South Jersey Industries Form 10-Q for March 31, 2007
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 March
31, 2007
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 May 1, 2007, there were 29,465,942 shares of the registrant’s common stock
outstanding.
PART
I — FINANCIAL INFORMATION
Item
1. Financial Statements — See Pages 2
through 16
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
(In
Thousands Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
Utility
|
|
$
|
265,285
|
|
$
|
269,521
|
|
Nonutility
|
|
|
103,142
|
|
|
103,090
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
|
368,427
|
|
|
372,611
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Cost
of Sales - (Excluding depreciation)
|
|
|
|
|
|
|
|
-
Utility
|
|
|
192,965
|
|
|
201,060
|
|
-
Nonutility
|
|
|
90,505
|
|
|
83,178
|
|
Operations
|
|
|
18,908
|
|
|
17,667
|
|
Maintenance
|
|
|
1,472
|
|
|
1,405
|
|
Depreciation
|
|
|
7,012
|
|
|
6,342
|
|
Energy
and Other Taxes
|
|
|
5,084
|
|
|
4,731
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
315,946
|
|
|
314,383
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
52,481
|
|
|
58,228
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
364
|
|
|
149
|
|
|
|
|
|
|
|
|
|
Interest
Charges
|
|
|
(6,969
|
)
|
|
(6,366
|
)
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
45,876
|
|
|
52,011
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(18,910
|
)
|
|
(21,486
|
)
|
|
|
|
|
|
|
|
|
Equity
in Affiliated Companies
|
|
|
205
|
|
|
378
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
27,171
|
|
|
30,903
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations - (Net of tax benefit)
|
|
|
(148
|
)
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
27,023
|
|
$
|
30,737
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share:
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
0.925
|
|
$
|
1.064
|
|
Discontinued
Operations
|
|
|
(0.005
|
)
|
|
(0.006
|
)
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$
|
0.920
|
|
$
|
1.058
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Basic
|
|
|
29,361
|
|
|
29,032
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share:
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
0.922
|
|
$
|
1.062
|
|
Discontinued
Operations
|
|
|
(0.005
|
)
|
|
(0.006
|
)
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$
|
0.917
|
|
$
|
1.056
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Diluted
|
|
|
29,483
|
|
|
29,100
|
|
|
|
|
|
|
|
|
|
Dividends
Declared per Common Share
|
|
$
|
0.2455
|
|
$
|
0.2250
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
27,023
|
|
$
|
30,737
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income, Net of Tax:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gain on Equity Investments
|
|
|
66
|
|
|
157
|
|
Unrealized
Gain on Derivatives - Other
|
|
|
65
|
|
|
1,224
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income - Net of Tax*
|
|
|
131
|
|
|
1,381
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
27,154
|
|
$
|
32,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Determined using a combined statutory tax rate of 41.08%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
(In
Thousands)
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
$
|
119,499
|
|
$ |
43,518
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Net
Proceeds from Sale (Net Purchase) of Restricted
Investments
|
|
|
10,241
|
|
|
(8,495
|
)
|
Capital
Expenditures
|
|
|
(12,074
|
)
|
|
(20,410
|
)
|
Other
|
|
|
-
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(1,833
|
)
|
|
(28,955
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
Net
Repayments of Lines of Credit
|
|
|
(112,400
|
)
|
|
(25,200
|
)
|
Proceeds
from Issuance of Long-Term Debt
|
|
|
-
|
|
|
16,400
|
|
Other
|
|
|
726
|
|
|
559
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Financing Activities
|
|
|
(111,674
|
)
|
|
(8,241
|
)
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
5,992
|
|
|
6,322
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
7,932
|
|
|
4,884
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
|
$
|
13,924
|
|
$
|
11,206
|
|
The
accompanying notes are an integral part of the condensed consolidated
financial statements.
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
|
Utility
Plant, at original cost
|
|
$
|
1,090,273
|
|
$
|
1,079,614
|
|
Accumulated
Depreciation
|
|
|
(262,750
|
)
|
|
(257,781
|
)
|
Nonutility
Property and Equipment, at cost
|
|
|
108,651
|
|
|
106,657
|
|
Accumulated
Depreciation
|
|
|
(9,358
|
)
|
|
(8,485
|
)
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment - Net
|
|
|
926,816
|
|
|
920,005
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
|
6,468
|
|
|
6,356
|
|
Restricted
|
|
|
12,810
|
|
|
23,051
|
|
Investment
in Affiliates
|
|
|
1,273
|
|
|
1,368
|
|
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
20,551
|
|
|
30,775
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
13,924
|
|
|
7,932
|
|
Accounts
Receivable
|
|
|
171,442
|
|
|
117,832
|
|
Unbilled
Revenues
|
|
|
38,149
|
|
|
39,397
|
|
Provision
for Uncollectibles
|
|
|
(5,973
|
)
|
|
(5,224
|
)
|
Natural
Gas in Storage, average cost
|
|
|
85,773
|
|
|
145,130
|
|
Materials
and Supplies, average cost
|
|
|
2,964
|
|
|
2,895
|
|
Prepaid
Taxes
|
|
|
-
|
|
|
12,443
|
|
Derivatives
- Energy Related Assets
|
|
|
22,169
|
|
|
45,627
|
|
Other
Prepayments and Current Assets
|
|
|
5,131
|
|
|
5,692
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
333,579
|
|
|
371,724
|
|
|
|
|
|
|
|
|
|
Regulatory
and Other Noncurrent Assets:
|
|
|
|
|
|
|
|
Regulatory
Assets
|
|
|
178,170
|
|
|
196,962
|
|
Derivatives
- Energy Related Assets
|
|
|
12,082
|
|
|
23,537
|
|
Unamortized
Debt Issuance Costs
|
|
|
7,787
|
|
|
7,972
|
|
Contract
Receivables
|
|
|
12,851
|
|
|
13,654
|
|
Other
|
|
|
9,124
|
|
|
8,403
|
|
|
|
|
|
|
|
|
|
Total
Regulatory and Other Noncurrent Assets
|
|
|
220,014
|
|
|
250,528
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,500,960
|
|
$
|
1,573,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Equity:
|
|
|
|
|
|
|
|
Common
Stock
|
|
$
|
36,775
|
|
$
|
36,657
|
|
Premium
on Common Stock
|
|
|
240,721
|
|
|
239,763
|
|
Accumulated
Other Comprehensive Loss
|
|
|
(7,660
|
)
|
|
(7,791
|
)
|
Retained
Earnings
|
|
|
193,453
|
|
|
174,407
|
|
|
|
|
|
|
|
|
|
Total
Common Equity
|
|
|
463,289
|
|
|
443,036
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
357,998
|
|
|
358,022
|
|
|
|
|
|
|
|
|
|
Total
Capitalization
|
|
|
821,287
|
|
|
801,058
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
401
|
|
|
461
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Notes
Payable
|
|
|
82,200
|
|
|
194,600
|
|
Current
Maturities of Long-Term Debt
|
|
|
2,369
|
|
|
2,369
|
|
Accounts
Payable
|
|
|
111,723
|
|
|
101,615
|
|
Customer
Deposits and Credit Balances
|
|
|
16,280
|
|
|
24,982
|
|
Margin
Account Liability
|
|
|
7,696
|
|
|
-
|
|
Environmental
Remediation Costs
|
|
|
23,250
|
|
|
26,439
|
|
Taxes
Accrued
|
|
|
31,477
|
|
|
1,967
|
|
Derivatives
- Energy Related Liabilities
|
|
|
13,723
|
|
|
42,124
|
|
Deferred
Income Taxes - Net
|
|
|
5,387
|
|
|
10,687
|
|
Deferred
Contract Revenues
|
|
|
4,223
|
|
|
5,066
|
|
Dividends
Payable
|
|
|
7,208
|
|
|
-
|
|
Interest
Accrued
|
|
|
4,915
|
|
|
6,458
|
|
Pension
and Other Postretirement Benefits
|
|
|
776
|
|
|
788
|
|
Other
Current Liabilities
|
|
|
6,183
|
|
|
5,699
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
317,410
|
|
|
422,794
|
|
|
|
|
|
|
|
|
|
Deferred
Credits and Other Noncurrent Liabilities:
|
|
|
|
|
|
|
|
Deferred
Income Taxes - Net
|
|
|
175,095
|
|
|
177,220
|
|
Investment
Tax Credits
|
|
|
2,390
|
|
|
2,470
|
|
Pension
and Other Postretirement Benefits
|
|
|
33,619
|
|
|
33,162
|
|
Environmental
Remediation Costs
|
|
|
46,450
|
|
|
45,391
|
|
Asset
Retirement Obligations
|
|
|
24,262
|
|
|
23,970
|
|
Derivatives
- Energy Related Liabilities
|
|
|
4,851
|
|
|
7,918
|
|
Regulatory
Liabilities
|
|
|
65,895
|
|
|
50,797
|
|
Other
|
|
|
9,300
|
|
|
7,791
|
|
|
|
|
|
|
|
|
|
Total
Deferred Credits
|
|
|
|
|
|
|
|
and
Other Noncurrent Liabilities
|
|
|
361,862
|
|
|
348,719
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities
|
|
$
|
1,500,960
|
|
$
|
1,573,032
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
-
South Jersey Industries, Inc. (SJI or the Company) currently provides a variety
of energy related products and services primarily through the following
subsidiaries:
· South
Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes
natural gas in the seven southernmost counties of New Jersey.
· 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.
· South
Jersey Resources Group, LLC (SJRG) markets wholesale natural gas storage,
commodity and transportation in the mid-Atlantic and southern
states.
· Marina
Energy, LLC (Marina) develops and operates on-site energy-related
projects.
· 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.
BASIS
OF
PRESENTATION — The condensed consolidated financial statements include the
accounts of SJI, its wholly owned subsidiaries and subsidiaries in which we
have
a controlling interest. All significant intercompany accounts and transactions
have been eliminated. In management’s opinion, the condensed 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. SJI’s 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. As permitted by the rules and
regulations of the Securities and Exchange Commission the accompanying unaudited
condensed consolidated financial statements contain certain condensed financial
information and exclude certain footnote disclosures normally included in annual
audited consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). These
financial statements should be read in conjunction with SJI’s 2006 Annual Report
on Form 10-K for a more complete discussion of the Company’s accounting policies
and certain other information.
REVENUE
BASED TAXES — SJI collects certain revenue-based energy taxes from customers.
Such taxes include New Jersey State Sales Tax, Transitional Energy Facility
Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is
recorded as a liability when billed to customers and is not included in revenue
or operating expenses. TEFA and PUA are included in both utility revenue and
cost of sales and totaled $4.0 million and $3.7 million in the three months
ended March 31, 2007 and 2006, respectively.
CAPITALIZED
INTEREST — SJG capitalizes interest on construction at the rate of return on
rate base utilized by the New Jersey Board of Public Utilities (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 condensed consolidated balance sheets.
Interest Charges are presented net of capitalized interest on the condensed
consolidated statements of income. SJI capitalized interest of $0.1 million
and
$0.4 million for the three months ended March 31, 2007 and 2006,
respectively.
DERIVATIVE
INSTRUMENTS — 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. SJRG
measures the fair value of the contracts and records these as Derivatives —
Energy Related Assets or Derivatives — Energy Related Liabilities on the
condensed consolidated balance sheets. The consolidated net pre-tax unrealized
(loss) gain of $(19.3) million, and $13.7 million (previously disclosed as
$9.5
million which included certain losses on settled contracts related to gas
in storage) in earnings during the three months ended March 31, 2007 and
2006, respectively, which are included with realized gains and losses in
Operating Revenues — Nonutility.
As
part
of its gas purchasing strategy, SJG uses financial contracts through SJRG to
hedge against forward price risk. The costs or benefits of these short-term
contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause,
subject to BPU approval. As of March 31, 2007 and December 31, 2006, SJG had
$2.0 million and $16.7 million of costs, respectively, included in its BGSS
related to open financial contracts.
From
time
to time we enter into interest rate derivatives and similar agreements to hedge
exposure to increasing interest rates, and the impact of those rates on our
cash
flows with respect to our variable-rate debt. We have designated and account
for
these interest rate derivatives as cash flow hedges which are included in Other
Noncurrent Assets and Other Noncurrent Liabilities. There have been no
significant changes to the Company’s active interest rate swaps since December
31, 2006 which are described in Note 1 to the Consolidated Financial Statements
in Item 8 of SJI’s Annual Report on Form 10-K as of December 31,
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 March 31, 2007 and December 31, 2006, the net market value of
these swaps was not significant.
NEW
ACCOUNTING PRONOUNCEMENTS —
On
January 1, 2007 SJI adopted the provisions of FASB Interpretation No. 48 (FIN
48), “Accounting for Uncertainty in Income Taxes.” This Interpretation provides
guidance on the recognition and measurement of uncertain tax positions in the
financial statements.
As
a
result of the implementation of FIN 48, SJI recognized a $0.8 million reduction
to beginning retained earnings as a cumulative effect adjustment and a
noncurrent deferred tax asset of $0.7 million. The total unrecognized tax
benefits as of January 1, 2007 were $1.5 million including $0.5 million of
accrued interest and penalties. The amount of unrecognized tax benefits that,
if
recognized, would affect the effective tax rate is not significant. The
Company’s policy is to record interest and penalties related to unrecognized tax
benefits as interest expense and other expense respectively. These amounts
were
not significant for the three months ended March 31, 2007. There have been
no
material changes to the unrecognized tax benefits for the three months ended
March 31, 2007 and the Company does not anticipate any material changes in
the
total unrecognized tax benefits within the next 12 months.
The
unrecognized tax benefits are primarily related to an uncertainty of state
income tax issues and the timing of certain deductions taken on the Company’s
income tax returns. Federal income tax returns from 2003 forward and state
income tax returns primarily from 2002 forward are open and subject to
examination.
In
September 2006, the FASB issued its Staff Position (FSP) on “Accounting for
Planned Major Maintenance Activities”. This FSP prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance activities
in annual and interim financial reporting periods. This FSP was effective
January 1, 2007. This FSP did not have a material effect on the Company’s
condensed consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measuring fair value in accounting principles generally accepted
in the United States of America (GAAP), and expands disclosures about fair
value
measurements. This statement is effective in fiscal years beginning after
November 15, 2007. Management is currently evaluating the impact that the
adoption of this statement will have on the Company’s consolidated financial
statements.
In
January 2007, the FASB posted Statement 133 Implementation Issue No. G26, “Cash
Flow Hedges: Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities
That Are Not Based on a Benchmark Interest Rate.” This issue provides guidance
on the designated risks that can be hedged in a cash flow hedge of a
variable-rate financial asset or liability for which the interest rate is not
based solely on an index, including situations in which an interest rate is
reset through an auction process. This issue is effective April 1, 2007.
Management does not anticipate that the adoption of this issue will have a
material effect on the Company’s condensed consolidated financial
statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The
statement permits entities to choose to measure certain financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This statement is effective
for the first fiscal year beginning after November 15, 2007. Management is
currently evaluating the impact that the adoption of this statement will have
on
the Company’s consolidated financial statements.
2. STOCK-BASED
COMPENSATION PLAN:
Under
the
Amended and Restated 1997 Stock-Based Compensation Plan, no more than 2,000,000
shares in the aggregate may be issued to SJI's officers (Officers), non-employee
directors (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 three months ended March 31,
2007
and no stock appreciation rights have been issued under the plan. During the
three months ended March 31, 2007, SJI granted 44,106 restricted shares to
Officers, and other key employees. These restricted shares vest over a
three-year period and are subject to SJI achieving certain market based
performance targets as compared to a peer group average, which can cause the
actual amount of shares that ultimately vest to range from between 0% to 150%
of
the original share units granted. During the three months ended March 31, 2007,
SJI did not grant any restricted shares to Directors. Shares issued to Directors
vest over a three-year service period but contain no performance conditions.
As
a result, 100% of the shares granted generally vest.
See
Note
2 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on
Form 10-K as of December 31, 2006 for related accounting policy.
The
following table summarizes the nonvested restricted stock awards outstanding
at
March 31, 2007 and the assumptions used to estimate the fair value of the
awards:
|
Grant
|
|
Shares
|
|
Fair
Value
|
|
Expected
|
|
Risk-Free
|
|
Date
|
|
Outstanding
|
|
Per
Share
|
|
Volatility
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
& Key Employees -
|
Jan.
2005
|
|
|
35,221
|
|
$
|
25.155
|
|
15.5%
|
|
3.4%
|
|
Jan.
2006
|
|
|
39,076
|
|
$
|
27.950
|
|
16.9%
|
|
4.5%
|
|
Jan.
2007
|
|
|
44,106
|
|
$
|
29.210
|
|
18.5%
|
|
4.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
-
|
Dec.
2004
|
|
|
5,220
|
|
$
|
24.955
|
|
-
|
|
-
|
|
Dec.
2005
|
|
|
6,340
|
|
$
|
29.970
|
|
-
|
|
-
|
|
Dec.
2006
|
|
|
9,261
|
|
$
|
34.020
|
|
-
|
|
-
|
Expected
volatility is based on the actual daily volatility of SJI’s share price over the
preceding three-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’ and other key employees’ 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, as though they 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 three months
ended March 31, 2007 and 2006 (in thousands):
|
|
2007
|
|
2006
|
|
Officers
& Key Employees
|
|
$
|
248
|
|
$
|
230
|
|
Directors
|
|
|
52
|
|
|
33
|
|
Total
Cost
|
|
|
300
|
|
|
263
|
|
Capitalized
|
|
|
(27
|
)
|
|
(20
|
)
|
Net
Expense
|
|
$
|
273
|
|
$
|
243
|
|
As
of
March 31, 2007, there was $2.2 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 2.3 years.
The
following table summarizes information regarding restricted stock award activity
during the three months ended March 31, 2007 excluding accrued dividend
equivalents:
|
|
Officers
& Other Key Employees
|
|
Directors
|
|
|
|
|
|
|
|
Nonvested
Shares Outstanding, January 1, 2007
|
|
|
116,432
|
|
|
20,821
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
44,106
|
|
|
-
|
|
Vested*
|
|
|
(42,135
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Nonvested
Shares Outstanding, March 31, 2007
|
|
|
118,403
|
|
|
20,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Actual shares awarded to officers upon vesting, including dividend
equivalents and
|
adjustments for performance measures totaled 69,781
shares.
|
During
the three months ended March 31, 2007 and 2006, SJI awarded 69,781 shares at
a
market value of $2.3 million and 101,009 shares at a market value of $2.9
million, respectively. The Company has a policy of issuing new shares to satisfy
its obligations under these plans; 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.
3. 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 months ended
March 31, were (in thousands, except per share amounts):
|
|
2007
|
|
2006
|
|
Loss
before Income Taxes:
|
|
|
|
|
|
|
|
Sand
Mining
|
|
$
|
(217
|
)
|
$
|
(143
|
)
|
Fuel
Oil
|
|
|
(11
|
)
|
|
(112
|
)
|
Income
Tax Benefits
|
|
|
80
|
|
|
89
|
|
Loss
from Discontinued Operations
|
|
$
|
(148
|
)
|
$
|
(166
|
)
|
Earnings
Per Common Share from
|
|
|
|
|
|
|
|
Discontinued
Operations Basic
and Diluted
|
|
$ |
(0.005 |
) |
$ |
(0.006
|
)
|
Losses
from sand mining are mainly comprised of environmental remediation and product
liability litigation associated with Morie’s prior activities.
4. COMMON
STOCK:
The
following shares were issued and outstanding at March 31:
|
|
2007
|
|
Beginning
Balance, January 1
|
|
|
29,325,593
|
|
New
Issues During Period:
|
|
|
|
|
Dividend
Reinvestment Plan
|
|
|
24,438
|
|
Stock-Based
Compensation Plan
|
|
|
69,781
|
|
Ending
Balance, March 31,
|
|
|
29,419,812
|
|
We
recorded the par value ($1.25 per share) of stock issued in Common Stock and
recorded the net excess over par value of approximately $1.0 million, in 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 122,280 and 67,448
shares for the three months ended March 31, 2007 and 2006, respectively. These
shares relate to SJI’s restricted stock as discussed in Note 2.
DIVIDEND
REINVESTMENT PLAN (DRP) — Newly issued shares of common stock offered through
the DRP are issued directly by SJI. As of March 31, 2007, SJI reserved
approximately 1.3 million shares of authorized, but unissued, common stock
for
future issuance through the DRP.
5. RESTRICTED
INVESTMENTS:
In
accordance with the terms of the Marina and certain SJG loan agreements, unused
proceeds are required to be escrowed pending approved construction expenditures.
As of March 31, 2007 and December 31, 2006, the escrowed proceeds, including
interest earned, totaled $12.8 million and $12.7 million,
respectively.
SJRG
maintains a margin account with a national investment firm to support its risk
management activities. The balance required to be held in this margin account
increases as the net value of the outstanding energy related financial contracts
with this investment firm decreases. As of March 31, 2007, there was no balance
in this account. As of December 31, 2006, the balance of this account was $10.4
million. As of March 31, 2007, the company is holding $7.7 million in a margin
account received from this investment firm as the value of the related financial
contracts has increased. This balance is reflected in Margin Account Liability
on the condensed consolidated balance sheets.
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 months
ended March 31 is presented below (in thousands):
|
|
2007
|
|
2006
|
|
Operating
Revenues:
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
277,864
|
|
$
|
277,081
|
|
Wholesale
Gas Operations
|
|
|
21,094
|
|
|
21,985
|
|
Retail
Gas and Other Operations
|
|
|
58,717
|
|
|
59,063
|
|
Retail
Electric Operations
|
|
|
12,444
|
|
|
13,036
|
|
On-Site
Energy Production
|
|
|
9,724
|
|
|
7,843
|
|
Appliance
Service Operations
|
|
|
3,968
|
|
|
3,774
|
|
Corporate
& Services
|
|
|
3,383
|
|
|
3,170
|
|
Subtotal
|
|
|
387,194
|
|
|
385,952
|
|
Intersegment
Sales
|
|
|
(18,767
|
)
|
|
(13,341
|
)
|
Total
Operating Revenues
|
|
$
|
368,427
|
|
$
|
372,611
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
46,271
|
|
$
|
43,180
|
|
Wholesale
Gas Operations
|
|
|
3,667
|
|
|
12,705
|
|
Retail
Gas and Other Operations
|
|
|
(307
|
)
|
|
(1,100
|
)
|
Retail
Electric Operations
|
|
|
555
|
|
|
508
|
|
On-Site
Energy Production
|
|
|
2,005
|
|
|
2,021
|
|
Appliance
Service Operations
|
|
|
203
|
|
|
752
|
|
Corporate
and Services
|
|
|
87
|
|
|
162
|
|
Total
Operating Income
|
|
$
|
52,481
|
|
$
|
58,228
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
7,212
|
|
$
|
6,329
|
|
Wholesale
Gas Operations
|
|
|
16
|
|
|
3
|
|
Retail
Gas and Other Operations
|
|
|
2
|
|
|
2
|
|
On-Site
Energy Production
|
|
|
782
|
|
|
461
|
|
Appliance
Service Operations
|
|
|
62
|
|
|
57
|
|
Corporate
and Services
|
|
|
57
|
|
|
61
|
|
Total
Depreciation and Amortization
|
|
$
|
8,131
|
|
$
|
6,913
|
|
|
|
|
|
|
|
|
|
Property
Additions:
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
11,549
|
|
$
|
13,121
|
|
Wholesale
Gas Operations
|
|
|
-
|
|
|
3
|
|
Retail
Gas and Other Operations
|
|
|
9
|
|
|
-
|
|
On-Site
Energy Production
|
|
|
1,748
|
|
|
2,745
|
|
Appliance
Service Operations
|
|
|
28
|
|
|
45
|
|
Corporate
and Services
|
|
|
207
|
|
|
208
|
|
Total
Property Additions
|
|
$
|
13,541
|
|
$
|
16,122
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
2007
|
|
|
December
31,
2006
|
|
Identifiable
Assets:
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
1,199,657
|
|
$
|
1,228,076
|
|
Wholesale
Gas Operations
|
|
|
142,500
|
|
|
181,257
|
|
Retail
Gas and Other Operations
|
|
|
48,972
|
|
|
48,998
|
|
Retail
Electric Operations
|
|
|
4,242
|
|
|
4,537
|
|
On-Site
Energy Production
|
|
|
119,548
|
|
|
121,498
|
|
Appliance
Service Operations
|
|
|
13,575
|
|
|
14,147
|
|
Discontinued
Operations
|
|
|
395
|
|
|
415
|
|
Subtotal
|
|
|
1,528,889
|
|
|
1,598,928
|
|
Corporate
and Services
|
|
|
56,378
|
|
|
109,201
|
|
Intersegment
Assets
|
|
|
(84,307
|
)
|
|
(135,097
|
)
|
Total
Identifiable Assets
|
|
$
|
1,500,960
|
|
$
|
1,573,032
|
|
7. RATES
AND
REGULATORY ACTIONS:
SJG
is
subject to the rules and regulations of the BPU. There have been no significant
regulatory actions or changes to SJG’s rate structure since December 31, 2006.
See Note 9 to the Consolidated Financial Statements in Item 8 of SJI’s Annual
Report on Form 10-K as of December 31, 2006.
8. REGULATORY
ASSETS & REGULATORY LIABILITIES:
Other
than the Deferred Gas Costs and Revenues — Net, discussed below, there have been
no significant changes to the nature of the Company’s regulatory assets and
liabilities since December 31, 2006 which are described in Note 10 to the
Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K
as of December 31, 2006.
Regulatory
Assets consisted of the following items (in thousands):
|
|
March
31,
2007
|
|
December
31,
2006
|
|
Environmental
Remediation Costs:
|
|
|
|
|
|
Expended
- Net
|
|
$
|
19,965
|
|
$
|
17,743
|
|
Liability
for Future Expenditures
|
|
|
65,671
|
|
|
67,905
|
|
Income
Taxes-Flowthrough Depreciation
|
|
|
4,441
|
|
|
4,685
|
|
Deferred
Asset Retirement Obligation Costs
|
|
|
21,284
|
|
|
21,009
|
|
Deferred
Gas Costs - Net
|
|
|
-
|
|
|
19,698
|
|
Deferred
Pension and Other Postretirement Benefit Costs
|
|
|
39,264
|
|
|
39,359
|
|
Temperature
Adjustment Clause Receivable
|
|
|
8,347
|
|
|
8,996
|
|
Conservation
Incentive Program Receivable
|
|
|
13,027
|
|
|
7,747
|
|
Societal
Benefit Costs Receivable
|
|
|
3,303
|
|
|
6,912
|
|
Premium
for Early Retirement of Debt
|
|
|
1,492
|
|
|
1,532
|
|
Other
Regulatory Assets
|
|
|
1,376
|
|
|
1,376
|
|
|
|
$
|
178,170
|
|
$
|
196,962
|
|
Regulatory
Liabilities consisted of the following items (in thousands):
|
March
31,
2007
|
|
December
31,
2006
|
Excess
Plant Removal Costs
|
$
|
48,566
|
|
$
|
48,377
|
Deferred
Gas Revenues - Net
|
|
13,785
|
|
|
-
|
Other
|
|
3,544
|
|
|
2,420
|
|
|
|
|
|
|
Total
Regulatory Liabilities
|
$
|
65,895
|
|
$
|
50,797
|
DEFERRED
GAS COSTS AND REVENUES — NET —
Over/under collections of gas costs are monitored through SJG’s Basic Gas Supply
Service Clause 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 SJG’s natural gas purchases are
also included in the BGSS, subject to BPU approval. The BGSS decreased from
$19.7 million regulatory asset at December 31, 2006 to a $13.8 million
regulatory liability at March 31, 2007 as a result of gas costs recovered from
customers during the first quarter. Gas cost recoveries are typically very
high
in the first quarter of the year as customer consumption is at its highest
point
during the winter months. In addition, a change in the fair value of SJG’s
energy related derivatives resulting from an increase in the average future
prices accounted for $14.7 million of the fluctuation.
9. PENSION
AND OTHER POSTRETIREMENT BENEFITS:
For
the
three months ended March 31, 2007 and 2006, net periodic benefit cost related
to
the employee and officer pension and other postretirement benefit plans
consisted of the following components (in thousands):
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
|
2007
|
|
|
2006
|
|
Service
Cost
|
$
|
912
|
|
$
|
855
|
|
|
$
|
267
|
|
$
|
198
|
|
Interest
Cost
|
|
2,077
|
|
|
1,786
|
|
|
|
752
|
|
|
471
|
|
Expected
Return on Plan Assets
|
|
(2,561
|
)
|
|
(2,264
|
)
|
|
|
(527
|
)
|
|
(349
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
Service Cost (Credits)
|
|
73
|
|
|
114
|
|
|
|
(87
|
)
|
|
(89
|
)
|
Actuarial
Loss
|
|
471
|
|
|
679
|
|
|
|
170
|
|
|
119
|
|
Net
Periodic Benefit Cost
|
|
972
|
|
|
1,170
|
|
|
|
575
|
|
|
350
|
|
Capitalized
Benefit Costs
|
|
(367
|
)
|
|
(399
|
)
|
|
|
(233
|
)
|
|
(98
|
)
|
Total
Net Periodic Benefit Expense
|
$
|
605
|
|
$
|
771
|
|
|
$
|
342
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
benefit costs reflected in the table above relate to SJG’s construction program.
See
Note
11 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on
Form 10-K as of December 31, 2006, for additional information related to SJI’s
pension and other postretirement benefits.
10. 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 $379.7 million at March 31, 2007.
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
March 31, 2007, these loan restrictions did not affect the amount that may
be
distributed from either SJG’s or SJI’s retained earnings.
11. UNUSED
LINES OF CREDIT:
Bank
credit available to SJI totaled $406.0 million at March 31, 2007, of which
$147.3 million, inclusive of $65.1 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 $200.0 million
revolving credit facility and $30.0 million of uncommitted bank lines available
to SJI. The revolving credit facilities expire in August 2011 and contain one
financial covenant regarding the ratio of total debt to total capitalization,
measured on a quarterly basis. SJI and SJG were in compliance with this covenant
as of March 31, 2007. Borrowings under these credit facilities are at market
rates. The average borrowing cost, which changes daily, was 5.75% and 5.42%
at
March 31, 2007 and 2006, respectively.
12. COMMITMENTS
AND CONTINGENCIES:
CONTRACTUAL
CASH OBLIGATIONS — The Company has incurred various contractual obligations in
the normal course of activities. These obligations primarily include future
cash
payments required under debt agreements, commodity supply purchase agreements,
regulatory agreements and construction contracts. The commodity supply purchase
agreements include contractual purchase obligations for physical commodities
as
well as financial instruments of approximately $330 million that are expected
to
result in physical purchases.
There
were no significant changes to the Company’s contractual obligations described
in Note 14 to the Consolidated Financial Statements in Item 8 of SJI’s Annual
Report on Form 10-K as of December 31, 2006, except for commodity supply
purchase obligations which decreased by approximately $107.1 million in total
since December 31, 2006. This was primarily due to the expiration of obligations
during the first quarter of 2007 which was partially offset by an increase
in
rates effective March 1, 2007 with one of SJG’s major gas commodity suppliers
with whom we have a multi-year purchase agreement.
PARENTAL
GUARANTEES — As of March 31, 2007, SJI had issued $327.9 million of parental
guarantees on behalf of its subsidiaries. Of this total, $269.3 million expire
within one year, and $57.6 million have no expiration date. These guarantees
were issued to guarantee payment to third parties with whom our subsidiaries
have commodity supply contracts and for Marina’s construction and operating
activities. As of March 31, 2007, these guarantees support future firm
commitments and $54.2 million of the Accounts Payable recorded on our condensed
consolidated balance sheet.
STANDBY
LETTERS OF CREDIT — As of March 31, 2007, SJI provided $65.1 million of standby
letters of credit through SJI’s revolving credit facility. Letters of credit in
the amount of $62.3 million support the variable-rate demand bonds issued
through the NJEDA to finance Marina’s thermal plant project. SJI has five
additional letters of credit outstanding totaling $2.8 million, two of which
were posted to different utilities and one was posted to the PJM Interconnection
to enable SJE to market retail electricity. The remaining two letters were
posted for various construction activities.
ENVIRONMENTAL
REMEDIATION COSTS — SJI incurred and accrued 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 accrued costs for environmental cleanup of sites where SJF
previously operated a fuel oil business and Morie maintained equipment, fueling
stations and storage. There have been no significant changes to the status
of
the Company’s environmental remediation efforts or the expected remediation
costs since December 31, 2006 which are described in Note 14 to the Consolidated
Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of
December 31, 2006.
13.
SUBSEQUENT EVENT:
In
April
2007, LVE Energy Partners, LLC (LVE), a joint venture in which Marina has a
50%
equity interest, entered into a 25 year contract with a resort developer to
design, build, own and operate a district energy system and central energy
center for a planned resort in Las Vegas, Nevada. LVE will begin construction
of
the facility in 2007 and expects to provide construction energy to the resort
in
2009 and full energy services when the resort is completed in 2010. SJI has
issued a performance guarantee for up to $180 million to the resort developer
to
ensure that certain construction milestones relating to the development of
the
thermal facility are met. Concurrently, SJI is the beneficiary of a surety
bond
purchased by the project’s general contractor that provides SJI with the
assurance that construction of the thermal facility will meet those same
milestones.
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
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 Annual Report on Form 10-K for the year ended December 31, 2006 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 —
Management must make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and related disclosures.
Actual results could differ from those estimates. Five types of transactions
presented in our condensed 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, 2006.
New
Accounting Pronouncements —
See
detailed discussions concerning New Accounting Pronouncements and their impact
on SJI in Note 1 to the condensed consolidated financial
statements.
Temperature
Adjustment Clause (TAC) —
Through
September 30, 2006, SJG’s tariff included a TAC to mitigate the effect of
variations in heating season temperatures from historical norms. Each TAC year
ran from November 1 through May 31 of the following year. Once the TAC year
ended, the net earnings impact was filed with the BPU for future recovery.
As a
result, the cash inflows or outflows generally would not begin until the next
TAC year. Because of the timing delay between the earnings impact and the
recovery, the net result can be either a regulatory asset or liability. The
TAC
increased SJG’s net income by $3.6 million for the three months ended March 31,
2006 as weather was 12.6% warmer than the 20-year TAC average.
Conservation
Incentive Program (CIP)—
The
CIP
is a BPU approved three-year pilot program that began October 1, 2006, and
is
designed to eliminate the link between SJG’s profits and the quantity of natural
gas sold per customer, and foster conservation efforts. With the CIP, SJG’s
profits will be tied to the number of customers served and how efficiently
SJG
serves them, thus allowing the company to focus on encouraging conservation
and
energy efficiency among our customers without negatively impacting net
income. The CIP tracking mechanism adjusts earnings based on weather, as
did the TAC, and also adjusts earnings where the actual usage per customer
experienced during an annual period varies from an established baseline usage
per customer.
Similar
to the TAC, utility earnings are recognized during current periods based upon
the application of the CIP. The cash impact of variations in customer usage
will
result in cash being collected from, or returned to, customers during the
subsequent CIP year, which runs from October 1 to September 30.
The
CIP
protected $3.1 million in earnings for the three months ended March 31, 2007,
which would have been lost due to warm weather and lower customer usage. Of
that
amount, $0.3 million was related to weather and $2.8 million was related to
customer usage.
Regulatory
Actions —
There
have been no significant regulatory actions since December 31, 2006. See
detailed discussion concerning Regulatory Actions in Note 9 to the Consolidated
Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of
December 31, 2006.
Environmental
Remediation —
There
have been no significant changes to the status of the Company’s environmental
remediation efforts since December 31, 2006. See detailed discussion concerning
Environmental Remediation in Note 14 to the Consolidated Financial Statements
in
Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2006.
Customer
Choice Legislation —
All
residential natural gas customers in New Jersey can choose their natural gas
commodity supplier under the terms of the “Electric
Discount and Energy Competition Act of 1999.”
This
bill created the framework and necessary time schedules for the restructuring
of
the state’s electric and natural gas utilities. The Act established unbundling,
under
which redesigned utility rate structures allow natural gas and electric
consumers to choose their energy supplier. It also established time frames for
instituting competitive services for customer account functions and for
determining whether basic gas supply services should become competitive.
Customers purchasing natural gas from a provider other than the local utility
(marketer) are charged for the gas costs by the marketer and charged for the
transportation costs by the utility. 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.
However, during the third quarter of 2005, marketers found it increasingly
difficult to compete with the local utility because of changing market
conditions and rising gas costs. SJE responded by returning all of its
approximately 69,000 residential gas customers to SJG during the third quarter
of 2005. Beginning in the first quarter of 2006, marketers began to attract
customers back through new offers. The total number of customers purchasing
the
gas commodity from a marketer within SJG’s territory increased from 10,411 as of
March 31, 2006 to 24,866 as of March 31, 2007.
RESULTS
OF OPERATIONS:
A
significant portion of the volatility in operating results is due to the impact
of the accounting methods associated with SJRG’s storage activities. SJRG
purchases and holds natural gas in storage to earn a profit margin from its
ultimate sale in the future. SJRG uses derivatives to mitigate commodity price
risk in order to substantially lock-in the profit margin that will ultimately
be
realized. However, gas stored in inventory is accounted for at the lower of
average cost or market; the derivatives used to reduce the risk associated
with
a change in the value of the inventory are accounted for at fair value, with
changes in fair value recorded in operating results in the period of change.
As
a result, earnings are subject to volatility as the market prices of derivatives
change, even when the underlying hedged value of the inventory is unchanged.
This volatility can be significant from period to period. Over time, gains
or
losses on the sale of gas in storage will be offset by losses or gains on the
derivatives, resulting in the realization of the profit margin expected when
the
transactions were initiated.
Net
Income for the three months ended March 31, 2007 decreased $3.7 million, or
12%
to $27.0 million compared to the three months ended March 31, 2006. This
decrease is primarily due to:
·
|
an
$8.7 million decrease in gross margin generated from SJRG.
|
This
decrease was offset by:
·
|
a
2.3% increase in SJG customers and;
|
·
|
an
additional $2.8 million relating to the SJG CIP that would have been
lost
due to lower customer usage as was experienced in the first quarter
of
2006.
|
These
changes are discussed in more detail below.
The
following tables summarize the composition of gas utility volumes, revenues,
margin and degree days for the three months ended March 31 (in thousands, except
for degree day data):
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Throughput
- dth:
|
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
|
Residential
|
|
|
11,281
|
|
|
9,774
|
|
Commercial
|
|
|
2,929
|
|
|
3,279
|
|
Industrial
|
|
|
106
|
|
|
100
|
|
Cogeneration
& Electric Generation
|
|
|
31
|
|
|
29
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
Residential
|
|
|
871
|
|
|
312
|
|
Commercial
|
|
|
2,610
|
|
|
1,594
|
|
Industrial
|
|
|
3,111
|
|
|
3,360
|
|
Cogeneration
& Electric Generation
|
|
|
414
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Total
Firm Throughput
|
|
|
21,353
|
|
|
18,450
|
|
|
|
|
|
|
|
|
|
Interruptible
|
|
|
10
|
|
|
31
|
|
Interruptible
Transportation
|
|
|
651
|
|
|
972
|
|
Off-System
|
|
|
6,835
|
|
|
4,118
|
|
Capacity
Release & Storage
|
|
|
8,814
|
|
|
15,105
|
|
|
|
|
|
|
|
|
|
Total
Throughput - Utility
|
|
|
37,663
|
|
|
38,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Utility
Operating Revenues:
|
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
|
Residential
|
|
$
|
168,072
|
|
$
|
166,436
|
|
Commercial
|
|
|
36,578
|
|
|
51,409
|
|
Industrial
|
|
|
3,983
|
|
|
2,364
|
|
Cogeneration
& Electric Generation
|
|
|
449
|
|
|
707
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
Residential
|
|
|
3,574
|
|
|
1,362
|
|
Commercial
|
|
|
7,028
|
|
|
4,221
|
|
Industrial
|
|
|
3,090
|
|
|
3,270
|
|
Cogeneration
& Electric Generation
|
|
|
394
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
Firm Revenues
|
|
|
223,168
|
|
|
229,769
|
|
|
|
|
|
|
|
|
|
Interruptible
|
|
|
140
|
|
|
399
|
|
Interruptible
Transportation
|
|
|
463
|
|
|
634
|
|
Off-System
|
|
|
52,066
|
|
|
41,643
|
|
Capacity
Release & Storage
|
|
|
1,744
|
|
|
4,302
|
|
Intercompany
Sales
|
|
|
(12,579
|
)
|
|
(7,560
|
)
|
Other
|
|
|
283
|
|
|
334
|
|
|
|
|
|
|
|
|
|
Total
Utility Operating Revenues
|
|
$
|
265,285
|
|
$
|
269,521
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
Utility
Net Operating Revenues:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$ 171,646
|
|
|
|
$ 167,798
|
|
|
|
Commercial
and Industrial
|
|
50,679
|
|
|
|
61,264
|
|
|
|
Cogeneration
and Electric Generation
|
|
843
|
|
|
|
707
|
|
|
|
Interruptible
|
|
|
603
|
|
|
|
|
|
1,033
|
|
|
|
|
Off-system,
Capacity Release & Storage
|
|
|
53,810
|
|
|
|
|
|
45,945
|
|
|
|
|
Intercompany
Sales
|
|
|
(12,579
|
)
|
|
|
|
|
(7,560
|
)
|
|
|
|
Other
Revenues
|
|
|
283
|
|
|
|
|
|
334
|
|
|
|
|
Total
Utility Operating Revenues
|
|
|
265,285
|
|
|
|
|
|
269,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
192,965
|
|
|
|
|
|
201,060
|
|
|
|
|
Conservation
Recoveries
|
|
|
1,213
|
|
|
|
|
|
2,218
|
|
|
|
|
RAC
Recoveries
|
|
|
472
|
|
|
|
|
|
447
|
|
|
|
|
Revenue
Taxes
|
|
|
4,035
|
|
|
|
|
|
3,679
|
|
|
|
|
Utility
Net Operating Revenues (Margin)
|
|
$
|
66,600
|
|
|
|
|
$
|
62,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
44,262
|
|
|
66.5
|
%
|
$
|
38,865
|
|
|
62.6
|
%
|
Commercial
and industrial
|
|
|
15,360
|
|
|
23.1
|
|
|
14,167
|
|
|
22.8
|
|
Cogeneration
and electric generation
|
|
|
359
|
|
|
0.5
|
|
|
519
|
|
|
0.8
|
|
Interruptible
|
|
|
57
|
|
|
0.1
|
|
|
70
|
|
|
0.1
|
|
Off-system,
capacity release & storage
|
|
|
991
|
|
|
1.5
|
|
|
2,157
|
|
|
3.5
|
|
Other
revenues
|
|
|
282
|
|
|
0.4
|
|
|
333
|
|
|
0.5
|
|
Margin
before weather normalization & decoupling
|
|
|
61,311
|
|
|
92.1
|
|
|
56,111
|
|
|
90.3
|
|
TAC
mechanism
|
|
|
-
|
|
|
0.0
|
|
|
6,006
|
|
|
9.7
|
|
CIP
mechanism
|
|
|
5,289
|
|
|
7.9
|
|
|
-
|
|
|
0.0
|
|
Utility
Net Operating Revenues (margin)
|
|
$
|
66,600
|
|
|
100.0
|
%
|
$
|
62,117
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Degree
Days
|
|
|
2,418
|
|
|
|
|
|
2,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes
— Utility —
Total
gas
throughput decreased 2.6% for the first three months of 2007, compared with
the
same period in 2006. While firm throughput increased 15.7% due to colder weather
and the addition of 7,501 customers, opportunities for capacity release and
storage decreased during the quarter. However, due to the lower margin on
capacity release and storage, coupled with SJG’s requirement to credit the BGSS
with 85% of these margins, such decrease in throughput has a minimal impact
on
SJG’s profitability.
Operating
Revenues —
Utility —
Revenues
decreased $4.2 million during the first quarter of 2007 compared with the same
period in the prior year primarily due to a shift in off-system sales to a
related party which are eliminated in consolidation. Prior to intercompany
eliminations, revenues increased $0.8 million during the first quarter of 2007
compared with the same period in the prior year primarily due to two factors.
First, SJG added 7,501 customers during the 12-month period ended March 31,
2007, which represents a 2.3% increase in total customers. SJG served 332,465
customers at March 31, 2007 compared with 324,964 customers at March 31, 2006.
Second, temperatures were approximately 12% colder in the first quarter of
2007,
resulting in increased volumes of gas sold or transported versus the prior
year
quarter.
Partially
offsetting the increases noted above were, a decrease in the BGSS gas cost
recovery rate and an increase in the number of residential and commercial
customers purchasing gas from third party marketers. The BGSS rate in the first
quarter of 2007 was 10.8% lower than the prior year rate. Last year’s rate was
higher to address under recovery of gas costs stemming from substantial
increases in wholesale gas prices across the country in 2005.
The
total
number of transportation customers more than doubled to 24,866 at March 31,
2007
as compared to 10,411 the prior year. Transportation customers generate less
revenue for the Company because they purchase the gas commodity from a third
party marketer. The Company does not profit from gas costs and therefore, BGSS
rate changes and customer migration between sales and transportation have no
impact on Company profitability.
Operating
Revenues — Nonutility —
Combined revenues for SJI’s nonutility businesses, net of intercompany
transactions, for the three months ended March 31, 2007, were comparable to
revenues for the three months ended March 31, 2006.
SJE’s
revenues from retail gas for the three months ended March 31, 2007 were
comparable to revenues for the three months ended March 31, 2006. Sales to
residential customers and to commercial and industrial customers in Northwest
Pennsylvania as a result of a November 2006 retail operations acquisition were
essentially offset by significantly lower sales prices in 2007 compared with
2006. SJE began adding residential customers in the second quarter of 2006
reaching a total customer count of over 15,400 as of March 31,
2007.
SJE’s
revenues from retail electricity decreased by $0.9 million for the three months
ended March 31, 2007 compared with the three months ended March 31, 2006 due
mainly to lower electricity sales prices.
SJRG’s
revenues decreased by $0.9 million for the three months ended March 31, 2007
compared with the three months ended March 31, 2006. For the three months ended
March 31, 2007, SJRG sold nearly double the storage volumes compared with the
three months ended March 31, 2006. Offsetting this increase in storage volumes
is $33.0 million relating to the net change in mark to market unrealized gains
and losses recorded on forward financial contracts. Due to price
volatility, SJRG recorded net unrealized losses of $19.2 million for the three
months ended March 31, 2007 compared with net unrealized gains of $13.8 million
(previously disclosed as $9.7 million which included certain losses on
settled contracts related to gas in storage) recorded for the three months
ended
March 31, 2006. ,
Marina’s
revenues increased by $1.9 million for the three months ended March 31, 2007
compared with the three months ended March 31, 2006 due mainly to sales to
Borgata’s expansion which began operations in July 2006.
Margin
(pre-tax) — Utility—
SJG’s
margin is defined as natural gas revenues less natural gas costs; volumetric
and
revenue based energy taxes; and regulatory rider expenses. We believe that
margin provides a more meaningful basis for evaluating utility operations than
revenues since natural gas costs, energy taxes and regulatory rider expenses
are
passed through to customers, and therefore, have no effect on margin. Natural
gas costs are charged to operating expenses on the basis of therm sales at
the
prices approved by the New Jersey Board of Public Utilities through the BGSS
tariff.
Total
margin increased 7.2% for the first three months of 2007, compared with the
same
period in 2006 primarily due to colder weather during 2007, customer additions
as noted above under “Operating Revenues — Utility” and approval of the CIP as
of October 1, 2006. Partially offsetting these increases, Off system sales,
capacity release and storage margin declined due to less favorable market
conditions in 2007 and a decrease in the percentage of earnings from these
sales
retained by the Company in accordance with a July 2004 base rate case
stipulation. Cogeneration and electric generation decreased in the first three
months of 2007 compared to the same period in 2006 primarily due to a new
long-term contract with a customer resulting in a different seasonal spread
of
annual margin.
The
CIP
replaced the TAC beginning October 1, 2006 and takes into account variations
in
customer usage factors due to weather as well as all other variations. The
CIP
added $5.3 million to margin in the first quarter of 2007. Of this amount $0.5
million was related to weather variations and $4.8 million was related to other
customer usage variations. The TAC added $6.0 million to margin in the first
quarter of 2006 and was all related to weather variations.
Gross
Margin — Nonutility—
Gross
margin for the nonutility businesses is defined as revenue less all costs that
are directly related to the production, selling and delivery of the company’s
products and services. These costs primarily include natural gas and electric
commodity costs as well as payroll and related benefits. On the condensed
consolidated statements of income, revenue is reflected in Operating Revenues
-
Nonutility and the costs are reflected in Cost of Sales - Nonutility. As
discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s
Annual Report on Form 10-K as of December 31, 2006, revenues and expenses
related to the energy trading activities of SJRG are presented on a net basis
in
Operating Revenues - Nonutility.
For
the
three months ended March 31, 2007, combined gross margins for the nonutility
businesses, net of intercompany transactions, decreased $7.3 million to $12.6
million for the three months ended March 31, 2007, compared with the three
months ended March 31, 2006. This decrease is primarily due to the
following:
·
|
Gross
Margin for SJRG decreased $8.7 million for the three months ended
March
31, 2007, compared with the three months ended March 31, 2006. Of
this
decrease, $33.0 million relates to the net change in mark-to-market
unrealized gains and losses discussed above under Operating Revenues
—
Nonutility.
Operationally, margins increased significantly due primarily to favorable
time spreads on storage asset positions. These storage assets allow
SJRG
to lock in the differential between purchasing natural gas at low
current
prices and selling equivalent quantities at higher future prices.
Gross
margin is generated via pricing differentials that occur over time.
SJRG’s
contribution to margin continues to increase as we expand our portfolio
of
storage assets under contract, which totaled 9.6 Bcf, and 4.8 Bcf
as of
March 31, 2007 and 2006, respectively. However, margins could fluctuate
significantly due to the volatile nature of wholesale gas prices.
|
·
|
Gross
Margin for Marina increased $1.1 million for the three months ended
March
31, 2007 compared with the three months ended March 31, 2006 due
mainly to
the increase in sales volumes from the thermal plant related to Borgata’s
expansion.
|
·
|
Gross
margin from SJE’s retail gas sales increased $1.1 million for the three
months ended March 31, 2007 compared with the three months ended
March 31,
2006, due mainly to margins recognized on residential sales volumes
in the
first quarter of 2007 and losses incurred relating to a full
requirements customer in the commercial market recognized in the
first
quarter of 2006.
|
·
|
Gross
margin from SJE’s retail electricity sales increased slightly for the
three months ended March 31, 2007 compared with the three months
ended
March 31, 2006, as SJE restructured its contracts in 2006 to pass
a
variable component of pricing on to its
customers.
|
Operations
Expense —
A
summary of net changes in operations expense, for the three months ended March
31 follows (in thousands):
|
|
2007
vs. 2006
|
|
|
|
|
|
|
Utility
|
|
$
|
70
|
|
Nonutility:
|
|
|
|
|
Wholesale
Gas
|
|
|
311
|
|
Retail
Gas and Other
|
|
|
53
|
|
Retail
Electricity
|
|
|
64
|
|
On-Site
Energy Production
|
|
|
687
|
|
Appliance
Service
|
|
|
(48
|
)
|
Total
Nonutility
|
|
|
1,067
|
|
Corporate
and Services
|
|
|
319
|
|
Intercompany
Eliminations
|
|
|
(215
|
)
|
Total
Operations
|
|
$
|
1,241
|
|
Nonutility
Wholesale Gas Operations expense increased for the three months ended March
31,
2007, compared with the same period of 2006, due mainly to higher Corporate
and
Services cost allocations and additional personnel costs to support
growth.
Nonutility
On-Site Energy Production Operations expense increased for the three months
ended March 31, 2007, compared to the same period of 2006, due mainly to higher
labor and operating costs at all active projects, higher Corporate and Services
cost allocations, and three months of costs related to the thermal plant
expansion which began operations in July 2006.
Other
Operating Expenses —
A
summary of changes in other consolidated operating expenses for the three months
ended March 31 follows (in thousands):
|
|
2007
vs. 2006
|
|
|
|
|
|
|
Maintenance
|
|
$
|
67
|
|
Depreciation
|
|
|
670
|
|
Energy
and Other Taxes
|
|
|
353
|
|
Depreciation
expense increased for the three months ended March 31, 2007, compared with
the
same period of 2006, due mainly to the increased investment in property, plant
and equipment by SJG and Marina.
Energy
and Other Taxes increased for the three months ended March 31, 2007, compared
with the same period in 2006, primarily due to higher energy-related taxes.
Higher taxable firm throughput in 2007 resulted from colder weather during
the
first quarter.
Interest
Charges —
Interest charges increased by $0.6 million for the three months ended March
31,
2007, compared with the same period of 2006, due primarily to higher interest
rates on short-term debt and, higher levels of long-term debt outstanding.
A
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.
Long-term debt levels rose to support capital expenditures at both our utility
and non-utility operations. Debt is incurred primarily to expand and upgrade
SJG’s gas transmission and distribution system, to support seasonal working
capital needs related to inventories and customer receivables, and to develop
energy projects.
Discontinued
Operations—
The
losses are primarily comprised of environmental remediation and product
liability litigation associated with previously disposed of
businesses.
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.
Cash
Flows from Operating Activities—
Liquidity needs are first met with net cash provided by operating activities.
Net cash provided by operating activities totaled $119.5 million, and $43.5
million in the first quarters of 2007 and 2006, 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, customer usage factors
related to conservation efforts and the price of the natural gas commodity,
inventory utilization and gas cost recoveries. The comparison of net cash
provided by operating activities between the 2007 and 2006 first quarters was
significantly impacted by differences in the terms under which SJI purchased
natural gas, and the impact of extremely warm weather on inventory levels and
collection under regulatory clauses at respective preceding year ends. Lower
payable levels at year end 2006 as compared with 2005 was due to SJI’s election
to pay for certain gas supplies on a current basis as opposed
to 2005 when we delayed those payments into the first quarter of
the subsequent year. Very warm weather conditions experienced during the fourth
quarter of 2006 resulted in low levels of gas withdrawn from storage to meet
customer demand, and decreased gas volumes consumed resulted in slower
collections of expenses under several regulatory clauses. We typically
anticipate that delays in withdrawing gas from storage during the fourth quarter
of any fiscal year will result in increased withdrawals in the subsequent
quarter, benefiting our cash flows for that quarter. SJI also ends each calendar
year in a prepaid tax position due to mandatory prepayment requirements on
all
state taxes. Such prepayments are credited against amounts otherwise due during
the first quarter of the subsequent year; further improving first quarter
liquidity.
Cash
Flows from Investing Activities—
SJI
has
a continuing need for cash resources and capital, primarily to invest in new
and
replacement facilities and equipment. Net cash outflows for construction
projects for the first quarters of 2007 and 2006 amounted to $12.1 million
and
$20.4 million, respectively. We estimate the net cash outflows for construction
projects for 2007, 2008 and 2009 to be approximately $59.0 million, $51.1
million and $47.5 million, respectively. Included in the 2007 estimates is
$3.8
million in capital costs accrued but not paid as of December 31, 2006.
In
support of its risk management activities, SJRG is required to maintain a margin
account with a national investment firm as collateral for its forward contracts,
swap agreements, options contracts and futures contracts. This margin account
is
included in Restricted Investments (or Margin Account Liability, depending
upon
the value of the related financial contracts. The change in the Margin Account
Liability is reflected in cash flows from Operating Activities) on the
consolidated balance sheets. The required amount of restricted investments
changes on a daily basis due to fluctuations in the market value of the related
outstanding contracts and is difficult to predict.
Cash
Flows from Financing Activities—
Short-term borrowings under lines of credit from commercial banks are used
to
supplement cash from operations, to support working capital needs and to finance
capital expenditures as incurred. From time to time, short-term debt incurred
to
finance capital expenditures is refinanced with long-term debt. No long-term
debt was issued during the first quarter of 2007.
Bank
credit available to SJI totaled $406.0 million at March 31, 2007, of which
$147.3 million, inclusive of $65.1 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 $200.0 million
revolving credit facility and $30.0 million of uncommitted bank lines available
to SJI. The revolving credit facilities expire in August 2011 and contain one
financial covenant regarding the ratio of total debt to total capitalization,
measured on a quarterly basis. SJI and SJG were in compliance with this covenant
as of March 31, 2007. Based upon the existing credit facilities and a regular
dialog 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 April
2006,
SJG issued $25.0 million of secured tax-exempt, auction-rate debt through the
New Jersey Economic Development Authority (NJEDA). 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 were used to fund construction costs related to the expansion of
Marina’s Atlantic City thermal plant. Investors in the bonds receive liquidity
and credit support via letters of credit provided by commercial banks through
SJI’s revolving credit.
SJI
has
raised equity capital 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 $0.8 million of equity
capital by issuing 24,438 shares in the first quarter of 2007, and $1.0 million
of equity capital by issuing 33,099 shares in the same quarter of 2006. We
anticipate raising less than $10.0 million of additional equity capital in
total
through the DRP in 2007, for the purpose of maintaining an
equity-to-capitalization ratio close to 50%.
SJI’s
capital structure was as follows:
|
|
As
of March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Common
Equity
|
|
|
51.1
|
%
|
|
47.7
|
%
|
Long-Term
Debt
|
|
|
39.8
|
|
|
38.1
|
|
Short-Term
Debt
|
|
|
9.1
|
|
|
14.2
|
|
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.
SJI
has
paid dividends on its common stock for 55 consecutive years and has increased
that dividend each year for the last eight years. The Company currently looks
to
grow that dividend by at least 6% to 7% per year and has a targeted payout
ratio
of between 50% and 60%. In setting the dividend rate, the Board of Directors
of
SJI considers future earnings expectations, payout ratio, and dividend yield
relative to those at peer companies as well as returns available on other
income-oriented investments.
COMMITMENTS
AND CONTINGENCIES:
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 first
quarter of 2007 amounted to $12.1 and $2.9 million, respectively. Management
estimates net cash outflows for construction projects for 2007, 2008 and 2009,
to be approximately $59.0 million, $51.1 million and $47.5 million,
respectively. Total cash outflows for remediation projects are expected to
be
$25.1, $13.6 and $9.0 for 2007, 2008 and 2009, respectively.
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 under
SJI’s revolving credit agreement to support the financing of the original
construction and recent expansion of Marina’s Atlantic City thermal plant
project.
SJG
has
certain commitments for both pipeline capacity and gas supply for which it
pays
fees regardless of usage. Those commitments as of March 31, 2007, average $53.1
million annually and total $231.9 million over the contracts’ lives.
Approximately 48% of the financial commitments under these contracts expire
during the next five years. SJG expects to renew each of these contracts under
renewal provisions as provided in each contract. SJG recovers all prudently
incurred fees through rates via the Basic Gas Supply Service
clause.
See
Note
12 in the condensed consolidated financial statements for additional discussion
of contractual cash obligations of the Company.
Off-Balance
Sheet Arrangements —
SJI
has
no off-balance sheet financing arrangements.
Parental
Guarantees —
As
of
March 31, 2007, SJI had issued $327.9 million of parental guarantees on behalf
of its subsidiaries. Of this total, $269.3 million expire within one year and
$57.6 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 March 31, 2007, these guarantees support future
firm commitments and $54.2 million of the Accounts Payable recorded on our
consolidated balance sheet. Parental guarantees totaling $22.9 million are
related to Marina’s construction and operating activities. As part of our risk
management policy, we also require parental guarantees from trading
counterparties as applicable. These arrangements are typical in our industry.
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.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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,
through SJRG 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.
We recorded the net unrealized pre-tax (loss) gain of $(19.3) million and $13.7
million (previously disclosed as $9.5 million which included certain losses
on settled contracts related to gas in storage) in earnings during the three
months ended March 31, 2007 and 2006, respectively. These unrealized gains
and
losses are included with realized gains and losses in Operating
Revenues — Nonutility.
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 contracts determined using
mark-to-market accounting as of March 31, 2007 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
|
|
$
|
13,721
|
|
$
|
8,039
|
|
$
|
265
|
|
$
|
22,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
External Sources
|
|
|
Basis
|
|
|
8,448
|
|
|
3,778
|
|
|
-
|
|
|
12,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
22,169
|
|
$
|
11,817
|
|
$
|
265
|
|
$
|
34,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
Source
of
|
|
|
Maturity
|
|
|
Maturity
|
|
|
Beyond
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
<
1 Year
|
|
|
1
- 3 Years
|
|
|
3
Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
Actively Quoted
|
|
|
NYMEX
|
|
$
|
10,182
|
|
$
|
2,701
|
|
$
|
252
|
|
$
|
13,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
External Sources
|
|
|
Basis
|
|
|
3,541
|
|
|
1,898
|
|
|
-
|
|
|
5,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
13,723
|
|
$
|
4,599
|
|
$
|
252
|
|
$
|
18,574
|
|
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 2.5
million decatherms with a weighted-average settlement price of $9.53 per
decatherm.
A
reconciliation of SJI's estimated net fair value of energy-related derivatives
follows (in thousands):
|
|
$
|
19,122
|
|
Contracts
Settled During Three Months Ended March 31, 2007, Net
|
|
|
(10,340
|
)
|
Other
Changes in Fair Value from Continuing and New Contracts,
Net
|
|
|
6,895
|
|
|
|
|
|
|
Net
Derivatives — Energy Related Assets March 31, 2007
|
|
$
|
15,677
|
|
Interest
Rate Risk —
Our
exposure to interest-rate risk relates primarily to short-term, variable-rate
borrowings. Short-term, variable-rate debt outstanding at March 31, 2007 was
$82.2 million and averaged $140.1 million during the first three months of
2007.
A hypothetical 100 basis point (1%) increase in interest rates on our average
variable-rate debt outstanding would result in a $827,000 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: 2006
— 67
b.p. increase; 2005 — 194 b.p. increase; 2004 — 115 b.p. decrease; 2003 — 28
b.p. decrease; and 2002 — 74 b.p. decrease. For March 2007, our average interest
rate on variable-rate debt was 5.72%.
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 March 31, 2007, the
interest costs on all but $4.1 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
March 31, 2007, SJI’s active interest rate swaps were as follows:
Amount
|
|
Fixed
Interest
Rate
|
|
Start
Date
|
|
Maturity
|
|
Type
|
|
Obligor
|
$ 3,000,000
|
|
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
|
$ 7,100,000
|
|
4.895
|
%
|
|
02/01/2006
|
|
02/01/2016
|
|
Taxable
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
4. Controls and Procedures
Disclosure
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.
Changes
in Internal Control Over Financial Reporting
There
has
not been any change in the Company's internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during
the
fiscal quarter ended March 31, 2007 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 2, Pending
Litigation, beginning on page 25.
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:
May 9, 2007
|
By:
/s/
Edward J. Graham
|
|
Edward J. Graham
|
|
Chairman, President & Chief Executive Officer
|
|
|
|
|
|
|
Dated:
May 9, 2007
|
By:
/s/
David A. Kindlick
|
|
David A. Kindlick
|
|
Vice President & Chief Financial
Officer
|