issued $16.4 million of tax-exempt, variable-rate bonds through
the
New Jersey Economic Development Authority (NJEDA), which mature in March 2036.
Proceeds of the bonds were used to finance the expansion of Marina’s Atlantic
City thermal energy plant. The interest rate on all but $1.1 million of the
bonds has been effectively fixed via interest rate swaps at 3.91% until January
2026. The variable interest rate on the $1.1 million portion of the bonds that
remain unhedged was 4.02% as of June 30, 2006.
In
April
2006, SJG issued $25.0 million of secured tax-exempt, auction-rate debt through
the NJEDA to finance infrastructure costs that qualify for tax-exempt financing.
The auction rate, which resets weekly, was set at 3.79% as of June 30, 2006.
In
anticipation of this transaction, SJG previously entered into forward-starting
interest rate swap agreements that effectively fixed the interest rate on this
debt at 3.43%, commencing December 1, 2006 through January 2036. The debt was
issued under SJG’s medium-term note program. An additional $115.0 million of
medium-term notes remains available for issuance under that
program.
5. FINANCIAL
INSTRUMENTS:
Restricted
Investments—
In
accordance with the terms of Marina’s and SJG’s loan agreements, we were
required to escrow unused proceeds pending approved construction expenditures.
As of June 30, 2006, the escrowed proceeds totaled $18.3 million. There were
no
escrowed proceeds as of December 31, 2005 as the related debt was issued during
2006.
SJRG
maintains a margin account with a national investment firm to support its risk
management activities. As of June 30, 2006 and December 31, 2005, the balance
of
this account was $11.2 million and $8.2 million, respectively, due to changes
in
the market value of outstanding contracts.
6. SEGMENTS
OF BUSINESS:
SJI
operates in several different operating segments. Gas Utility Operations (SJG)
consists primarily of natural gas distribution to residential, commercial and
industrial customers. Wholesale Gas Operations include SJRG’s activities. SJE is
involved in both retail gas and retail electric activities. Retail Gas and
Other
Operations include natural gas acquisition and transportation service business
lines. Retail Electric Operations consist of electricity acquisition and
transportation to commercial and industrial customers. On-Site Energy Production
consists of Marina’s thermal energy facility and other energy-related projects.
Appliance Service Operations includes SJESP’s servicing of appliances via the
sale of appliance service programs as well as on a time and materials basis,
and
the installation of residential and small commercial HVAC systems.
Information
about SJI's operations in different operating segments for the three and six
months ended June 30 is presented below (in thousands):
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
105,006
|
|
$
|
86,083
|
|
$
|
382,087
|
|
$
|
300,620
|
|
Wholesale
Gas Operations
|
|
|
6,297
|
|
|
3,282
|
|
|
20,646
|
|
|
14,842
|
|
Retail
Gas and Other Operations
|
|
|
34,709
|
|
|
41,060
|
|
|
93,772
|
|
|
115,547
|
|
Retail
Electric Operations
|
|
|
11,629
|
|
|
16,846
|
|
|
24,665
|
|
|
39,544
|
|
On-Site
Energy Production
|
|
|
5,002
|
|
|
5,196
|
|
|
11,492
|
|
|
10,566
|
|
Appliance
Service Operations
|
|
|
3,576
|
|
|
3,768
|
|
|
7,350
|
|
|
7,193
|
|
Corporate
and Services
|
|
|
3,020
|
|
|
509
|
|
|
6,190
|
|
|
1,049
|
|
Subtotal
|
|
|
169,239
|
|
|
156,744
|
|
|
546,202
|
|
|
489,361
|
|
Intersegment
Sales
|
|
|
(13,707
|
)
|
|
(2,705
|
)
|
|
(25,694
|
)
|
|
(6,752
|
)
|
Total
Operating Revenues
|
|
$
|
155,532
|
|
$
|
154,039
|
|
$
|
520,508
|
|
$
|
482,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
9,560
|
|
$
|
10,133
|
|
$
|
52,740
|
|
$
|
53,293
|
|
Wholesale
Gas Operations
|
|
|
4,458
|
|
|
2,141
|
|
|
9,527
|
|
|
6,841
|
|
Retail
Gas and Other Operations
|
|
|
(202
|
)
|
|
1,987
|
|
|
(180
|
)
|
|
2,290
|
|
Retail
Electric Operations
|
|
|
1,574
|
|
|
427
|
|
|
2,082
|
|
|
861
|
|
On-Site
Energy Production
|
|
|
1,486
|
|
|
1,889
|
|
|
3,507
|
|
|
3,513
|
|
Appliance
Service Operations
|
|
|
498
|
|
|
1,090
|
|
|
1,250
|
|
|
1,788
|
|
Corporate
and Services
|
|
|
139
|
|
|
(259
|
)
|
|
302
|
|
|
(445
|
)
|
Total
Operating Income
|
|
$
|
17,513
|
|
$
|
17,408
|
|
$
|
69,228
|
|
$
|
68,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
6,195
|
|
$
|
6,169
|
|
$
|
12,524
|
|
$
|
12,238
|
|
Wholesale
Gas Operations
|
|
|
2
|
|
|
3
|
|
|
5
|
|
|
7
|
|
Retail
Gas and Other Operations
|
|
|
3
|
|
|
3
|
|
|
5
|
|
|
6
|
|
Appliance
Services Operations
|
|
|
58
|
|
|
46
|
|
|
115
|
|
|
82
|
|
On-Site
Energy Production
|
|
|
461
|
|
|
455
|
|
|
922
|
|
|
901
|
|
Corporate
and Services
|
|
|
52
|
|
|
26
|
|
|
113
|
|
|
53
|
|
Discontinued
Operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Depreciation and Amortization
|
$
|
6,771
|
|
$
|
6,702
|
|
$
|
13,684
|
|
$
|
13,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
16,255
|
|
$
|
18,193
|
|
$
|
29,249
|
|
$
|
30,295
|
|
Wholesale
Gas Operations
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
-
|
|
Retail
Gas and Other Operations
|
|
|
5
|
|
|
-
|
|
|
5
|
|
|
3
|
|
Appliance
Service Operations
|
|
|
125
|
|
|
30
|
|
|
170
|
|
|
57
|
|
On-Site
Energy Production
|
|
|
6,715
|
|
|
7,652
|
|
|
9,460
|
|
|
13,043
|
|
Corporate
and Services
|
|
|
180
|
|
|
2
|
|
|
388
|
|
|
7
|
|
Discontinued
Operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Property Additions
|
|
$
|
23,280
|
|
$
|
25,877
|
|
$
|
39,275
|
|
$
|
43,405
|
|
|
|
|
|
|
|
|
|
June
30,
2006
|
|
December
31,
2005
|
|
|
|
|
|
Identifiable
Assets:
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
1,165,892
|
|
$
|
1,167,398
|
|
Wholesale
Gas Operations
|
|
|
115,499
|
|
|
124,922
|
|
Retail
Gas and Other Operations
|
|
|
34,899
|
|
|
50,880
|
|
Retail
Electric Operations
|
|
|
4,464
|
|
|
7,751
|
|
Appliance
Service Operations
|
|
|
13,260
|
|
|
13,624
|
|
On-Site
Energy Production
|
|
|
119,833
|
|
|
105,822
|
|
Discontinued
Operations
|
|
|
400
|
|
|
408
|
|
Subtotal
|
|
|
1,454,247
|
|
|
1,470,805
|
|
Corporate
and Services
|
|
|
73,679
|
|
|
70,379
|
|
Intersegment
Assets
|
|
|
(102,537
|
)
|
|
(99,472
|
)
|
Total
Identifiable Assets
|
|
$
|
1,425,389
|
|
$
|
1,441,712
|
|
7. REGULATORY
ACTIONS:
Base
Rates—
On
July
7, 2004, the BPU granted SJG a base rate increase of $20.0 million effective
July 8, 2004, which was predicated in part upon a 7.97% rate of return on rate
base that included a 10.0% return on common equity. SJG was also permitted
to
recover regulatory assets contained in its petition and to reduce its composite
depreciation rate from 2.9% to 2.4%.
Pending
Audit—
In
2004, the BPU commenced a competitive services audit and a management audit
that
included a focused review of SJG’s gas supply and purchasing practices. The BPU
is mandated by statute to conduct such audits at predetermined intervals. In
February 2006, the audit reports were released by the BPU for comments. The
recommendations contained in these audits have no material effect on SJG’s
financial statements.
Other
Regulatory Matters —
In
December 2004, the BPU approved the statewide funding of the NJCEP of $745.0
million for the years 2005 through 2008. Of this amount, SJG will be responsible
for approximately $25.4 million over the 4-year period. Amounts not yet expended
have been included in the Contractual Cash Obligations table included in Note
11.
In
February 2005, SJG filed notice with the BPU to provide for an $11.4 million
bill credit to customers. The bill credit was implemented in March 2005. In
June
2005, SJG made its annual BGSS filing with the BPU requesting a $17.1 million,
or 6.3% increase in gas cost recoveries in response to increasing wholesale
gas
costs. In August 2005, the BPU approved SJG’s requested increase, effective
September 1, 2005, on an interim basis.
In
October 2005 SJG filed a petition with the BPU to implement a Pipeline Integrity
Management Tracker (Tracker) along with the three other natural gas distribution
companies in New Jersey. The purpose of the Tracker is to recover costs to
be
incurred by SJG as a result of new federal regulations, which are aimed at
enhancing public safety and reliability. The regulations require that utilities
use a comprehensive analysis to assess, evaluate, repair and validate the
integrity of certain transmission lines in the event of a leak or failure.
The
New Jersey utilities are requesting approval of the Tracker since the new
regulations will result in ongoing incremental costs. We anticipate that a
large
portion of the incremental cost is dependent upon overall assessment results,
and therefore cannot be specifically predicted at this time.
In
November 2005, SJG made its annual SBC filing, requesting a $6.1 million
reduction in annual recoveries.
In
November 2005, SJG also filed a BGSS Motion for Emergent Rate Relief in
conjunction with the other natural gas utilities in New Jersey. This filing
was
necessary due to substantial increases in wholesale natural gas prices across
the country. In December 2005, the BPU approved an $85.7 million increase to
SJG’s rates, effective December 15, 2005, on an interim basis.
In
November 2005, SJG also made its annual TAC filing, requesting a $1.0 million
increase in annual revenues. The increase will recover the cash related to
the
net TAC deficiency resulting from warmer-than-normal weather for the 2003-2004
winter, partially offset by colder-than-normal weather for the 2004-2005 winter.
The 2003-2004 TAC was resolved as part of SJG’s global settlement, which was
approved by the BPU in March 2006.
In
December 2005, SJG made a filing proposing to implement a Conservation and
Usage
Adjustment (CUA) Clause, on a 5-year pilot basis. The primary purpose of the
CUA
is to promote conservation and to base SJG’s profit margin on its number of
customers rather than the amount of natural gas it distributes to its customers.
This structure will allow SJG to aggressively promote conservation programs
without negatively impacting its financial stability. The proposed CUA would
replace SJG’s existing TAC, but continue to protect customers and the Company
from significant temperature variations from normal.
In
March
2006, the BPU approved a global settlement, effective April 1, 2006, fully
resolving SJG’s September 2004 SBC filing, 2003-2004 TAC, 2004-2005 BGSS filing
and certain issues in the 2005-2006 BGSS filing. The net impact is a $4.4
million reduction to annual revenues; however, this reduction has no impact
on
net income as there will be a dollar-for-dollar reduction in expense. In
addition, a pilot storage incentive program was approved. This program began
during the second quarter of 2006 and will continue for three summer injection
periods through 2008. It is designed to provide SJG with the opportunity to
achieve BGSS price reductions and additional price stability. It will also
provide SJG with an opportunity to share in the storage-related gains and
losses, with 20% being retained by SJG, and 80% being credited to
customers.
In
June
2006, SJG made its annual BGSS filing with the BPU requesting a $19.7 million
decrease in gas cost recoveries in response to decreasing wholesale gas costs
and an $11.5 million benefit derived from the release of a storage facility
and
the liquidation of its low-cost base gas made available during the second
quarter. This represents a 4.6% rate reduction and is pending BPU approval
for
implementation on October 1, 2006.
In
July
2006, SJG made its annual USF filing, along with the state’s other electric and
gas utilities, proposing to increase annual statewide gas revenues to $115.3
million, an increase of $68.5 million. Under the proposal, SJG’s annual USF
revenues will increase to $13.0 million, which represents a $7.7 million
increase in annual USF revenues.
Filings
and petitions described above are still pending unless otherwise
indicated.
8. PENSION
& OTHER POSTRETIREMENT BENEFITS:
SJI
has
several defined benefit pension plans and other postretirement benefit plans.
The pension plans provide annuity payments to the majority of full-time, regular
employees upon retirement. Newly hired employees do not qualify for
participation in the defined benefit pension plans. New hires are eligible
to
receive an enhanced version of SJI’s defined contribution plan. Certain SJI
officers also participate in a non-funded supplemental executive retirement
plan
(SERP), a non-qualified defined benefit pension plan. The other postretirement
benefit plans provide health care and life insurance benefits to some
retirees.
The
BPU
authorized SJG to recover costs related to postretirement benefits other than
pensions under the accrual method of accounting consistent with FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SJG deferred amounts accrued prior to that authorization and are
amortizing them as allowed by the BPU. The unamortized balance of $2.5million
at
June 30, 2006 is recoverable in rates. SJG is amortizing this amount over 15
years, which started January 1998.
Net
periodic benefit cost for the three and six months ended June 30, 2006 and
2005
related to the employee and officer pension and other postretirement benefit
plans consisted of the following components (in thousands):
|
|
Pension
Benefits
|
|
|
|
Three
Months Ended
June
30,
|
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
2006
|
|
2005
|
|
Service
Cost
|
|
$
|
729
|
|
$
|
787
|
|
|
|
|
$
|
1,584
|
|
$
|
1,618
|
|
Interest
Cost
|
|
|
1,821
|
|
|
1,652
|
|
|
|
|
|
3,607
|
|
|
3,371
|
|
Expected
Return on Plan Assets
|
|
|
(2,354
|
)
|
|
(2,345
|
)
|
|
|
|
|
(4,618
|
)
|
|
(4,284
|
)
|
Amortization
of Loss and Other
|
|
|
628
|
|
|
837
|
|
|
|
|
|
1,421
|
|
|
1,500
|
|
Net
Periodic Benefit Cost
|
|
|
824
|
|
|
931
|
|
|
|
|
|
1,994
|
|
|
2,205
|
|
Capitalized
Benefit Costs
|
|
|
(238
|
)
|
|
(243
|
)
|
|
|
|
|
(637
|
)
|
|
(629
|
)
|
Net
Periodic Benefit Expense
|
|
$
|
586
|
|
$
|
688
|
|
|
|
|
$
|
1,357
|
|
$
|
1,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Postretirement Benefits
|
|
|
|
Three
Months Ended
June
30,
|
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
2006
|
|
2005
|
|
Service
Cost
|
|
$
|
198
|
|
$
|
45
|
|
|
|
|
$
|
396
|
|
$
|
454
|
|
Interest
Cost
|
|
|
471
|
|
|
374
|
|
|
|
|
|
942
|
|
|
1,078
|
|
Expected
Return on Plan Assets
|
|
|
(349
|
)
|
|
(390
|
)
|
|
|
|
|
(698
|
)
|
|
(799
|
)
|
Amortization
of Loss and Other
|
|
|
30
|
|
|
30
|
|
|
|
|
|
60
|
|
|
68
|
|
Net
Periodic Benefit Cost
|
|
|
350
|
|
|
59
|
|
|
|
|
|
700
|
|
|
801
|
|
Capitalized
Benefit Costs
|
|
|
(98
|
)
|
|
(28
|
)
|
|
|
|
|
(196
|
)
|
|
(249
|
)
|
Net
Periodic Benefit Expense
|
|
$
|
252
|
|
$
|
31
|
|
|
|
|
$
|
504
|
|
$
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
benefit costs reflected in the table above relate to SJG’s construction program.
Future
Benefit Payments—
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid during the following years (in
thousands):
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
2006
|
|
$
|
5,937
|
|
$
|
2,262
|
|
2007
|
|
|
6,028
|
|
|
2,490
|
|
2008
|
|
|
6,132
|
|
|
2,636
|
|
2009
|
|
|
6,256
|
|
|
2,733
|
|
2010
|
|
|
6,369
|
|
|
2,891
|
|
2011-2015
|
|
|
35,830
|
|
|
14,537
|
|
Contributions—
SJI
expects to make no contributions to its pension plan in 2006; however, changes
in future investment performance and discount rates may ultimately result in
a
contribution. SJG has a regulatory obligation to contribute approximately $3.6
million annually to its other postretirement benefit plans’ trusts, less costs
incurred directly by the company.
9. RETAINED
EARNINGS:
SJG
is
restricted as to the amount of cash dividends or other distributions that may
be
paid on its common stock by an order issued by the BPU in July 2004, that
granted SJG an increase in base rates. Per the order, SJG is required to
maintain total common equity of no less than $289.2 million. SJG’s total common
equity balance was $360.7 million at June 30, 2006.
Various
loan agreements also contain potential restrictions regarding the amount of
cash
dividends or other distributions that SJG may pay on its common stock. As of
June 30, 2006, SJG’s loan restrictions did not affect the amount that may be
distributed from either SJG’s or SJI’s retained earnings.
10. UNUSED
LINES OF CREDIT:
Bank
credit available to SJI totaled $266.0 million at June 30, 2006, of which $164.9
million, inclusive of $20.3 million of letters of credit, was used. Those bank
facilities consist of a $100.0 million revolving credit facility and $76.0
million of uncommitted bank lines available to SJG; and a $60.0 million
revolving credit facility and $30.0 million of uncommitted bank lines available
to SJI. On August 3, 2006, SJG replaced the existing revolving credit with
a new
$100.0 million revolver that expires in August 2011. SJI is presently working
with all of its banks to also extend SJI’s existing revolving credit from August
2007 through August 2011. The revolving credit facilities contain certain
financial covenants measured on a quarterly basis. SJI and SJG were in
compliance with these covenants as of June 30, 2006. Borrowings under these
credit facilities are at market rates. The weighted-average borrowing cost,
which changes daily, was 5.95% and 3.81% at June 30, 2006 and 2005,
respectively. We maintain demand deposits with lending banks on an informal
basis and they do not constitute compensating balances.
11. COMMITMENTS
AND CONTINGENCIES:
Contractual
Cash Obligations—
The
following table summarizes our contractual cash obligations and their applicable
payment due dates as of June 30, 2006 (in thousands):
|
|
|
|
Up
to
|
|
Years
|
|
Years
|
|
More
than
|
|
Contractual
Cash Obligations
|
|
Total
|
|
1
Year
|
|
2
& 3
|
|
4
& 5
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
$
|
360,496
|
|
$
|
2,363
|
|
$
|
211
|
|
$
|
10,237
|
|
$
|
347,685
|
|
Interest
on Long-Term Debt
|
|
|
312,591
|
|
|
20,411
|
|
|
40,424
|
|
|
40,092
|
|
|
211,664
|
|
Operating
Leases
|
|
|
1,118
|
|
|
409
|
|
|
618
|
|
|
91
|
|
|
-
|
|
Construction
Obligations
|
|
|
109,745
|
|
|
39,916
|
|
|
69,829
|
|
|
-
|
|
|
-
|
|
Commodity
Supply Purchase Obligations
|
|
|
574,831
|
|
|
292,360
|
|
|
169,086
|
|
|
47,169
|
|
|
66,216
|
|
New
Jersey Clean Energy Program
|
|
|
16,770
|
|
|
5,270
|
|
|
11,500
|
|
|
-
|
|
|
-
|
|
Other
Purchase Obligations
|
|
|
17,580
|
|
|
8,487
|
|
|
8,193
|
|
|
900
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contractual Cash Obligations
|
|
$
|
1,393,131
|
|
$
|
369,216
|
|
$
|
299,861
|
|
$
|
98,489
|
|
$
|
625,565
|
|
Expected
environmental remediation costs and asset retirement obligations are not
included in the table above due to the subjective nature of such costs and
timing of anticipated payments. As a result, the total obligation cannot be
calculated. Additionally, future pension contributions are not included in
the
table as contributions vary from year-to-year based on investment performance
and discount rates. SJG’s regulatory obligation to contribute to SJG’s
postretirement benefit plans’ trust, as discussed in Note 8, is also not
included as its duration is indefinite.
Gas
Supply Contracts—
In
the
normal course of business, SJG has entered into long-term contracts for natural
gas supplies, firm transportation and gas storage service. The earliest that
any
of these contracts expires is October 2007. The transportation and storage
service agreements between SJG and its interstate pipeline suppliers were made
under Federal Energy Regulatory Commission approved tariffs. SJG's cumulative
obligation for demand charges and reservation fees paid to suppliers for these
services is approximately $4.7million per month, which are recovered on a
current basis through the BGSS.
Pending
Litigation—
SJI
is
subject to claims arising in the ordinary course of business and other legal
proceedings. We accrue liabilities related to these claims when we can determine
the amount or range of amounts of probable settlement costs. SJI has been named
in, among other actions, certain product liability claims related to our former
sand mining subsidiary. Management does not currently anticipate the disposition
of any known claims to have a material adverse effect on SJI’s financial
position, results of operations or liquidity.
Union
Contract—
Unionized personnel represent 61% of our workforce at June 30, 2006 and are
operating under agreements that run through at least January 2008.
Parental
Guarantees—
As
of
June 30, 2006, SJI had issued $287.6 million of parental guarantees on behalf
of
its subsidiaries. Of this total, $236.5 million expire within one year, $5.0
million expire between one and two years and $46.1 million have no expiration
date. The vast majority of these guarantees were issued to guarantee payment
to
third parties with whom our subsidiaries have commodity supply contracts. These
contracts contain netting provisions, which permit us to net the ultimate cash
payment for monthly buys and sells from/to counterparties. As of June 30, 2006,
these guarantees support future firm commitments and $33.5 million of the
Accounts
Payable
recorded
on our consolidated balance sheet. As part of our risk management policy, we
also require parental guarantees from trading counterparties as applicable.
These arrangements are typical in our industry. SJI has also issued several
parental guarantees totaling $18.3 million related to Marina’s construction and
operating activities.
Standby
Letters of Credit—
As
of
June 30, 2006, SJI provided $62.3 million of standby letters of credit from
commercial banks supporting the variable-rate demand bonds issued through the
New Jersey Economic Development Authority to finance Marina’s thermal plant
project. The agreements under which the letters of credit were issued, contain
certain financial covenants measured on a quarterly basis. SJI was in compliance
with these covenants as of June 30, 2006.
Also,
as
of June 30, 2006, SJI has five additional letters of credit outstanding totaling
$3.3 million. Two of these letters were posted to different utilities and two
more were posted to the PJM Interconnection to enable SJE to market retail
electricity. The remaining letter was posted related to ACLE’s construction
activity.
Environmental
Remediation Costs—
SJI
incurred and recorded costs for environmental cleanup of 12 sites where SJG
or
its predecessors operated gas manufacturing plants. SJG stopped manufacturing
gas in the 1950s. SJI and some of its nonutility subsidiaries also recorded
costs for environmental cleanup of sites where SJF previously operated a fuel
oil business and Morie maintained equipment, fueling stations and
storage.
SJI
successfully entered into settlements with all of its historic comprehensive
general liability carriers regarding the environmental remediation expenditures
at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance Policy
limiting the amount of remediation expenditures that SJG will be required to
make at 11 of its sites. This Policy will be in force until 2024 at 10 sites
and
until 2029 at one site. The future cost estimates discussed hereafter are not
reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance
Policy. The Policy is limited to an aggregate amount of $50.0 million, of which
SJG has received $8.2 million through June 30, 2006.
Since
the
early 1980s, SJI accrued environmental remediation costs of $166.0 million,
of
which $109.2 million was spent as of June 30, 2006.
The
following table details the amounts expended and accrued for SJI’s environmental
remediation for the six months ended June 30, 2006 and the year ended December
31, 2005 (in thousands):
|
|
Six
Months
Ended
June 30,
2006
|
|
Year
Ended
December
31,
2005
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
60,654
|
|
$
|
54,991
|
|
Accruals
and Adjustments
|
|
|
1,359
|
|
|
11,791
|
|
Expenditures
|
|
|
(4,538
|
)
|
|
(6,128
|
)
|
Insurance
Recoveries
|
|
|
(689
|
)
|
|
-
|
|
Ending
Balance
|
|
$
|
56,786
|
|
$
|
60,654
|
|
The
balances are segregated between current and noncurrent on the consolidated
balance sheets under the captions Current
Liabilities
and
Deferred
Credits and Other Noncurrent Liabilities.
With
the
assistance of consulting firms, we estimate that undiscounted future costs
to
clean up SJG's sites will range from $52.9million to $200.4 million. SJG
recorded the lower end of this range, $52.9 million, as a liability because
a
single reliable estimation point is not feasible due to the amount of
uncertainty involved in the nature of projected remediation efforts and the
long
period over which remediation efforts will continue. Four of SJG’s sites
comprise a significant portion of these estimates, ranging from a low of $32.7
million and a high of $124.2 million. Recorded amounts include estimated
costs based on projected investigation and remediation work plans using existing
technologies. Actual costs could differ from the estimates due to the long-term
nature of the projects, changing technology, government regulations and
site-specific requirements. Significant risks surrounding these estimates
include unforeseen market price increases for remedial services, property owner
acceptance of remedy selection, regulatory approval of selected remedy and
remedial investigative findings.
The
remediation efforts at SJG’s four most significant sites include the
following:
Site
1 -
The remedial selection process is underway for this site. Once complete, a
remedial action work plan will be submitted to the New Jersey Department of
Environmental Protection (NJDEP) for approval. Remaining steps to remediate
include remedy selection, regulatory approval and remedy implementation for
impacted soil, groundwater, and river sediments as well as acceptance of the
selected remedy by affected property owners.
Site
2 -
Various remedial investigation and action activities, such as completed and
approved interim remedial measures and conceptual remedy selection, are ongoing
at this site. Remaining steps to remediate include remedy selection, regulatory
approval, and implementation for the remaining impacted soil, groundwater,
and
stream sediments.
Site
3 -
Remedial investigative activities are ongoing at this site. Remaining steps
to
remediate include completing the remedial investigation of impacted soil and
groundwater in preparation for selecting the appropriate action and
implementation gaining regulatory and property owner approval of the selected
remedy.
Site
4 -
The NJDEP has approved the selected remedy to address impacted soil and
groundwater at this site. Remaining steps to remediate include bidding,
implementation, and ongoing operation and maintenance of the selected
remedy.
SJG
has
two regulatory assets associated with environmental costs. The first asset,
Environmental
Remediation Cost: Expended — Net,
represents what was actually spent to clean up former gas manufacturing plant
sites. These costs meet the requirements of Statement No. 71. The BPU allows
SJG
to recover expenditures through the RAC. The other asset, Environmental
Remediation Cost: Liability for Future Expenditures,
relates
to estimated future expenditures determined under the guidance of FASB Statement
No. 5, "Accounting for Contingencies." We recorded this amount, which relates
to
former manufactured gas plant sites, as a regulatory asset under Statement
No.
71 with the corresponding amounts reflected on the consolidated balance sheets
under Current
Liabilities
and
Deferred
Credits and Other Noncurrent Liabilities.
The
BPU's intent, evidenced by current practice, is to allow SJG to recover the
deferred costs over 7-year periods after they are spent. As of June 30, 2006,
we
reflected SJG's unamortized expended remediation costs of $12.9 million on
the
consolidated balance sheet under Regulatory
Assets.
Since
implementing the RAC in 1992, SJG has recovered $45.8 million through
rates.
With
Morie's sale, EMI assumed responsibility for environmental liabilities estimated
between $2.8 million and $8.8 million. The information available on these
sites
is sufficient only to establish a range of probable liability and no point
within the range is more likely than any other. Therefore, EMI has accrued
the
lower end of the range. Changes in the accrual are included in the statements
of
consolidated income under Loss
from Discontinued Operations — Net.
SJI
and
SJF estimated their potential exposure for the future remediation of four
sites
where fuel oil operations existed years ago. Estimates for these sites range
from $1.2 million to $4.9 million. We recorded the lower end of this range
on
the 2006 consolidated balance sheet under Current
Liabilities
and
Deferred
Credits and Other Noncurrent Liabilities
as of
June 30, 2006.
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (Unaudited)
Overview—
South
Jersey Industries, Inc. (SJI) is an energy services holding company that
provides a variety of products and services through the following wholly owned
subsidiaries:
South
Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributed
natural gas in the seven southernmost counties of New Jersey to 325,169
customers at June 30, 2006, compared with 316,426 customers at June 30, 2005.
SJG also:
• sells
natural gas and pipeline transportation capacity (off-system sales) on a
wholesale basis to various customers on the interstate pipeline system;
and
• transports
natural gas purchased directly from producers or suppliers for its own sales
and
for some of its customers.
SJI
Services, LLC (SJIS) was established January 1, 2006, for the purpose of
providing services to SJI and its other subsidiaries such as information
technology, human resources, government relations, corporate communications,
materials purchasing, fleet management and insurance.
South
Jersey Energy Solutions, LLC (SJES) was established January 1, 2006 as a direct
subsidiary for the purpose of serving as a holding company for all of SJI’s
nonutility businesses. The following businesses are wholly owned subsidiaries
of
SJES:
1)
South Jersey Energy Company (SJE) acquires and markets natural gas and
electricity to retail end users and provides total energy management services
to
commercial and industrial customers. SJE also marketed an air quality monitoring
system through AirLogics, LLC (AirLogics). SJE and GZA GeoEnvironmental, Inc.
(GZA), an environmental consulting firm, each had a 50% equity interest in
AirLogics. On June 30, 2006, SJE sold its entire interest in AirLogics to
GZA.
2)
South Jersey Resources Group, LLC (SJRG) markets wholesale natural gas storage,
commodity and transportation in the mid-Atlantic and southern states. SJRG
also
conducts price-risk management activities for itself, SJG and SJE by entering
into a variety of physical and financial transactions including forward
contracts, swap agreements, option contracts and futures contracts.
3)
Marina Energy LLC (Marina) develops and operates energy-related projects.
Marina's largest project provides cooling, heating and hot water to the Borgata
Hotel Casino & Spa in Atlantic City. Marina’s most recent projects include
two landfill gas-fired electricity production facilities. Marina owns a 51%
equity interest in AC Landfill Energy, LLC (ACLE). ACLE was formed with DCO
Energy, LLC to develop and install a 1,600-kilowatt methane-to-electric power
generation system at a county-owned landfill in Egg Harbor Township, NJ.
Commercial operation of the initial system began in March 2005. An additional
1,900-kilowatt system is under construction at the site and is expected to
be
operational in the third quarter of 2006. Marina also owns a 51% equity interest
in WC Landfill Energy, LLC (WCLE). WCLE was formed with DCO to develop and
install a 3,800-kilowatt methane-to-electric power generation system at a
county-owned landfill in White Township, NJ. Commercial operation of the plant
is targeted to begin in the fall of 2006.
4)
South Jersey Energy Service Plus, LLC (SJESP) installs residential and small
commercial HVAC systems, provides plumbing services and services appliances
via
the sale of appliance service programs as well as on a time and materials basis
in southern New Jersey.
SJES
also
has a joint venture investment with Conectiv Solutions, LLC in Millennium
Account Services, LLC (Millennium). Millennium provides meter reading services
to SJG and Atlantic City Electric Company in southern New
Jersey.
Forward-Looking
Statements and Risk Factors—
Certain
statements contained in this Quarterly Report may qualify as “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements other than
statements of historical fact included in this Report should be considered
forward-looking statements made in good faith and are intended to qualify for
the safe harbor from liability established by the Private Securities Litigation
Reform Act of 1995. Words such as “anticipate”, “believe”, “expect”, “estimate”,
“forecast”, “goal”, “intend”, “objective”, “plan”, “project”, “seek”, “strategy”
and similar expressions are intended to identify forward-looking statements.
Such forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
in the statements. These risks and uncertainties include, but are not limited
to, the following: general economic conditions on an international, national,
state and local level; weather conditions in our marketing areas; changes in
commodity costs; changes in the availability of natural gas; “non-routine” or
“extraordinary” disruptions in our distribution system; regulatory, legislative
and court decisions; competition; the availability and cost of capital; costs
and effects of legal proceedings and environmental liabilities; the failure
of
customers or suppliers to fulfill their contractual obligations; and changes
in
business strategies.
A
discussion of these and other risks and uncertainties may be found in the
Company’s Form 10-K and Annual Report for the year ended December 31, 2005 and
in other filings made by us with the Securities and Exchange Commission. These
cautionary statements should not be construed by you to be exhaustive and they
are made only as of the date of this Quarterly Report on Form 10-Q, or in any
document incorporated by reference, at the date of such document. While SJI
believes these forward-looking statements to be reasonable, there can be no
assurance that they will approximate actual experience or that the expectations
derived from them will be realized. Further, SJI undertakes no obligation to
update or revise any of its forward-looking statements, whether as a result
of
new information, future events or otherwise.
CRITICAL
ACCOUNTING POLICIES —
Estimates
and Assumptions—
As
described in the notes to our consolidated financial statements, management
must
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related disclosures. Actual results could
differ from those estimates. Five types of transactions presented in our
consolidated financial statements require a significant amount of judgment
and
estimation. These relate to regulatory accounting, energy derivatives,
environmental remediation costs, pension and other postretirement employee
benefit costs, and revenue recognition. A discussion of these estimates and
assumptions may be found in our Form 10-K for the year ended December 31,
2005.
New
Accounting Pronouncements—
See
detailed discussions concerning New Accounting Pronouncements and their impact
on SJI in Note 1 to the consolidated financial statements.
Temperature
Adjustment Clause—
The
BPU-approved Temperature Adjustment Clause (TAC) is designed to mitigate the
effect of variations in heating season temperatures from historical norms.
While
SJG records the revenue and earnings impacts of TAC adjustments as incurred,
cash inflows or outflows directly attributable to TAC adjustments generally
do
not begin until the next clause year. Each TAC year begins October 1 and ends
May 31 of the subsequent year. The TAC increased (decreased) SJG’s net income by
$1.3 million and $0.7million for the three months and $4.9 million and $(0.1)
million for the six months ended June 30, 2006 and 2005, respectively. Weather
during the second quarter of 2006 was 31.6% warmer than the same period last
year, and 27.0% warmer than the 20-year TAC average. Weather during the first
six months of 2006 was 18.8% warmer than the same period last year, and 13.9%
warmer than the 20-year TAC average. Due to significantly warmer weather during
the 2005-2006 winter season, the deferred amount due from the ratepayers as
of
June 30, 2006 for TAC adjustments was $9.1 million as compared to $1.1 million
as of June 30, 2005.
Regulatory
Actions —
See
detailed discussion concerning Regulatory Actions in Note 7 to the consolidated
financial statements.
Environmental
Remediation—
See
detailed discussion concerning Environmental Remediation in Note 11 to the
consolidated financial statements.
Customer
Choice Legislation—
All
residential natural gas customers in New Jersey can choose their gas supplier
under the terms of the “Electric
Discount and Energy Competition Act of 1999.”
As of
June 30, 2006, approximately 16,500 of SJG’s residential customers chose a
natural gas commodity supplier other than SJG. The number of such customers
fell
from approximately 82,800 at June 30, 2005, as marketers were unable to offer
natural gas at prices competitive with those available under regulated utility
tariffs during the later part of 2005, due to unfavorable market conditions.
However, during the first quarter of 2006 marketers began adding customers
through new offers. Customers purchasing natural gas from providers other than
SJG are charged for gas costs by the marketer, not SJG. While customer choice
can significantly affect utility revenues and gas costs, it does not affect
SJG’s earnings or financial condition (See Results of Operations). The BPU
continues to allow for full recovery of prudently incurred natural gas costs
through the Basic Gas Supply Service (BGSS) Clause as well as other costs of
service, including deferred costs, through tariffs.
For
a
period of several years, marketers had successfully attracted gas commodity
customers by offering natural gas at prices competitive with those available
under regulated utility tariffs. More recently, marketers have found it
increasingly difficult to compete with the utility under changing market
conditions (See caption Operating Revenues - Utility). SJE responded to these
difficult market conditions by returning all of their approximately 69,000
residential gas customers to the utility at the end of the third quarter of
2005. SJE began marketing a new residential offer that is more reflective of
current market conditions during the first quarter of 2006.
RESULTS
OF OPERATIONS:
Operating
Revenues—
Utility—
Revenues, net of intercompany transactions, increased $10.3 million and $67.7
million for the three and six months periods ended June 30, 2006, respectively,
compared with the same periods last year primarily due to four factors. First,
SJG added 8,743 customers during the 12-month period ended June 30, 2006, which
represents a 2.8% increase in total customers. Second, 80% of the residential
customers and 20% of the commercial customers purchasing their gas from sources
other than SJG migrated back to utility sales service during the 12-month period
ended June 30, 2006. The total number of transportation customers decreased
from
82,829 at June 30, 2005, to only 16,475 at June 30, 2006, as third party
marketers found it difficult to compete with SJG’s BGSS rates under current
market conditions. The migration of customers from transportation service back
to sales service has a direct impact on utility revenues as charges for gas
costs are included in sales revenues and not in transportation revenues.
However, since gas costs are passed on directly to customers without any profit
margin added by SJG, the change in customer utilization of gas marketers did
not
impact SJG’s earnings. Third, SJG was granted two BGSS rate increases as a
result of substantial increases in wholesale natural gas prices across the
country. The first increase in September 2005, resulted in a 4.4% increase
in
the average residential customer’s bill and 5.0% in the average
commercial/industrial customer’s bill. The second was effective in December
2005, and resulted in a 24.3% increase in the average residential customer’s
bill and 28.4% in the average commercial/industrial customer’s bill. However, as
previously stated, since gas costs are passed on directly to customers without
any profit margin added by SJG, the BGSS rate increases did not impact SJG’s
profitability. Fourth, SJG experienced an increase in revenues from Off-System
Sales (OSS) as a result of higher sales volume in the second quarter of 2006
as
compared with the same period in 2005. The increase in volume is due primarily
to market conditions which favored off-system sales as opposed to capacity
release. An off-system sale requires the purchase and sale of natural gas
whereas a capacity release does not include the cost of the natural gas. As
a
result, off-system sales creates higher revenue than does capacity release.
Partially offsetting the positive factors noted above were lower customer
utilization rates experienced during the three and six months ended June 30,
2006, compared with the same periods in 2005, primarily due to the impact of
higher natural gas prices on customer usage.
Total
gas
throughput decreased 16.5% to 29.2 billion cubic feet (Bcf) for the three months
ended June 30, 2006, compared with the same period in 2005. Total gas throughput
decreased 17.2% to 67.9 Bcf for the six months ended June 30, 2006, compared
with the same period in 2005. The lower throughput was primarily due to
significantly warmer weather experienced during 2006, as previously discussed
under the TAC.
The
following table is a comparison of utility operating revenue and throughput
for
the three and six months ended June 30:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Operating
Revenues (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
46,948
|
|
$
|
29,943
|
|
$
|
213,384
|
|
$
|
127,114
|
|
Commercial
|
|
|
12,844
|
|
|
10,234
|
|
|
64,253
|
|
|
45,438
|
|
Industrial
|
|
|
948
|
|
|
566
|
|
|
2,962
|
|
|
2,144
|
|
Cogeneration
& Electric Generation
|
|
|
2,303
|
|
|
3,813
|
|
|
3,360
|
|
|
5,139
|
|
Firm
Transportation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
781
|
|
|
5,440
|
|
|
2,143
|
|
|
20,926
|
|
Commercial
|
|
|
2,252
|
|
|
2,514
|
|
|
6,473
|
|
|
8,421
|
|
Industrial
|
|
|
2,992
|
|
|
3,245
|
|
|
6,262
|
|
|
6,564
|
|
Cogeneration
& Electric Generation
|
|
|
11
|
|
|
60
|
|
|
11
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Firm Revenues
|
|
|
69,079
|
|
|
55,815
|
|
|
298,848
|
|
|
215,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interruptible
|
|
|
370
|
|
|
424
|
|
|
769
|
|
|
839
|
|
Interruptible
Transportation
|
|
|
358
|
|
|
516
|
|
|
992
|
|
|
1,115
|
|
Off-System
|
|
|
33,101
|
|
|
26,334
|
|
|
74,744
|
|
|
75,239
|
|
Capacity
Release & Storage
|
|
|
1,699
|
|
|
2,414
|
|
|
6,001
|
|
|
6,606
|
|
Other
|
|
|
399
|
|
|
580
|
|
|
733
|
|
|
970
|
|
Intercompany
Sales
|
|
|
(9,899
|
)
|
|
(1,324
|
)
|
|
(17,459
|
)
|
|
(3,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
$
|
95,107
|
|
$
|
84,759
|
|
$
|
364,628
|
|
$
|
296,926
|
|
Throughput
(MMcf):
|
|
|
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
2,439
|
|
|
2,287
|
|
|
12,213
|
|
|
10,591
|
|
Commercial
|
|
|
903
|
|
|
907
|
|
|
4,182
|
|
|
4,260
|
|
Industrial
|
|
|
28
|
|
|
26
|
|
|
128
|
|
|
126
|
|
Cogeneration
& Electric Generation
|
|
|
215
|
|
|
422
|
|
|
244
|
|
|
487
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
135
|
|
|
1,035
|
|
|
447
|
|
|
4,839
|
|
Commercial
|
|
|
745
|
|
|
888
|
|
|
2,339
|
|
|
3,167
|
|
Industrial
|
|
|
3,269
|
|
|
3,912
|
|
|
6,629
|
|
|
8,051
|
|
Cogeneration
& Electric Generation
|
|
|
10
|
|
|
85
|
|
|
12
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Firm Throughput
|
|
|
7,744
|
|
|
9,562
|
|
|
26,194
|
|
|
31,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interruptible
|
|
|
33
|
|
|
41
|
|
|
64
|
|
|
79
|
|
Interruptible
Transportation
|
|
|
812
|
|
|
741
|
|
|
1,784
|
|
|
1,596
|
|
Off-System
|
|
|
4,518
|
|
|
3,467
|
|
|
8,636
|
|
|
10,130
|
|
Capacity
Release & Storage
|
|
|
16,090
|
|
|
21,150
|
|
|
31,195
|
|
|
38,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Throughput
|
|
|
29,197
|
|
|
34,961
|
|
|
67,873
|
|
|
81,926
|
|
Operating
Revenues — Nonutility—
Combined revenues for SJI’s nonutility businesses, net of intercompany
transactions, decreased by $8.9 million and $29.8 million for the three and
six
months ended June 30, 2006, respectively, compared with the same periods of
2005.
SJE’s
revenues from retail gas decreased by $6.2 million and $22.6 million for the
three and six months ended June 30, 2006, respectively, compared with the same
periods of 2005, due mainly to a decline in the number of residential and
commercial gas customers, resulting from unfavorable market conditions. As
the
market price for gas has been above the price charged by SJG to its customers,
SJE returned all of its approximately 69,000 residential customers to the
utility in the third quarter of 2005 and only recently resumed its residential
gas marketing efforts. The loss of residential and commercial sales revenue
was
partially offset by higher gas prices.
SJE’s
revenues from retail electricity decreased by $5.4 million and $14.9 million
for
the three and six months ended June 30, 2006, compared with the same periods
of
2005, due mainly to the loss of revenues from a large school contract that
was
not renewed in May 2005. This decrease was partially offset by higher
electricity commodity prices and the addition of several industrial
customers.
SJRG’s
revenues increased by $3.1 million and $6.0 million for the three and six months
ended June 30, 2006, respectively, compared with the same periods of 2005,
due
mainly to higher gas prices. This increase was partially offset by lower sales
volume attributable to SJE’s turnback of their residential customers to SJG in
September 2005.
Cost
of Sales — Utility—
Cost
of
sales, net of intercompany transactions, increased $12.4 million and $71.4
million during the three and six month periods ended June 30, 2006,
respectively, compared with the same periods in 2005. This increase resulted
from growth in SJG’s total customer base, the impact of the migration of
customers from transportation service back to sales service and increased gas
costs now being recovered through rates. Changes in the unit cost of gas sold
to
utility ratepayers do not always directly affect cost of sales. SJG defers
fluctuations in gas costs to ratepayers not reflected in current rates to future
periods under a BPU-approved Basic Gas Supply Service (BGSS) price structure.
As
a result of the two BGSS rate increases in 2005, discussed under Operating
Revenues - Utility, SJG was able to recover and recognize some of the increase
in gas costs experienced during the later part of 2005 and the first quarter
of
2006.
Gas
supply sources include contract and open-market purchases. SJG secures and
maintains its own gas supplies to serve its sales customers. SJG does not
anticipate any difficulty renewing or replacing expiring contracts under
acceptable terms and conditions.
Cost
of Sales — Nonutility—
Combined cost of sales for SJI’s nonutility businesses, net of intercompany
transactions, decreased $9.6 million and $30.7 million for the three and six
months ended June 30, 2006, respectively, compared with the same periods of
2005.
SJE’s
cost of retail gas sales decreased by $4.0 million and $18.3 million for the
three and six months ended June 30, 2006, respectively, compared with the same
periods of 2005, due mainly to lower volumes of gas sold caused by the loss
of
residential and commercial customers, which was partially offset by higher
gas
commodity prices. SJE’s cost of retail electricity sales decreased $6.3 million
and $16.0 million for the three and six months ended June 30, 2006,
respectively, compared with the same periods of 2005, due mainly to the
expiration of the school board contract in May 2005. This decrease was partially
offset by higher electricity commodity prices and the addition of several
industrial customers.
SJRG’s
cost of sales increased $0.5 million and $2.6 million for the three and six
months ended June 30, 2006, respectively, compared with the same periods of
2005, mainly due to higher gas prices.
Operations
Expense —
A
summary of net changes in operations expense, for the three and six months
ended
June 30 follows (in thousands):
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
2006
vs. 2005
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
Utility
|
|
$
|
(1,419
|
)
|
$
|
(2,877
|
)
|
Nonutility:
|
|
|
|
|
|
|
|
Wholesale
Gas
|
|
|
229
|
|
|
486
|
|
Retail
Gas and Other
|
|
|
(39
|
)
|
|
(1,211
|
)
|
Retail
Electricity
|
|
|
(91
|
)
|
|
(75
|
)
|
On-Site
Energy Production
|
|
|
331
|
|
|
728
|
|
Appliance
Service
|
|
|
15
|
|
|
(8
|
)
|
Total
Nonutility
|
|
|
445
|
|
|
(80
|
)
|
Corporate
and Services
|
|
|
1,916
|
|
|
3,842
|
|
Intercompany
Eliminations
|
|
|
(2,331
|
)
|
|
(4,804
|
)
|
Total
Operations
|
|
$
|
(1,389
|
)
|
$
|
(3,919
|
)
|
Utility
Operations expense decreased $1.4 million during the second quarter of 2006
and
$2.9 million during the first half of 2006, compared with the same periods
in
2005, primarily as
a
result of five factors. First, SJG experienced a $0.4 million reduction in
its
bad debt expense during the second quarter corresponding with a decrease in
its
accounts receivable as a result of warmer weather. Second, there were $0.3
million and $1.3 million decreases for the three and six month periods ended
June 30, 2006, respectively, in SJG’s costs under the New Jersey Clean Energy
Programs (NJCEP).
Such
costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced
offsetting decreases in revenues during the periods. The BPU-approved NJCEP
allows for full recovery of costs, including carrying costs when applicable.
As
a result, the decrease in expense had no impact on SJG’s net income. Third,
SJG’s regulatory expenses decreased $0.3 million in the first half of 2006
primarily as a result of amortizations of previously deferred expense related
to
its 2004 base rate proceeding with the BPU. Such costs were fully amortized
as
of December 31, 2005. The amount previously amortized in 2005 was $128,000
per
quarter. Fourth, insurance expense was offset by $0.1 million in the second
quarter of 2006 due to a refund approved by SJG’s insurance carrier. Lastly, SJG
also experienced lower pension and other postretirement benefit costs during
2006 as detailed in Note 8 to the consolidated financial statements. Such
reductions were the result of earnings on additional contributions to both
plans, the transfer of employees to SJI Services, LLC effective January 1,
2006,
and savings resulting from the early retirement plan offered in 2004 and 2005.
Nonutility
Wholesale Gas Operations expense increased for three and six months ended June
30, 2006, compared with the same periods of 2005, due mainly to higher Corporate
and Services cost allocations.
Nonutility
Retail Gas and Other Operations expense decreased for the six months ended
June
30, 2006, compared with the same period of 2005, mainly due to a significant
uncollectible reserve adjustment following a bankruptcy declaration by one
of
SJE’s industrial gas customers in 2005.
Nonutility
On-Site Energy Production Operations expense increased for the three and six
months ended June 30, 2006, compared to the same periods of 2005, due mainly
to
higher labor and operating costs at all active projects, higher Corporate and
Services cost allocations and a full six months of costs related to our ACLE
project which began operations in March 2005.
Corporate
and Services increased for the three and six months ended June 30, 2006 compared
with the same periods of 2005, mainly due to the formation of SJI Services,
LLC
(SJIS) effective January 1, 2006 and the growing needs of our nonutility
subsidiaries. Common services such as information technology, human resources,
government relations, corporate communications, materials purchasing, fleet
management and insurance were transferred to SJIS, having mostly been housed
within SJG prior to January 1, 2006. Because these costs are allocated to our
operating subsidiaries, they are eliminated in consolidation.
Other
Operating Expenses — A summary of changes in other consolidated
operating expenses for the three and six months ended June 30 follows (in
thousands):
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
2006
vs. 2005
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
Maintenance
|
|
$
|
(146
|
)
|
$
|
(234
|
)
|
Depreciation
|
|
|
425
|
|
|
894
|
|
Energy
and Other Taxes
|
|
|
(226
|
)
|
|
(653
|
)
|
Depreciation
expense increased for the three and six months ended June 30, 2006, compared
with the same periods of 2005, due mainly to SJG’s continuing investment in
utility plant.
Energy
and Other Taxes decreased for the three and six months ended June 30, 2006,
compared with the same periods in 2005, primarily due to lower energy-related
taxes based on the decreased sales volumes in 2006. This was partially offset
by
a slight increase in SJG’s revenue-based taxes resulting from higher revenues,
as discussed in detail under Operating Revenues-Utility.
Other
Income —
Other
income increased $0.7 million and $0.5 million for the three and six months
ended June 30, 2006, compared with same periods of 2005, due mainly to the
gain
recognized by South Jersey Energy upon the sale of their interest in AirLogics,
LLC on June 30, 2006.
Interest
Charges—
Interest charges increased by $1.3 million and $2.4 million for the three and
six months ended June 30, 2006, compared with the same periods of 2005, due
primarily to higher levels of short-term debt and higher interest rates on
short-term debt. Short-term debt levels rose to support our capital
expenditures, which were not financed with long-term debt until 2006, and to
support higher gas costs incurred during the 2006 summer injection period.
A
steep rise in short-term interest rates was driven by a series of interest
rate
hikes enacted by the Federal Reserve Bank over the periods covered by this
Report. Debt is incurred primarily to expand and upgrade SJG’s gas transmission
and distribution system, to support seasonal working capital needs related
to
inventories, customer receivables, and to develop energy projects.
Liquidity
and Capital Resources—
Liquidity needs are driven by factors that include natural gas commodity prices;
the impact of weather on customer bills; lags in fully collecting gas costs
from
customers under the Basic Gas Supply Service charge; working capital needs
of
our energy trading and marketing activities; the timing of construction and
remediation expenditures and related permanent financings; mandated tax payment
dates; both discretionary and required repayments of long-term debt; and the
amounts and timing of dividend payments.
Liquidity
needs are first met with net cash provided by operating activities. Net cash
provided by operating activities totaled $41.7 million and $86.7 million for
the
six months ended June 30, 2006 and 2005, respectively. Net cash provided by
operating activities varies from year-to-year primarily due to the impact of
weather on customer demand and related gas purchases, inventory utilization
and
gas cost recoveries. Net cash provided by operating activities for the first
half of 2006 was impacted by higher gas costs and warmer weather than
experienced during the same period of 2005. The larger than normal change in
Accounts Payable was the primary cause of the decrease in operating cash flow.
High gas costs boosted payable levels at the end of 2005 and warm weather and
lower customer utilization rates experienced during 2006 resulted in higher
than
normal levels of natural gas in storage that had been paid for as of June 30,
2006. Typically, we would be buying more gas during the second quarter to inject
into storages that had been depleted during the winter season, causing payables
to rise.
We
use
short-term borrowings under lines of credit from commercial banks to supplement
cash from operations, to support working capital needs and to finance capital
expenditures as incurred. From time to time, we refinance short-term debt
incurred to finance capital expenditures with long-term debt.
SJI’s
operations are also subject to seasonal fluctuations. Significant changes in
the
balances of Current Assets and Current Liabilities can occur from the end of
one
reporting period to another, as evidenced by the changes on the consolidated
balance sheets. The high level of gas inventory maintained as of June 30, 2006
is expected to result in reduced cash outflows during the next quarter.
Bank
credit available to SJI totaled $266.0 million at June 30, 2006, of which $164.9
million, inclusive of $20.3 million of letters of credit, was used. Those bank
facilities consist of a $100.0 million revolving credit facility and $76.0
million of uncommitted bank lines available to SJG; and a $60.0 million
revolving credit facility and $30.0 million of uncommitted bank lines available
to SJI. On August 3, 2006, SJG replaced the existing revolving credit with
a new
$100.0 million revolver that expires in August 2011. SJI is presently working
with its banks to also extend SJI’s existing revolving credit from August 2007
through August 2011. The revolving credit facilities contain certain financial
covenants measured on a quarterly basis. SJI and SJG were in compliance with
these covenants as of June 30, 2006. Based upon the existing credit facilities
and a regular dialogue with our banks, we believe there will continue to be
sufficient credit available to meet our business’ future liquidity
needs.
SJI
supplements its operating cash flow and credit lines with both debt and equity
capital. Over the years, SJG has used long-term debt, primarily in the form
of
First Mortgage Bonds and Medium Term Notes (MTN), secured by the same pool
of
utility assets, to finance its long-term borrowing needs. These needs are
primarily capital expenditures for property, plant and equipment. In September
of 2005, SJG established a new $150.0 million MTN program. On April 20, 2006,
SJG issued $25.0 million of secured tax-exempt, auction-rate debt through the
New Jersey Economic Development Authority (NJEDA). The auction rate, which
resets weekly, was 3.79% as of June 30, 2006. In anticipation of this
transaction, SJG previously entered into forward-starting interest rate swap
agreements that effectively fixed the interest rate on this debt at 3.43%
commencing December 1, 2006, through January 2036. The debt was issued under
SJG’s MTN program. An additional $115.0 million of MTN’s remains available for
issuance under that program.
In
March
2006, Marina issued $16.4 million of tax-exempt Series A variable-rate bonds,
through the NJEDA due in 2036. The proceeds are being used to fund construction
costs related to Marina’s Atlantic City thermal plant expansion which serves
Borgata’s expanded resort which opened on June 30, 2006. Investors in the bonds
receive liquidity and credit support via letters of credit provided by
commercial banks. The underlying letters of credit that provide liquidity
support for the weekly remarketing of the variable-rate demand bonds are issued
under agreements that expire in August and September 2007.
SJI
has
raised equity capital over the past several years through its Dividend
Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued shares.
We offer a 2% discount on DRP investments as it is the most cost-effective
way
to raise equity capital in the quantities we are seeking. Through the DRP,
SJI
raised $2.5million of equity capital by issuing 93,222 shares during the six
months ended June 30, 2006 and $31.9 million of equity capital by issuing
1,141,590 shares during the year ended December 31, 2005. We anticipate raising
a total of less than $10.0 million of additional equity capital through the
DRP
in 2006.
SJI’s
capital structure was as follows:
|
|
As
of
June
30,
2006
|
|
|
As
of
December
31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Equity |
|
|
45.6
|
%
|
|
|
|
45.6
|
%
|
|
Long-Term
Debt |
|
|
38.6
|
%
|
|
|
|
37.0
|
%
|
|
Short-Term
Debt |
|
|
15.8
|
%
|
|
|
|
17.4
|
%
|
|
Total |
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
SJG’s
long-term, senior secured debt is rated “A” and “Baa1” by Standard & Poor’s
and Moody’s Investor Services, respectively. These ratings have not changed in
the past five years.
SJG
is
restricted as to the amount of cash dividends or other distributions that may
be
paid on its common stock by an order issued by the BPU in July 2004, that
granted SJG an increase in base rates. Per the order, SJG is required to
maintain total common equity of no less than $289.2 million. SJG’s total common
equity balance was $360.7 million at June 30, 2006.
CAPITAL
EXPENDITURES, COMMITMENTS AND CONTINGENCIES:
Capital
Expenditures — SJI has a continuing need for cash resources and capital,
primarily to invest in new and replacement facilities and equipment and for
environmental remediation costs. Net cash outflows for construction and
remediation projects for the six months ended June 30, 2006 amounted to $42.3
million and $3.5 million, respectively. We estimate the net cash outflows for
construction and remediation projects for 2006, 2007 and 2008 to be
approximately $54.7 million, $46.6 million and $46.1 million, respectively.
Included in the 2006 estimates is $8.9 million in capital costs accrued but
not
paid as of December 31, 2005, primarily related to two large special projects
totaling $12.1 million for SJG pipeline installation.
Commitments
and Contingencies—
SJI
is
obligated on the letters of credit supporting the variable-rate demand bonds
issued through the New Jersey Economic Development Authority by Marina.
Commercial banks have issued $62.3 million of renewing letters of credit to
support the financing of the original construction and recent expansion of
Marina’s Atlantic City thermal plant project. The agreements under which the
letters of credit were issued contain certain financial covenants measured
on a
quarterly basis. SJI was in compliance with these covenants as of June 30,
2006.
SJG
has
certain commitments for both pipeline capacity and gas supply for which it
pays
fees regardless of usage. Those commitments as of June 30, 2006, average $49.8
million annually and total $223.6 million over the contracts’ lives.
Approximately 54% of the financial commitment under these contracts expires
during the next five years. We expect to renew each of these contracts under
renewal provisions as provided in each contract. SJG recovers all prudently
incurred costs through rates via the Basic Gas Supply Service
clause.
The
following table summarizes our contractual cash obligations and their applicable
payment due dates as of June 30, 2006 (in thousands):
|
|
|
|
Up
to
|
|
Years
|
|
Years
|
|
More
than
|
|
Contractual
Cash Obligations
|
|
Total
|
|
1
Year
|
|
2
& 3
|
|
4
& 5
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
$
|
360,496
|
|
$
|
2,363
|
|
$
|
211
|
|
$
|
10,237
|
|
$
|
347,685
|
|
Interest
on Long-Term Debt
|
|
|
312,591
|
|
|
20,411
|
|
|
40,424
|
|
|
40,092
|
|
|
211,664
|
|
Operating
Leases
|
|
|
1,118
|
|
|
409
|
|
|
618
|
|
|
91
|
|
|
-
|
|
Construction
Obligations
|
|
|
109,745
|
|
|
39,916
|
|
|
69,829
|
|
|
-
|
|
|
-
|
|
Commodity
Supply Purchase Obligations
|
|
|
574,831
|
|
|
292,360
|
|
|
169,086
|
|
|
47,169
|
|
|
66,216
|
|
New
Jersey Clean Energy Program
|
|
|
16,770
|
|
|
5,270
|
|
|
11,500
|
|
|
-
|
|
|
-
|
|
Other
Purchase Obligations
|
|
|
17,580
|
|
|
8,487
|
|
|
8,193
|
|
|
900
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contractual Cash Obligations
|
|
$
|
1,393,131
|
|
$
|
369,216
|
|
$
|
299,861
|
|
$
|
98,489
|
|
$
|
625,565
|
|
Expected
environmental remediation costs and asset retirement obligations are not
included in the table above due to the subjective nature of these costs and
the
timing of anticipated payments. As a result, the total obligation cannot be
calculated. Additionally, future pension contributions are not included in
the
table as contributions vary from year-to-year based on investment performance
and discount rates. SJG’s regulatory obligation to contribute to SJG’s
postretirement benefit plans’ trust, as discussed in Note 8 to the consolidated
financial statements, is also not included as its duration is indefinite.
Off-Balance
Sheet Arrangements—
SJI
has
no off-balance sheet financing arrangements.
Parental
Guarantees—
As
of
June 30, 2006, SJI had issued $287.6 million of parental guarantees on behalf
of
its subsidiaries. Of this total, $236.5 million expire within one year, $5.0
million expire between one and two years, and $46.1 million have no expiration
date. The vast majority of these guarantees were issued as guarantees of payment
to third parties with whom our subsidiaries have commodity supply contracts.
These contracts contain netting provisions, which permit us to net the ultimate
cash payment for monthly buys and sells from/to counterparties. As of June
30,
2006, these guarantees support future firm commitments and $33.5 million of
the
Accounts Payable recorded on our consolidated balance sheet. As part of our
risk
management policy, we also require parental guarantees from trading
counterparties as applicable. These arrangements are typical in our industry.
SJI has also issued several parental guarantees totaling $18.3 million related
to Marina’s construction and operating activities.
Pending
Litigation—
SJI
is
subject to claims arising in the ordinary course of business and other legal
proceedings. We accrue liabilities related to claims when we can determine
the
amount or range of amounts of probable settlement costs. SJI has been named
in,
among other actions, certain product liability claims related to our former
sand
mining subsidiary. Management does not currently anticipate the disposition
of
any known claims to have a material adverse effect on SJI’s financial position,
results of operations or liquidity.
Union
Contract—
Unionized personnel represent 61% of our workforce at June 30, 2006 and are
operating under agreements that run through at least January 2008.
Item
3. Quantitative and Qualitative Disclosures About Market Risk of the Company
(Unaudited)
Commodity
Market Risks—
Certain
regulated and nonregulated SJI subsidiaries are involved in buying, selling,
transporting and storing natural gas and buying and selling retail electricity
for their own accounts as well as managing these activities for other third
parties. These subsidiaries are subject to market risk due to price
fluctuations. To hedge against this risk, we enter into a variety of physical
and financial transactions including forward contracts, swaps, futures and
options agreements. To manage these transactions, SJI has a well-defined risk
management policy approved by our Board of Directors that includes volumetric
and monetary limits. Management reviews reports detailing activity daily.
Generally, the derivative activities described above are entered into for risk
management purposes.
SJG
and
SJE transact commodities on a physical basis and typically do not enter into
financial derivative positions directly. SJRG manages risk for these entities
as
well as for its own portfolio by entering into the types of transactions noted
above. As part of its gas purchasing strategy, SJG uses financial contracts
to
hedge against forward price risk. These contracts are recoverable through SJG’s
BGSS, subject to BPU approval. It is management's policy, to the extent
practical, within predetermined risk management policy guidelines, to have
limited unmatched positions on a deal or portfolio basis while conducting these
activities. As a result of holding open positions to a minimal level, the
financial impact to SJRG of changes in value of a particular transaction is
substantially offset by an opposite change in the related hedge transaction.
SJRG
and
SJE entered into certain contracts to purchase, sell, and transport natural
gas.
For those derivatives not designated as hedges, we recorded the net unrealized
pre-tax loss of $(1.2) million and $(2.0) million in earnings during the three
months ended June 30, 2006 and 2005, respectively, which are included with
realized gains and losses in Operating Revenues — Nonutility. For the six months
ended June 30, 2006, we recorded the net unrealized pre-tax gain of $3.8 and
$2.1 million, respectively. Typically, SJRG's, SJE's, and SJG’s contracts are
less than 12 months long. The fair value and maturity of all these energy
trading and hedging contracts determined using mark-to-market accounting as
of
June 30, 2006 is as follows (in thousands):
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Source
of
Fair
Value
|
|
|
Maturity
<
1 Year
|
|
|
Maturity
1
-
3 Years
|
|
|
Beyond
3
Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
Actively Quoted
|
|
NYMEX
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
$
|
2,665
|
|
$
|
2,331
|
|
$
|
827
|
|
$
|
5,823
|
Hedging
|
|
|
|
|
|
8,922
|
|
|
2,656
|
|
|
—
|
|
|
11,578
|
Subtotal
|
|
|
|
|
|
11,587
|
|
|
4,987
|
|
|
827
|
|
|
17,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
External Sources
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
7,768
|
|
|
2,283
|
|
|
48
|
|
|
10,099
|
Hedging
|
|
|
|
|
|
403
|
|
|
—
|
|
|
—
|
|
|
403
|
Subtotal
|
|
|
|
|
|
8,171
|
|
|
2,283
|
|
|
48
|
|
|
10,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
19,758
|
|
$
|
7,270
|
|
$
|
875
|
|
$
|
27,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
Source
of
|
|
|
Maturity
|
|
|
Maturity
|
|
|
Beyond
|
|
|
|
|
|
Fair
Value
|
|
|
<
1 Year
|
|
|
1
-
3 Years
|
|
|
3
Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
Actively Quoted
|
|
NYMEX
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
$
|
12,854
|
|
$
|
3,164
|
|
$
|
775
|
|
$
|
16,793
|
Hedging
|
|
|
|
|
9,327
|
|
|
4,204
|
|
|
—
|
|
|
13,531
|
Subtotal
|
|
|
|
|
22,181
|
|
|
7,368
|
|
|
774
|
|
|
30,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
External Sources
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
5,947
|
|
|
1,063
|
|
|
—
|
|
|
7,010
|
Hedging
|
|
|
|
|
247
|
|
|
—
|
|
|
—
|
|
|
247
|
Subtotal
|
|
|
|
|
6,194
|
|
|
1,063
|
|
|
—
|
|
|
7,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
28,375
|
|
$
|
8,431
|
|
$
|
775
|
|
$
|
37,581
|
NYMEX
(New York Mercantile Exchange) is the primary national commodities exchange
on
which natural gas is traded. Basis represents the price of a NYMEX natural
gas
futures contract adjusted for the difference in price for delivering the gas
at
another location. Contracted volumes of our NYMEX and Basis Contracts are 9.8
million decatherms with a weighted-average settlement price of $10.44 per
decatherm.
A
reconciliation of SJI's estimated net fair value of energy-related derivatives,
including hedging contracts, follows (in thousands):
Net
Derivatives — Energy Related Assets, January 1, 2006
|
|
$
|
2,636
|
|
Contracts
Settled During Six Months Ended June 30, 2006, Net
|
|
|
(4,728
|
)
|
Other
Changes in Fair Value from Continuing and New Contracts,
Net
|
|
|
(7,586
|
)
|
|
|
|
|
|
Net
Derivatives — Energy Related Liabilities, June 30, 2006
|
|
$
|
(9,678
|
)
|
Interest
Rate Risk—
Our
exposure to interest-rate risk relates primarily to short-term, variable-rate
borrowings. Short-term, variable-rate debt outstanding at June 30, 2006 was
$144.6 million and averaged $121.5 million during the first six months of 2006.
A hypothetical 100 basis point (1%) increase in interest rates on our average
variable-rate debt outstanding would result in a $717,000 increase in our annual
interest expense, net of tax. The 100 basis point increase was chosen for
illustrative purposes, as it provides a simple basis for calculating the impact
of interest rate changes under a variety of interest rate scenarios. Over the
past five years, the change in basis points (b.p.) of our average monthly
interest rates from the beginning to end of each year was as follows: 2005
— 194
b.p. increase; 2004 — 115 b.p. increase; 2003 — 28 b.p. decrease; 2002 — 74 b.p.
decrease; and 2001 — 383 b.p. decrease. For June 2006, our average interest rate
on variable-rate debt was 5.70%.
We
issue
long-term debt either at fixed rates or use interest rate derivatives to fix
interest rates on variable-rate, long-term debt. As of June 30, 2006, the
interest costs on all but $1.1 million of our long-term debt were either at
a
fixed-rate or at a rate fixed via an interest rate derivative. Consequently,
interest expense on existing long-term debt is not significantly impacted by
changes in market interest rates.
As
of
June 30, 2006, SJI’s active interest rate swaps were as follows:
Amount
|
|
Fixed
Interest
Rate
|
|
Start
Date
|
|
Maturity
|
|
Type
|
|
Obligor
|
$ 6,000,000
|
*
|
4.550
|
%
|
|
|
11/19/2001
|
|
12/01/2007
|
|
Taxable
|
|
Marina
|
$
3,900,000
|
|
4.795
|
%
|
|
|
12/01/2004
|
|
12/01/2014
|
|
Taxable
|
|
Marina
|
$
8,000,000
|
|
4.775
|
%
|
|
|
11/12/2004
|
|
11/12/2014
|
|
Taxable
|
|
Marina
|
$ 20,000,000
|
|
4.080
|
%
|
|
|
11/19/2001
|
|
12/01/2011
|
|
Tax-exempt
|
|
Marina
|
$ 14,500,000
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
01/15/2026
|
|
Tax-exempt
|
|
Marina
|
$
500,000
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
01/15/2026
|
|
Tax-exempt
|
|
Marina
|
$
330,000
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
01/15/2026
|
|
Tax-exempt
|
|
Marina
|
$ 12,500,000
|
**
|
3.430
|
%
|
|
|
12/01/2006
|
|
02/01/2036
|
|
Tax-exempt
|
|
SJG
|
$ 12,500,000
|
**
|
3.430
|
%
|
|
|
12/01/2006
|
|
02/01/2036
|
|
Tax-exempt
|
|
SJG
|
$ 7,100,000
|
|
4.895
|
%
|
|
|
02/01/2006
|
|
02/01/2016
|
|
Taxable
|
|
Marina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Amount
reduced to $6.0 million on 12/01/05, and further reduces to $3.0
million
on 12/01/06.
|
**
|
SJG
entered into these forward-starting swaps in anticipation of the
issuance
of $25.0 million of auction-rate bonds that were issued in April
2006.
|
Item
4. Controls and Procedures
Management has established controls and procedures to ensure that material
information relating to SJI, including its consolidated subsidiaries, is made
known to the officers who certify its financial reports and to other members
of
senior management and the Board of Directors.
Based
upon their evaluation as of the end of the period of this report, the principal
executive officer and the principal financial officer of SJI have concluded
that
the disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) employed at SJI are
effective to ensure that the information required to be disclosed by SJI in
the
reports that it files or submits under the Securities Exchange Act of 1934
is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
No change in SJI’s internal control over financial reporting occurred during
SJI’s second fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART
II — OTHER INFORMATION
Item
l. Legal Proceedings
Information
required by this Item is incorporated by reference to Part I, Item 1, Note
11,
beginning on page 21.
Item
1A. Risk Factors
The following paragraph
should be read in conjunction with the risk factors included in Part I, Item
1A
of the Company’s Annual Report on Form 10-K for the year ended December 31,
2005:
Non-routine or extraordinary disruptions to SJG’s natural gas distribution
system could significantly affect its results of operations and financial
position.
Utility distribution systems are routinely disrupted for a variety of reasons
that include leak repair, system upgrades and contractor damage. These
disruptions are typically localized and result in relatively brief service
disruptions that do not have a material impact on SJG’s financial condition.
However, accidental or intentional damage to multiple key portions of our
distribution system, particularly if that damage occurred at the same time
and
depending on the type of damage, could result in an extended disruption in
gas
deliveries.
Item
4. Submission of Matters to a Vote of Security Holders
(a) |
Our
annual meeting of shareholders was held on April 28,
2006.
|
(b) |
Class
II directors (with a term expiring 2009) were elected as
follows:
|
|
|
For
|
|
Withheld
|
|
|
|
|
|
Shirli
M. Billings
|
|
25,759,281
|
|
443,324
|
Thomas
A. Bracken
|
|
24,689,524
|
|
1,513,081
|
Sheila
Hartnett-Devlin
|
|
25,867,088
|
|
335,517
|
Frederick
R. Raring
|
|
25,831,828
|
|
370,777
|
Class
I
directors (with a term expiring in 2008) continuing in office are:
Charles
Biscieglia, Keith S. Campbell, and W. Cary Edwards. Mr. Biscieglia subsequently
retired as a director on June 1, 2006.
Class
III
directors (with terms expiring in 2007) continuing in office are:
Helen
R.
Bosley, Edward J. Graham, William J. Hughes, and Herman D. James.
The
appointment of Deloitte & Touche LLP as our
independent accountants for the year ending December 2006 was approved by a
vote
of
25,783,267 for the appointment and 273,687
against, with 145,650 abstentions.
Item
6. Exhibits
(a) Exhibits
Exhibit
No.
|
Description
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange
Act.
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange
Act.
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange
Act
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United
States Code).
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange
Act
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United
States Code).
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SOUTH
JERSEY INDUSTRIES, INC.
(Registrant)
Dated:
August 9, 2006
|
By:
/s/
Edward J. Graham
|
|
Edward J. Graham
|
|
Chairman, President & Chief Executive Officer
|
|
|
|
|
|
|
Dated:
August 9, 2006
|
By:
/s/
David A. Kindlick
|
|
David A. Kindlick
|
|
Vice President & Chief Financial
Officer
|