sjiform10q093008.htm
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 September 30,
2008
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, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
[X]
|
|
Accelerated
filer
|
[ ]
|
Non-accelerated
filer
|
[ ] (Do not
check if a smaller reporting company)
|
|
Smaller
reporting company
|
[
]
|
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
November 3, 2008, there were 29,728,697 shares of the registrant’s common stock
outstanding.
PART I -
FINANCIAL INFORMATION
Item
1. Financial Statements - See Pages 3 through 20
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
(In
Thousands, Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues:
|
|
|
|
|
|
|
Utility
|
|
$ |
63,687 |
|
|
$ |
83,385 |
|
Nonutility
|
|
|
146,726 |
|
|
|
72,843 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
|
210,413 |
|
|
|
156,228 |
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Cost
of Sales - (Excluding depreciation)
|
|
|
|
|
|
|
|
|
-
Utility
|
|
|
40,324 |
|
|
|
61,188 |
|
-
Nonutility
|
|
|
61,935 |
|
|
|
47,976 |
|
Operations
|
|
|
17,923 |
|
|
|
16,084 |
|
Maintenance
|
|
|
1,925 |
|
|
|
1,544 |
|
Depreciation
|
|
|
7,333 |
|
|
|
6,982 |
|
Energy
and Other Taxes
|
|
|
1,646 |
|
|
|
1,587 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
131,086 |
|
|
|
135,361 |
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
79,327 |
|
|
|
20,867 |
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
496 |
|
|
|
303 |
|
|
|
|
|
|
|
|
|
|
Interest
Charges
|
|
|
(5,745 |
) |
|
|
(6,966 |
) |
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
74,078 |
|
|
|
14,204 |
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(30,367 |
) |
|
|
(5,818 |
) |
|
|
|
|
|
|
|
|
|
Equity
in Earnings of Affiliated Companies
|
|
|
147 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
43,858 |
|
|
|
8,564 |
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations - (Net of tax benefit)
|
|
|
(76 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
43,782 |
|
|
$ |
8,531 |
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
1.475 |
|
|
$ |
0.290 |
|
Discontinued
Operations
|
|
|
(0.002 |
) |
|
|
(0.001 |
) |
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$ |
1.473 |
|
|
$ |
0.289 |
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Basic
|
|
|
29,729 |
|
|
|
29,518 |
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
1.469 |
|
|
$ |
0.289 |
|
Discontinued
Operations
|
|
|
(0.003 |
) |
|
|
(0.001 |
) |
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$ |
1.466 |
|
|
$ |
0.288 |
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Diluted
|
|
|
29,865 |
|
|
|
29,627 |
|
|
|
|
|
|
|
|
|
|
Dividends
Declared per Common Share
|
|
$ |
0.270 |
|
|
$ |
0.245 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
(In
Thousands, Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues:
|
|
|
|
|
|
|
Utility
|
|
$ |
393,262 |
|
|
$ |
441,073 |
|
Nonutility
|
|
|
301,038 |
|
|
|
255,241 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
|
694,300 |
|
|
|
696,314 |
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Cost
of Sales - (Excluding depreciation)
|
|
|
|
|
|
|
|
|
-
Utility
|
|
|
261,604 |
|
|
|
314,408 |
|
-
Nonutility
|
|
|
231,141 |
|
|
|
198,830 |
|
Operations
|
|
|
56,805 |
|
|
|
51,619 |
|
Maintenance
|
|
|
5,412 |
|
|
|
4,446 |
|
Depreciation
|
|
|
21,758 |
|
|
|
20,884 |
|
Energy
and Other Taxes
|
|
|
8,628 |
|
|
|
8,891 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
585,348 |
|
|
|
599,078 |
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
108,952 |
|
|
|
97,236 |
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
1,235 |
|
|
|
1,184 |
|
|
|
|
|
|
|
|
|
|
Interest
Charges
|
|
|
(17,246 |
) |
|
|
(20,123 |
) |
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
92,941 |
|
|
|
78,297 |
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(38,245 |
) |
|
|
(32,350 |
) |
|
|
|
|
|
|
|
|
|
Equity
in Earnings of Affiliated Companies
|
|
|
593 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
55,289 |
|
|
|
46,547 |
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations - (Net of tax benefit)
|
|
|
(101 |
) |
|
|
(235 |
) |
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
55,188 |
|
|
$ |
46,312 |
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
1.862 |
|
|
$ |
1.581 |
|
Discontinued
Operations
|
|
|
(0.004 |
) |
|
|
(0.008 |
) |
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$ |
1.858 |
|
|
$ |
1.573 |
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Basic
|
|
|
29,699 |
|
|
|
29,449 |
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
1.854 |
|
|
$ |
1.575 |
|
Discontinued
Operations
|
|
|
(0.004 |
) |
|
|
(0.008 |
) |
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$ |
1.850 |
|
|
$ |
1.567 |
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Diluted
|
|
|
29,828 |
|
|
|
29,561 |
|
|
|
|
|
|
|
|
|
|
Dividends
Declared per Common Share
|
|
$ |
0.810 |
|
|
$ |
0.735 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
43,782 |
|
|
$ |
8,531 |
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income, Net of Tax:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(Loss) Gain on Available-for-Sale Securities
|
|
|
(355 |
) |
|
|
41 |
|
Unrealized
Loss on Derivatives - Other
|
|
|
(20 |
) |
|
|
(1,277 |
) |
Unrealized
Loss on Derivatives - Other from Affiliated Companies
|
|
|
(347 |
) |
|
|
(858 |
) |
|
|
|
|
|
|
|
|
|
Other
Comprehensive Loss - Net of Tax*
|
|
|
(722 |
) |
|
|
(2,094 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$ |
43,060 |
|
|
$ |
6,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
55,188 |
|
|
$ |
46,312 |
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income, Net of Tax:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(Loss) Gain on Available-for-Sale Securities
|
|
|
(635 |
) |
|
|
221 |
|
Unrealized
Gain on Derivatives - Other
|
|
|
499 |
|
|
|
64 |
|
Unrealized
Loss on Derivatives - Other from Affiliated Companies
|
|
|
(154 |
) |
|
|
(858 |
) |
|
|
|
|
|
|
|
|
|
Other
Comprehensive Loss - Net of Tax*
|
|
|
(290 |
) |
|
|
(573 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$ |
54,898 |
|
|
$ |
45,739 |
|
|
|
|
|
|
|
|
|
|
*
Determined using a combined statutory tax rate of 41.08%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
(In
Thousands)
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
$ |
32,072 |
|
|
$ |
104,453 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(45,048 |
) |
|
|
(40,915 |
) |
Net
(Purchase) Proceeds from Sale of Restricted Investments in Margin
Account
|
|
|
(11,150 |
) |
|
|
10,404 |
|
Proceeds
from Sale of Restricted Investments from Escrowed Loan
Proceeds
|
|
|
- |
|
|
|
4,172 |
|
Purchase
of Restricted Investments with Escrowed Loan Proceeds
|
|
|
(75 |
) |
|
|
(127 |
) |
Merchandise
Loans
|
|
|
(2,857 |
) |
|
|
(2,695 |
) |
Proceeds
from Merchandise Loans
|
|
|
2,923 |
|
|
|
2,975 |
|
Purchase
of Company Owned Life Insurance
|
|
|
(4,287 |
) |
|
|
(3,917 |
) |
Investment
in Affiliate
|
|
|
(781 |
) |
|
|
(7,463 |
) |
Advances
on Notes Receivable - Affiliate
|
|
|
(4,832 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(66,107 |
) |
|
|
(37,566 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net
Borrowings (Repayments) of Lines of Credit
|
|
|
40,835 |
|
|
|
(48,915 |
) |
Proceeds
from Issuance of Long-Term Debt
|
|
|
25,000 |
|
|
|
- |
|
Payments
for Issuance of Long-Term Debt
|
|
|
(247 |
) |
|
|
- |
|
Principal
Repayments of Long-Term Debt
|
|
|
(25,079 |
) |
|
|
(2,364 |
) |
Dividends
on Common Stock
|
|
|
(16,042 |
) |
|
|
(14,431 |
) |
Proceeds
from Sale of Common Stock
|
|
|
2,076 |
|
|
|
5,105 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
26,543 |
|
|
|
(60,605 |
) |
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(7,492 |
) |
|
|
6,282 |
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
11,678 |
|
|
|
7,932 |
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
4,186 |
|
|
$ |
14,214 |
|
The
accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
Utility
Plant, at original cost
|
|
$ |
1,156,565 |
|
|
$ |
1,123,992 |
|
Accumulated
Depreciation
|
|
|
(290,215 |
) |
|
|
(276,301 |
) |
Nonutility
Property and Equipment, at cost
|
|
|
120,225 |
|
|
|
112,971 |
|
Accumulated
Depreciation
|
|
|
(14,483 |
) |
|
|
(11,793 |
) |
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment - Net
|
|
|
972,092 |
|
|
|
948,869 |
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
|
5,653 |
|
|
|
6,734 |
|
Restricted
|
|
|
17,685 |
|
|
|
6,460 |
|
Investment
in Affiliates
|
|
|
2,058 |
|
|
|
1,694 |
|
|
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
25,396 |
|
|
|
14,888 |
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
4,186 |
|
|
|
11,678 |
|
Accounts
Receivable
|
|
|
93,291 |
|
|
|
111,899 |
|
Unbilled
Revenues
|
|
|
9,788 |
|
|
|
48,304 |
|
Provision
for Uncollectibles
|
|
|
(5,839 |
) |
|
|
(5,491 |
) |
Natural
Gas in Storage, average cost
|
|
|
179,330 |
|
|
|
123,790 |
|
Materials
and Supplies, average cost
|
|
|
3,730 |
|
|
|
2,777 |
|
Prepaid
Taxes
|
|
|
18,594 |
|
|
|
6,878 |
|
Derivatives
- Energy Related Assets
|
|
|
44,448 |
|
|
|
23,270 |
|
Other
Prepayments and Current Assets
|
|
|
7,382 |
|
|
|
5,225 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
354,910 |
|
|
|
328,330 |
|
|
|
|
|
|
|
|
|
|
Regulatory
and Other Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Regulatory
Assets
|
|
|
212,743 |
|
|
|
188,688 |
|
Prepaid
Pension
|
|
|
7,046 |
|
|
|
1,970 |
|
Derivatives
- Energy Related Assets
|
|
|
16,300 |
|
|
|
10,941 |
|
Unamortized
Debt Issuance Costs
|
|
|
7,231 |
|
|
|
7,386 |
|
Notes
Receivable - Affiliate
|
|
|
4,832 |
|
|
|
- |
|
Contract
Receivables
|
|
|
12,678 |
|
|
|
13,220 |
|
Other
|
|
|
20,083 |
|
|
|
15,149 |
|
|
|
|
|
|
|
|
|
|
Total
Regulatory and Other Noncurrent Assets
|
|
|
280,913 |
|
|
|
237,354 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,633,311 |
|
|
$ |
1,529,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOUTH
JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization and
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
$ |
37,161 |
|
|
$ |
37,010 |
|
Premium
on Common Stock
|
|
|
251,340 |
|
|
|
248,449 |
|
Treasury
Stock (at par)
|
|
|
(182 |
) |
|
|
(187 |
) |
Accumulated
Other Comprehensive Loss
|
|
|
(10,605 |
) |
|
|
(10,315 |
) |
Retained
Earnings
|
|
|
237,242 |
|
|
|
206,123 |
|
|
|
|
|
|
|
|
|
|
Total
Common Equity
|
|
|
514,956 |
|
|
|
481,080 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
357,818 |
|
|
|
357,896 |
|
|
|
|
|
|
|
|
|
|
Total
Capitalization
|
|
|
872,774 |
|
|
|
838,976 |
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
1,255 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Notes
Payable
|
|
|
159,125 |
|
|
|
118,290 |
|
Current
Maturities of Long-Term Debt
|
|
|
106 |
|
|
|
106 |
|
Accounts
Payable
|
|
|
88,095 |
|
|
|
101,154 |
|
Customer
Deposits and Credit Balances
|
|
|
30,323 |
|
|
|
18,475 |
|
Margin
Account Liability
|
|
|
- |
|
|
|
4,112 |
|
Environmental
Remediation Costs
|
|
|
20,035 |
|
|
|
25,827 |
|
Taxes
Accrued
|
|
|
3,632 |
|
|
|
5,310 |
|
Derivatives
- Energy Related Liabilities
|
|
|
31,299 |
|
|
|
13,735 |
|
Deferred
Income Taxes - Net
|
|
|
19,661 |
|
|
|
20,251 |
|
Deferred
Contract Revenues
|
|
|
5,701 |
|
|
|
5,231 |
|
Dividends
Payable
|
|
|
8,027 |
|
|
|
- |
|
Interest
Accrued
|
|
|
4,831 |
|
|
|
6,657 |
|
Pension
and Other Postretirement Benefits
|
|
|
841 |
|
|
|
805 |
|
Other
Current Liabilities
|
|
|
6,715 |
|
|
|
8,358 |
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
378,391 |
|
|
|
328,311 |
|
|
|
|
|
|
|
|
|
|
Deferred
Credits and Other Noncurrent Liabilities:
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes - Net
|
|
|
190,818 |
|
|
|
175,686 |
|
Investment
Tax Credits
|
|
|
1,911 |
|
|
|
2,150 |
|
Pension
and Other Postretirement Benefits
|
|
|
28,461 |
|
|
|
29,036 |
|
Environmental
Remediation Costs
|
|
|
55,181 |
|
|
|
52,078 |
|
Asset
Retirement Obligations
|
|
|
23,932 |
|
|
|
24,604 |
|
Derivatives
- Energy Related Liabilities
|
|
|
10,277 |
|
|
|
4,190 |
|
Derivatives
- Other
|
|
|
3,089 |
|
|
|
2,484 |
|
Regulatory
Liabilities
|
|
|
52,336 |
|
|
|
55,779 |
|
Other
|
|
|
14,886 |
|
|
|
15,707 |
|
|
|
|
|
|
|
|
|
|
Total
Deferred Credits
|
|
|
|
|
|
|
|
|
and
Other Noncurrent Liabilities
|
|
|
380,891 |
|
|
|
361,714 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities
|
|
$ |
1,633,311 |
|
|
$ |
1,529,441 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Unaudited 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 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 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 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 2007 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 $0.9 million in both of the three month periods
ended September 30, 2008 and 2007, and $5.9 million and $6.3
million in the nine months ended September 30, 2008 and 2007,
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. The amount of interest capitalized by SJI for
the three and nine months ended September 30, 2008 and 2007 was not
significant.
DERIVATIVE
INSTRUMENTS — The Company manages its risks of purchases and sales, as well as
natural gas in storage, using a variety of derivative instruments that include
forward contracts, swap agreements, options contracts and futures
contracts. These contracts are measured at fair value and recorded in
Derivatives — Energy Related Assets or Derivatives — Energy Related Liabilities
on the condensed consolidated balance sheets. The consolidated net unrealized
pre-tax gain of $71.9 million and $17.8 million were recorded in earnings
during the three months ended September 30, 2008 and 2007,
respectively. For the nine months ended September 30, 2008 and 2007,
the net unrealized pre-tax gain of $2.1 million and $8.8 million,
respectively were recorded in earnings. These unrealized gains and
losses 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 September 30, 2008 and December 31, 2007, SJG had
$13.9 million and $2.1 million of costs, respectively, included in its BGSS
related to open financial contracts.
The
Company has entered into interest rate derivatives and similar agreements to
hedge exposure to increasing interest rates, and the impact of those rates on
cash flows of variable-rate debt. These interest rate derivatives are included
in Derivatives-Other on the condensed consolidated balance sheets. There have
been no significant changes to the Company’s active interest rate swaps since
December 31, 2007 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,
2007.
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 September 30, 2008 and December 31, 2007, the net unrealized
loss on these swaps was $3.1 million and $2.5 million, respectively. The market
value represents the amount SJI would have to pay the counterparty to terminate
these contracts as of those dates. For selected interest rate derivatives, the
market value upon termination can be recovered in rates and has therefore been
included in Other Regulatory Assets in the condensed consolidated balance sheets
in accordance with FAS 71 “Accounting for the Effects of Certain Types of
Regulation.” The remaining interest rate derivatives have been designated as
cash flow hedges.
GAS
EXPLORATION AND DEVELOPMENT - The Company capitalizes all costs associated with
gas property acquisition, exploration and development activities under the full
cost method of accounting. Capitalized costs include costs related to unproved
properties, which are not amortized until proved reserves are found or it is
determined that the unproved properties are impaired. All costs related to
unproved properties are reviewed quarterly to determine if impairment has
occurred. As of September 30, 2008, $5.6 million related to the acquisition of
interests in proved and unproved properties in Pennsylvania is included with
Nonutility Property and Equipment on the condensed consolidated balance
sheets.
TREASURY
STOCK – SJI uses the par value method of accounting for treasury stock. As of
September 30, 2008, SJI held 145,776 shares of treasury stock. These shares are
related to deferred compensation arrangements where the amounts earned are held
in the stock of SJI.
NEW
ACCOUNTING PRONOUNCEMENTS — 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, and expands
disclosures about fair value measurements. In October 2008, the FASB issued FSP
157-3, “Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active,” to provide clarification of the application of FAS 157 in
a market that is not active and to provide an example to illustrate key
considerations in determining the fair value of a financial asset in such a
non-active market. This statement was effective in fiscal years beginning after
November 15, 2007. However for nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis, FAS 157 is effective in fiscal years beginning after
November 15, 2008. The adoption of the initial phase of this statement did
not have a material effect on the Company’s condensed consolidated financial
statements. Management does not anticipate that the adoption of the remainder of
this statement 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. The Company has not elected this
fair value option, and as a result, the adoption of this statement did not have
a material effect on the Company’s condensed consolidated financial
statements.
In April
2007, the FASB posted FASB Staff Position (FSP) FIN 39-1 “Amendment of FASB
Interpretation No. 39” which addresses questions received by the FASB staff
regarding Interpretation 39 relating to the offsetting of amounts recognized for
forward, interest rate swap, currency swap, option, and other conditional or
exchange contracts. The guidance in this FSP is effective for fiscal
years beginning after November 15, 2007. The adoption of this
position did not have a material effect on the Company’s condensed consolidated
financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations.” The statement requires the acquiring entity in
a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. This statement is effective for the first
fiscal year beginning after December 15, 2008. Management is currently
evaluating the impact that the adoption of this statement will have on the
Company’s condensed consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements.” The
statement requires all entities to report noncontrolling (minority) interests in
subsidiaries in the same way—as equity in the consolidated financial statements.
Moreover, Statement No. 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and noncontrolling interests by
requiring they be treated as equity transactions. This statement is effective
for the first fiscal year beginning after December 15, 2008. Management is
currently evaluating the impact that the adoption of this statement will have on
the Company’s condensed consolidated financial statements.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities - an amendment
of SFAS No. 133” (FAS 161). This statement requires disclosures of how and why
an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for and how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. FAS 161 is effective for fiscal years beginning after November 15, 2008.
Management is currently evaluating the impact that the adoption of this
statement will have on the Company’s condensed consolidated financial
statements.
In
September 2008, the FASB issued FASB Staff Position (FSP) No. 133-1 and FIN 45-4
“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161.” The FSP is intended to
improve disclosures about credit derivatives by requiring more information about
the potential adverse effects of changes in credit risk on the financial
position, financial performance, and cash flows of the sellers of credit
derivatives. The provisions of the FSP that amend Statement 133 and
Interpretation 45 are effective for reporting periods (annual or interim) ending
after November 15, 2008. Management is currently evaluating the impact that the
adoption of this position will have on the Company’s condensed consolidated
financial statements.
CORRECTION
IN THE PRESENTATION OF THE STATEMENT OF CASH FLOWS - The following
items represent corrections made to the nine months ended September 30,
2007 on the statements of condensed consolidated cash flows:
|
·
|
Cash
flows related to merchandise loans to customers for the purpose of
attracting conversions to natural gas heating systems should have been
classified under the caption Cash Flows from Investing Activities on the
statements of condensed consolidated cash flows. Accordingly, cash
outflows for loans originated of $2.7 million and cash inflows
from the principal collection on these loans of $3.0 million during the
nine months ended September 30, 2007 are now included within Cash
Flows from Investing Activities. The overall net impact resulted
in an insignificant amount of Cash Flows from Operating Activities
for the nine months ended September 30, 2007 now being included within
Cash Flows from Investing
Activities.
|
|
·
|
Cash
flows related to unused loan proceeds that are held in restricted escrow
accounts were incorrectly presented on a net basis with the cash flows
related to the restricted margin account that is used to support the
Company’s risk management activities within Cash Flows from Investing
Activities on the statements of condensed consolidated cash flows.
Accordingly, purchases of restricted investments with unused loan proceeds
of $0.1 million during the nine months ended September 30, 2007 are now
included in Purchase of Restricted Investments with Escrowed Loan Proceeds
and proceeds from the sale of these restricted investments of $4.2 million
during the nine months ended September 30, 2007 are now included in
Proceeds from Sale of Restricted Investments from Escrowed Loan
Proceeds. The cash flows related to the restricted margin
account remain in Net Proceeds from Sale of Restricted Investments in
Margin Account. This change had no overall impact on total Cash Flows from
Investing Activities on the statements of condensed consolidated cash
flows.
|
These
changes did not impact previously reported revenue or net income and are
considered immaterial to the overall presentation of the condensed 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 nine months ended September 30,
2008 and 2007. No stock appreciation rights have been issued under the plan.
During the nine months ended September 30, 2008 and 2007, SJI granted 45,241 and
44,106 restricted shares to Officers and other key employees,
respectively. 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 nine months ended September 30, 2008, SJI granted
8,667 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, 2007 for the related accounting
policy.
The
following table summarizes the nonvested restricted stock awards outstanding at
September 30, 2008 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.
2006
|
|
35,310
|
|
$
|
27.950
|
|
16.9%
|
|
4.5%
|
|
Jan.
2007
|
|
38,624
|
|
$
|
29.210
|
|
18.5%
|
|
4.9%
|
|
Jan.
2008
|
|
44,479
|
|
$
|
34.030
|
|
21.7%
|
|
2.9%
|
|
|
|
|
|
|
|
|
|
|
|
Directors
-
|
Dec.
2005
|
|
6,340
|
|
$
|
29.970
|
|
-
|
|
-
|
|
Dec.
2006
|
|
9,261
|
|
$
|
34.020
|
|
-
|
|
-
|
|
Jan.
2008
|
|
8,667
|
|
$
|
36.355
|
|
|
|
|
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 dividends are paid or credited to the holder
during the three-year service period, the market value of these awards on
the date of grant approximates the fair value.
The
following table summarizes the total compensation cost for the three and nine
months ended September 30, 2008 and 2007 (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
& Key Employees
|
|
$
|
286
|
|
|
$
|
249
|
|
|
$
|
858
|
|
|
$
|
747
|
|
Directors
|
|
|
67
|
|
|
|
52
|
|
|
|
201
|
|
|
|
156
|
|
Total
Cost
|
|
|
353
|
|
|
|
301
|
|
|
|
1,059
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
(37
|
)
|
|
|
(28
|
)
|
|
|
(112
|
)
|
|
|
(81
|
)
|
Net
Expense
|
|
$
|
316
|
|
|
$
|
273
|
|
|
$
|
947
|
|
|
$
|
822
|
|
As of
September 30, 2008, there was $2.0 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 1.9 years.
The
following table summarizes information regarding restricted stock award activity
during the nine months ended September 30, 2008 excluding accrued dividend
equivalents:
|
|
Officers
& Other
Key
Employees
|
|
Directors
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
|
|
|
|
|
Nonvested
Shares Outstanding, January 1, 2008
|
|
|
76,657
|
|
15,601
|
|
$
|
29.245
|
Granted
|
|
|
45,241
|
|
8,667
|
|
|
34.404
|
Forfeited
|
|
|
(3,485
|
)
|
-
|
|
|
29.801
|
Nonvested
Shares Outstanding, September 30, 2008
|
|
|
118,413
|
|
24,268
|
|
$
|
31.181
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended September 30, 2008 and 2007, SJI awarded 51,838 shares,
which had vested at December 31, 2007, at a market value of $1.9 million and
69,781 shares, which had vested at December 31, 2006, at a market value of $2.3
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. At the discretion of the Officers, Directors and
other key employees, the receipt of vested shares can be deferred until future
periods. These deferred shares are included in Treasury Stock on the
condensed consolidated balance sheets.
3. DISCONTINUED
OPERATIONS:
Discontinued
Operations consist of the environmental remediation activities related to the
properties of South Jersey Fuel, Inc. (SJF) and the product liability litigation
and environmental remediation activities related to the prior business of The
Morie Company, Inc. (Morie). SJF is a subsidiary of Energy & Minerals, Inc.
(EMI), an SJI subsidiary, which previously operated a fuel oil business. Morie
is the former sand mining and processing subsidiary of EMI. EMI sold the common
stock of Morie in 1996.
SJI
conducts tests annually to estimate the environmental remediation costs for
these properties.
Summarized
operating results of the discontinued operations for the three and nine months
ended September 30, were (in thousands, except per share amounts):
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Loss
before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Sand
Mining
|
$
|
(22
|
)
|
|
$
|
(37
|
)
|
|
$
|
(73
|
)
|
|
$
|
(316
|
)
|
Fuel
Oil
|
|
(95
|
)
|
|
|
(13
|
)
|
|
|
(83
|
)
|
|
|
(32
|
)
|
Income
Tax Benefits
|
|
41
|
|
|
|
17
|
|
|
|
55
|
|
|
|
113
|
|
Loss
from Discontinued Operations — Net
|
$
|
(76
|
)
|
|
$
|
(33
|
)
|
|
$
|
(101
|
)
|
|
$
|
(235
|
)
|
Earnings
Per Common Share from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations — Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.002
|
)
|
|
$
|
(0.001
|
)
|
|
$
|
(0.004
|
)
|
|
$
|
(0.008
|
)
|
Diluted
|
$
|
(0.003
|
)
|
|
$
|
(0.001
|
)
|
|
$
|
(0.004
|
)
|
|
$
|
(0.008
|
)
|
4. COMMON
STOCK:
The
following shares were issued and outstanding at September 30:
|
|
2008
|
|
Beginning
Balance, January 1
|
|
|
29,607,802
|
|
New
Issues During Period:
|
|
|
|
|
Dividend
Reinvestment Plan
|
|
|
60,390
|
|
Stock-Based
Compensation Plan
|
|
|
60,505
|
|
Ending
Balance, September 30
|
|
|
29,728,697
|
|
The par
value ($1.25 per share) of stock issued was recorded in Common Stock and the net
excess over par value of approximately $1.9 million, was recorded in Premium on
Common Stock.
EARNINGS
PER COMMON SHARE — Basic EPS is 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 136,718
and 108,703 shares for the three months ended September 30, 2008 and 2007,
respectively, and 129,124 and 112,199 shares for the nine months ended September
30, 2008 and 2007, respectively These shares relate to SJI’s restricted stock as
discussed in Note 2.
DIVIDEND
REINVESTMENT PLAN (DRP) — Through April 2008, shares of common stock offered
through the DRP have been new shares issued directly by SJI. Beginning in April
2008, shares of common stock offered by the DRP have been purchased in open
market transactions.
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 September 30, 2008 and December 31, 2007, the escrowed proceeds, including
interest earned, totaled $6.5 million.
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 September 30,
2008, the balance in this account was $11.2 million. As of December 31,
2007, the Company was holding $4.1 million in a margin account received
from this investment firm as the value of the related financial
contracts had increased. The balance as of December 31, 2007 is reflected
in Margin Account Liability on the condensed consolidated balance
sheets.
6. SEGMENTS
OF BUSINESS:
SJI
operates in several different reportable 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 reportable operating segments is presented
below (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
64,563
|
|
|
$
|
84,421
|
|
|
$
|
396,038
|
|
|
$
|
458,280
|
|
|
Wholesale
Gas Operations
|
|
|
79,828
|
|
|
|
18,176
|
|
|
|
76,225
|
|
|
|
55,059
|
|
|
Retail
Gas and Other Operations
|
|
|
37,670
|
|
|
|
29,393
|
|
|
|
138,635
|
|
|
|
128,126
|
|
|
Retail
Electric Operations
|
|
|
15,313
|
|
|
|
13,502
|
|
|
|
48,876
|
|
|
|
39,079
|
|
|
On-Site
Energy Production
|
|
|
14,123
|
|
|
|
11,419
|
|
|
|
37,092
|
|
|
|
30,601
|
|
|
Appliance
Service Operations
|
|
|
4,891
|
|
|
|
4,228
|
|
|
|
14,100
|
|
|
|
11,924
|
|
|
Corporate
& Services
|
|
|
4,139
|
|
|
|
3,203
|
|
|
|
13,135
|
|
|
|
9,989
|
|
|
Subtotal
|
|
|
220,527
|
|
|
|
164,342
|
|
|
|
724,101
|
|
|
|
733,058
|
|
|
Intersegment
Sales
|
|
|
(10,114
|
)
|
|
|
(8,114
|
)
|
|
|
(29,801
|
)
|
|
|
(36,744
|
)
|
|
Total
Operating Revenues
|
|
$
|
210,413
|
|
|
$
|
156,228
|
|
|
$
|
694,300
|
|
|
$
|
696,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
1,184
|
|
|
$
|
2,190
|
|
|
$
|
58,613
|
|
|
$
|
59,637
|
|
|
Wholesale
Gas Operations
|
|
|
72,122
|
|
|
|
14,319
|
|
|
|
34,474
|
|
|
|
27,624
|
|
|
Retail
Gas and Other Operations
|
|
|
322
|
|
|
|
164
|
|
|
|
2,311
|
|
|
|
108
|
|
|
Retail
Electric Operations
|
|
|
619
|
|
|
|
412
|
|
|
|
1,656
|
|
|
|
1,789
|
|
|
On-Site
Energy Production
|
|
|
4,094
|
|
|
|
2,925
|
|
|
|
9,030
|
|
|
|
7,049
|
|
|
Appliance
Service Operations
|
|
|
752
|
|
|
|
602
|
|
|
|
1,780
|
|
|
|
531
|
|
|
Corporate
and Services
|
|
|
234
|
|
|
|
255
|
|
|
|
1,088
|
|
|
|
498
|
|
|
Total
Operating Income
|
|
$
|
79,327
|
|
|
$
|
20,867
|
|
|
$
|
108,952
|
|
|
$
|
97,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
7,804
|
|
|
$
|
7,305
|
|
|
$
|
23,283
|
|
|
$
|
21,751
|
|
|
Wholesale
Gas Operations
|
|
|
28
|
|
|
|
2
|
|
|
|
59
|
|
|
|
5
|
|
|
Retail
Gas and Other Operations
|
|
|
4
|
|
|
|
4
|
|
|
|
13
|
|
|
|
9
|
|
|
Appliance
Services Operations
|
|
|
73
|
|
|
|
74
|
|
|
|
227
|
|
|
|
206
|
|
|
On-Site
Energy Production
|
|
|
784
|
|
|
|
724
|
|
|
|
2,289
|
|
|
|
2,225
|
|
|
Corporate
and Services
|
|
|
111
|
|
|
|
31
|
|
|
|
312
|
|
|
|
185
|
|
|
Total Depreciation
and Amortization
|
|
$
|
8,804
|
|
|
$
|
8,140
|
|
|
$
|
26,183
|
|
|
$
|
24,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
4,586
|
|
|
$
|
5,371
|
|
|
$
|
14,179
|
|
|
$
|
15,403
|
|
|
Wholesale
Gas Operations
|
|
|
201
|
|
|
|
563
|
|
|
|
407
|
|
|
|
1,758
|
|
|
Retail
Gas and Other Operations
|
|
|
3
|
|
|
|
19
|
|
|
|
111
|
|
|
|
155
|
|
|
On-Site
Energy Production
|
|
|
905
|
|
|
|
913
|
|
|
|
2,515
|
|
|
|
2,707
|
|
|
Corporate
and Services
|
|
|
317
|
|
|
|
1,036
|
|
|
|
942
|
|
|
|
2,906
|
|
|
Subtotal
|
|
|
6,012
|
|
|
|
7,902
|
|
|
|
18,154
|
|
|
|
22,929
|
|
|
Intersegment
Borrowings
|
|
|
(267
|
)
|
|
|
(936
|
)
|
|
|
(908
|
)
|
|
|
(2,806
|
)
|
|
Total
Interest Charges
|
|
$
|
5,745
|
|
|
$
|
6,966
|
|
|
$
|
17,246
|
|
|
$
|
20,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
13,900
|
|
|
$
|
12,040
|
|
|
$
|
37,171
|
|
|
$
|
36,333
|
|
|
Wholesale
Gas Operations
|
|
|
1,359
|
|
|
|
330
|
|
|
|
4,697
|
|
|
|
330
|
|
|
Retail
Gas and Other Operations
|
|
|
0
|
|
|
|
18
|
|
|
|
0
|
|
|
|
49
|
|
|
Appliance
Service Operations
|
|
|
5
|
|
|
|
29
|
|
|
|
25
|
|
|
|
173
|
|
|
On-Site
Energy Production
|
|
|
1,340
|
|
|
|
1,334
|
|
|
|
2,581
|
|
|
|
4,734
|
|
|
Corporate
and Services
|
|
|
(664
|
)
|
|
|
230
|
|
|
|
44
|
|
|
|
883
|
|
|
Total
Property Additions
|
|
$
|
15,940
|
|
|
$
|
13,981
|
|
|
$
|
44,518
|
|
|
$
|
42,502
|
|
|
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Identifiable
Assets:
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
1,251,540
|
|
|
$
|
1,227,162
|
|
Wholesale
Gas Operations
|
|
|
203,955
|
|
|
|
142,848
|
|
Retail
Gas and Other Operations
|
|
|
32,913
|
|
|
|
42,735
|
|
Retail
Electric Operations
|
|
|
9,177
|
|
|
|
7,082
|
|
On-Site
Energy Production
|
|
|
129,707
|
|
|
|
124,982
|
|
Appliance
Service Operations
|
|
|
17,276
|
|
|
|
16,060
|
|
Discontinued
Operations
|
|
|
2,164
|
|
|
|
2,604
|
|
Corporate
and Services
|
|
|
86,126
|
|
|
|
58,274
|
|
Subtotal
|
|
|
1,732,858
|
|
|
|
1,621,747
|
|
Intersegment
Assets
|
|
|
(99,547
|
)
|
|
|
(92,306
|
)
|
Total
Identifiable Assets
|
|
$
|
1,633,311
|
|
|
$
|
1,529,441
|
|
7. RATES
AND REGULATORY ACTIONS:
SJG is
subject to the rules and regulations of the BPU. In August 2008 the
BPU approved the statewide funding of the New Jersey Clean Energy Program
(NJCEP) of $1.2 billion for the years 2009 through 2012. Of this
amount, SJG will be responsible for the collection and remittance of
approximately $41.5 million over the four year period to the
State. This mechanism recovers costs associated with SJG’s energy
efficiency and renewable energy programs. NJCEP adjustments affect
revenue and cash flows but do not directly affect earnings as related cost are
deferred and recovered through rates on an on-going basis.
There
have been no other significant regulatory actions or changes to SJG’s rate
structure since December 31, 2007. See Note 9 to the Consolidated Financial
Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31,
2007.
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, 2007 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, 2007.
Regulatory
Assets consisted of the following items (in thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Environmental
Remediation Costs:
|
|
|
|
|
|
|
Expended
- Net
|
|
$
|
43,930
|
|
|
$
|
25,960
|
|
Liability
for Future Expenditures
|
|
|
71,161
|
|
|
|
73,880
|
|
Income
Taxes-Flowthrough Depreciation
|
|
|
2,974
|
|
|
|
3,707
|
|
Deferred
Asset Retirement Obligation Costs
|
|
|
21,942
|
|
|
|
21,572
|
|
Deferred
Pension and Other Postretirement Benefit Costs
|
|
|
32,422
|
|
|
|
32,686
|
|
Interest
Rate Swaps
|
|
|
1,413
|
|
|
|
-
|
|
Deferred
Gas Costs and Revenues - Net
|
|
|
10,913
|
|
|
|
-
|
|
Temperature
Adjustment Clause Receivable
|
|
|
399
|
|
|
|
6,516
|
|
Conservation
Incentive Program Receivable
|
|
|
23,543
|
|
|
|
18,173
|
|
Societal
Benefit Costs Receivable
|
|
|
601
|
|
|
|
2,952
|
|
Premium
for Early Retirement of Debt
|
|
|
1,248
|
|
|
|
1,370
|
|
Other
Regulatory Assets
|
|
|
2,197
|
|
|
|
1,872
|
|
|
|
|
|
|
|
|
|
|
Total
Regulatory Assets
|
|
$
|
212,743
|
|
|
$
|
188,688
|
|
Regulatory
Liabilities consisted of the following items (in thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Excess
Plant Removal Costs
|
|
$
|
48,814
|
|
|
$
|
48,705
|
|
Liability
for NJCEP
|
|
|
1,672
|
|
|
|
2,797
|
|
Deferred
Gas Costs and Revenues - Net
|
|
|
-
|
|
|
|
2,586
|
|
Other
|
|
|
1,850
|
|
|
|
1,691
|
|
|
|
|
|
|
|
|
|
|
Total
Regulatory Liabilities
|
|
$
|
52,336
|
|
|
$
|
55,779
|
|
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. Deferred gas costs and revenues-net shifted from
a $2.6 million liability at December 31, 2007 to a $10.9 million asset at
September 30, 2008. A change in the fair value of SJG’s energy related
derivatives accounted for $11.8 million of the fluctuation.
9. PENSION
AND OTHER POSTRETIREMENT BENEFITS:
For the
three and nine months ended September 30, 2008 and 2007, 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
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
Cost
|
|
$
|
800
|
|
|
$
|
738
|
|
|
$
|
2,399
|
|
|
$
|
2,593
|
|
Interest
Cost
|
|
|
2,080
|
|
|
|
1,737
|
|
|
|
6,240
|
|
|
|
6,049
|
|
Expected
Return on Plan Assets
|
|
|
(2,605
|
)
|
|
|
(2,201
|
)
|
|
|
(7,814
|
)
|
|
|
(7,817
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
Service Cost
|
|
|
73
|
|
|
|
64
|
|
|
|
219
|
|
|
|
229
|
|
Actuarial
Loss
|
|
|
402
|
|
|
|
448
|
|
|
|
1,206
|
|
|
|
1,482
|
|
Net
Periodic Benefit Cost
|
|
|
750
|
|
|
|
786
|
|
|
|
2,250
|
|
|
|
2,536
|
|
Capitalized
Benefit Costs
|
|
|
(263
|
)
|
|
|
(266
|
)
|
|
|
(788
|
)
|
|
|
(900
|
)
|
Total
Net Periodic Benefit Expense
|
|
$
|
487
|
|
|
$
|
520
|
|
|
$
|
1,462
|
|
|
$
|
1,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Postretirement Benefits
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
Cost
|
|
$
|
242
|
|
|
$
|
225
|
|
|
$
|
726
|
|
|
$
|
756
|
|
Interest
Cost
|
|
|
739
|
|
|
|
618
|
|
|
|
2,217
|
|
|
|
2,077
|
|
Expected
Return on Plan Assets
|
|
|
(549
|
)
|
|
|
(482
|
)
|
|
|
(1,646
|
)
|
|
|
(1,620
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
Service Credits
|
|
|
(89
|
)
|
|
|
(82
|
)
|
|
|
(266
|
)
|
|
|
(275
|
)
|
Actuarial
Loss
|
|
|
186
|
|
|
|
139
|
|
|
|
558
|
|
|
|
469
|
|
Net
Periodic Benefit Cost
|
|
|
529
|
|
|
|
418
|
|
|
|
1,589
|
|
|
|
1,407
|
|
Capitalized
Benefit Costs
|
|
|
(188
|
)
|
|
|
(145
|
)
|
|
|
(563
|
)
|
|
|
(525
|
)
|
Total
Net Periodic Benefit Expense
|
|
$
|
341
|
|
|
$
|
273
|
|
|
$
|
1,026
|
|
|
$
|
882
|
|
Capitalized
benefit costs reflected in the table above relate to SJG’s construction
program.
During
February 2008, SJI contributed $5.9 million to its pension plans. No
contribution was made during the nine months ended September 30, 2007. SJI
does not expect to make additional contributions to its employee pension plans
in 2008.
See Note
11 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on
Form 10-K as of December 31, 2007, 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 $392.6 million at September 30, 2008.
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
September 30, 2008, 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 $403.0 million at September 30, 2008, of which
$225.7 million, inclusive of $66.6 million of letters of credit, was used. Those
bank facilities consist of a $100.0 million revolving credit facility, a $10.0
million line of credit and $53.0 million of uncommitted bank lines available to
SJG; and a $200.0 million revolving credit facility and $40.0 million of
uncommitted bank lines available to SJI. The revolving credit facilities expire
in August 2011. All of the facilities 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 September 30, 2008.
Borrowings under these credit facilities are at market rates. The weighted
average borrowing cost, which changes daily, was 3.62% and 5.64% at
September 30, 2008 and 2007, respectively.
In June
2008, SJG used $25.0 million of the revolving credit facility to repurchase its
outstanding auction-rate Series A 2006 Bonds at par. Those bonds were remarketed
to the public in August 2008 as variable rate demand bonds with liquidity
support provided by a letter of credit from a commercial bank as discussed in
Note 12. The related borrowings under the revolver were repaid at that
time. Material terms of the original bonds, such as the 2036 maturity
date, floating rate interest that resets weekly, and a first mortgage collateral
position, remain unchanged.
12. COMMITMENTS
AND CONTINGENCIES:
GUARANTEES
— The Company has recorded a liability of $2.0 million in Other Noncurrent
Liabilities on the condensed consolidated balance sheets as of September 30,
2008 and December 31, 2007 for the fair value of the following
guarantees:
· In
April 2007, SJI guaranteed certain obligations of LVE Energy Partners, LLC (LVE)
an unconsolidated joint venture in which Marina has a 50% equity
interest. LVE 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 began
construction of the facility in 2007 and expected to provide full energy
services in 2010 when the resort was originally scheduled to be
completed. However, the developer of the resort recently announced
that it was delaying construction of the project due to the difficult
environment in the capital markets and weak economic conditions. The
developer has indicated that they are considering different strategies to move
the project forward, including opening the project in phases and obtaining a
partner, but that it was unlikely construction would resume during
2009.
As of
September 30, 2008, the Company had approximately $0.4 million included in
Investment in Affiliates on the condensed consolidated balance sheets related to
this project and an unsecured Note Receivable – Affiliate of approximately $2.3
million due from LVE. The district energy system and central energy center are
being financed by LVE with debt that is non-recourse to SJI and includes a
guaranty by the developer of certain fixed payments to be made under the Energy
Sales Agreement until the project begins commercial operations. LVE is currently
in discussions with the banks that are financing the energy facilities regarding
a plan to address the developer’s construction delay. Those discussions include
a revised timetable and funding schedule for the completion of construction of
the energy facilities, and the potential contribution of additional equity.
SJI is obligated to invest at least $30.0 million of
equity during the construction period as discussed below and may invest up
to an additional $9.0 million. SJI's risk of loss is limited to its equity
contribution and the unsecured Note Receivable.
SJI has
issued a performance guaranty for up to $180.0 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
assurance that construction of the thermal facility will meet those same
milestones. Those milestones are currently being revised due to delays announced
by the project developer. In addition, SJI has guaranteed the obligations of LVE
under certain insurance policies during the construction period. The
maximum amount that SJI could be obligated for, in the event that LVE does not
have sufficient resources to make deductible payments on future claims under
these insurance policies, is approximately $6.0 million. SJI has also
guaranteed certain performance obligations of LVE under the operating agreements
between LVE and the resort, up to $20.0 million each year for the term of the
agreement, commencing with the first year of operations. SJI and the
partner in this joint venture have entered into reimbursement agreements that
secure reimbursement for SJI of a proportionate share of any payments made by
SJI on these guarantees.
· In
August 2007, SJI guaranteed certain obligations of BC Landfill Energy, LLC
(BCLE), an unconsolidated joint venture in which Marina has a 50% equity
interest. BCLE has entered into a 20-year agreement with a county government to
lease and operate a facility that will produce electricity from landfill methane
gas. The facility went online in the fourth quarter of 2007. Although unlikely,
the maximum amount that SJI could be obligated for, in the event that BCLE does
not meet minimum specified levels of operating performance and no mitigating
action is taken, or is unable to meet certain financial obligations as they
become due, is approximately $4.0 million each year. SJI and the
partner in this joint venture have entered into reimbursement agreements that
secure reimbursement for SJI of a proportionate share of any payments made by
SJI on these guarantees.
CAPITAL
CONTRIBUTION OBLIGATION — In December 2007, Marina and its joint venture partner
agreed to each contribute approximately $30.0 million of equity to LVE as part
of its construction period financing. LVE will initially use bank and bond
financing to fund project construction and then expects to use contributed
equity to complete the project. Marina’s obligation is secured by an irrevocable
letter of credit from a bank. In the event of a default by LVE on its financing
arrangements, the partners may be required to make the equity contributions
prior to the end of the construction period.
STANDBY
LETTERS OF CREDIT — As of September 30, 2008, SJI provided $66.6 million of
standby letters of credit through SJI’s revolving credit facility. Letters of
credit in the amount of $62.3 million support variable-rate demand bonds issued
through the New Jersey Economic Development Authority (NJEDA) to finance
Marina’s initial thermal plant project. The additional outstanding letters of
credit total $4.3 million, and were posted to enable SJE to market retail
electricity and for various construction activities. The Company also provided
two additional letters of credit under separate facilities outside of the
revolving credit facility. Those letters of credit consist of a $25.3 million
letter of credit provided by SJG to support variable-rate demand bonds issued
through the NJEDA to finance the expansion of SJG’s natural gas distribution
system as discussed in Note 11; and a $30.7 million letter of credit provided by
Marina to support a capital contribution obligation as discussed above. These
letters of credit expire in August 2009 and November 2010,
respectively.
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 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 changes to the
status of the Company’s environmental remediation efforts since December 31,
2007 as 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,
2007. However, the lower end of the range of expected
remediation costs, which is recorded as a liability on the condensed
consolidated balance sheets, has decreased $2.7 million since December 31,
2007. This decrease is the result of expenditures of $20.9 million
during 2008 and revised forecasts of expected remediation costs for all sites as
additional information has become available.
13.
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
Effective
January 1, 2008, SJI adopted the provisions of FAS 157 that relate to financial
assets and financial liabilities as discussed in Note 1. FAS 157
establishes a hierarchy that prioritizes fair value measurements based on the
types of inputs used for the various valuation techniques. The levels
of the hierarchy are described below:
|
·
|
Level
1: Observable inputs such as quoted prices in active markets
for identical assets or
liabilities.
|
|
·
|
Level
2: Inputs other than quoted prices that are observable for the
asset or liability, either directly or indirectly; these include quoted
prices for similar assets or liabilities in active markets and quoted
prices for identical or similar assets or liabilities in markets that are
not active.
|
|
·
|
Level
3: Unobservable inputs that reflect the reporting entity’s own
assumptions.
|
Assessment
of the significance of a particular input to the fair value measurement requires
judgment and may affect the valuation of financial assets and financial
liabilities and their placement within the fair value hierarchy.
For
financial assets and financial liabilities measured at fair value on a recurring
basis, information about the fair value measurements for each major category as
of September 30, 2008 is as follows (in thousands):
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities (A)
|
|
$
|
5,653
|
|
|
$
|
5,653
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivatives
– Energy Related Assets (B)
|
|
|
60,748
|
|
|
|
28,514
|
|
|
|
32,234
|
|
|
|
-
|
|
|
|
$
|
66,401
|
|
|
$
|
34,167
|
|
|
$
|
32,234
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
– Energy Related Liabilities (B)
|
|
$
|
41,576
|
|
|
$
|
17,013
|
|
|
$
|
24,563
|
|
|
$
|
-
|
|
Derivatives
– Other (C)
|
|
|
3,089
|
|
|
|
-
|
|
|
|
3,089
|
|
|
|
-
|
|
|
|
$
|
44,665
|
|
|
$
|
17,013
|
|
|
$
|
27,652
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
Available-for-Sale Securities are valued using the quoted principal market close
prices that are provided by the trustees of these securities.
(B)
Derivatives – Energy Related Assets and Liabilities are traded in both
exchange-based and non-exchange-based markets. Exchange-based contracts are
valued using unadjusted quoted market sources in active markets and are
categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based
contracts are valued using indicative price quotations available through brokers
or over-the-counter, on-line exchanges and are categorized in Level 2. These
price quotations reflect the average of the bid-ask mid-point prices and are
obtained from sources that management believes provide the most liquid market.
Management reviews and corroborates the price quotations to ensure the prices
are observable which includes consideration of actual transaction volumes,
market delivery points, bid-ask spreads and contract duration.
(C)
Derivatives – Other are valued using quoted prices on commonly quoted intervals,
which are interpolated for periods different than the quoted intervals, as
inputs to a market valuation model. Market inputs can generally be verified and
model selection does not involve significant management judgment.
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, suppliers or business partners 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, 2007 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, 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,
2007.
In recent
months, declines in the investment markets have negatively impacted the value of
our pension and other postretirement benefit plan assets. As a
result, SJI anticipates an increase in the amount of pension and other
postretirement benefit costs that will be required to be recognized in 2009 and
beyond. We are unable to determine these amounts at this time, as
changes in the investment performance between now and the end of the year can
significantly impact the ultimate determination of these future
costs.
New
Accounting Pronouncements — See detailed
discussions concerning New Accounting Pronouncements and their impact on SJI in
Note 1 to the condensed consolidated financial statements.
Regulatory
Actions —Other than the changes
discussed in Note 7 to the condensed consolidated financial statements, there
have been no significant regulatory actions since December 31, 2007. 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, 2007.
Environmental
Remediation —Other than the changes
discussed in Note 12 to the condensed consolidated financial statements, there
have been no significant changes to the status of the Company’s environmental
remediation efforts since December 31, 2007. 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, 2007.
RESULTS OF
OPERATIONS:
SJI
operates in several different reportable 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.
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 September 30, 2008 increased $35.3 million, or
413% to net income of $43.8 million compared to the three months ended September
30, 2007. Net Income for the nine months ended September 30, 2008 increased $8.9
million, or 19% to $55.2 million compared to the nine months ended September 30,
2007. This increase is primarily due to the unrealized gains on
derivatives used by SJRG to mitigate commodity price risk, as discussed
above. These changes are also discussed in more detail below.
The
following tables summarize the composition of selected SJG data for the three
and nine months ended September 30 (in thousands, except for degree day
data):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Utility
Throughput –
dth:
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,559
|
|
|
|
1,556
|
|
|
|
14,490
|
|
|
|
16,069
|
|
Commercial
|
|
|
652
|
|
|
|
637
|
|
|
|
4,065
|
|
|
|
4,497
|
|
Industrial
|
|
|
13
|
|
|
|
17
|
|
|
|
103
|
|
|
|
138
|
|
Cogeneration
& Electric Generation
|
|
|
156
|
|
|
|
791
|
|
|
|
528
|
|
|
|
953
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
136
|
|
|
|
129
|
|
|
|
1,351
|
|
|
|
1,273
|
|
Commercial
|
|
|
598
|
|
|
|
607
|
|
|
|
3,927
|
|
|
|
4,271
|
|
Industrial
|
|
|
3,095
|
|
|
|
2,835
|
|
|
|
9,542
|
|
|
|
8,903
|
|
Cogeneration
& Electric Generation
|
|
|
1,115
|
|
|
|
1,288
|
|
|
|
2,040
|
|
|
|
2,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Firm Throughput
|
|
|
7,324
|
|
|
|
7,860
|
|
|
|
36,046
|
|
|
|
38,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interruptible
Sales
|
|
|
1
|
|
|
|
1
|
|
|
|
28
|
|
|
|
39
|
|
Interruptible
Transportation
|
|
|
509
|
|
|
|
722
|
|
|
|
2,034
|
|
|
|
2,101
|
|
Off-System
|
|
|
1,458
|
|
|
|
3,505
|
|
|
|
7,330
|
|
|
|
13,419
|
|
Capacity
Release
|
|
|
20,196
|
|
|
|
23,738
|
|
|
|
47,253
|
|
|
|
55,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Throughput
|
|
|
29,488
|
|
|
|
35,826
|
|
|
|
92,691
|
|
|
|
109,295
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Utility Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
26,587
|
|
|
$
|
33,386
|
|
|
$
|
214,098
|
|
|
$
|
247,641
|
|
Commercial
|
|
|
9,650
|
|
|
|
10,113
|
|
|
|
53,449
|
|
|
|
57,760
|
|
Industrial
|
|
|
874
|
|
|
|
1,013
|
|
|
|
6,051
|
|
|
|
6,419
|
|
Cogeneration
& Electric Generation
|
|
|
2,166
|
|
|
|
6,202
|
|
|
|
7,453
|
|
|
|
8,269
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,081
|
|
|
|
1,136
|
|
|
|
7,161
|
|
|
|
5,924
|
|
Commercial
|
|
|
2,124
|
|
|
|
2,293
|
|
|
|
12,532
|
|
|
|
11,917
|
|
Industrial
|
|
|
2,974
|
|
|
|
3,497
|
|
|
|
9,247
|
|
|
|
9,230
|
|
Cogeneration
& Electric Generation
|
|
|
599
|
|
|
|
657
|
|
|
|
1,356
|
|
|
|
1,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Firm Revenues
|
|
|
46,055
|
|
|
|
58,297
|
|
|
|
311,347
|
|
|
|
348,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interruptible
Sales
|
|
|
22
|
|
|
|
14
|
|
|
|
304
|
|
|
|
450
|
|
Interruptible
Transportation
|
|
|
334
|
|
|
|
451
|
|
|
|
1,301
|
|
|
|
1,389
|
|
Off-System
|
|
|
14,403
|
|
|
|
22,008
|
|
|
|
72,989
|
|
|
|
98,304
|
|
Capacity
Release
|
|
|
3,512
|
|
|
|
3,324
|
|
|
|
9,265
|
|
|
|
8,406
|
|
Other
|
|
|
237
|
|
|
|
326
|
|
|
|
832
|
|
|
|
968
|
|
|
|
|
64,563
|
|
|
|
84,420
|
|
|
|
396,038
|
|
|
|
458,280
|
|
Less:
Intercompany Sales
|
|
|
876
|
|
|
|
1,035
|
|
|
|
2,776
|
|
|
|
17,207
|
|
Total
Utility Operating Revenues
|
|
|
63,687
|
|
|
|
83,385
|
|
|
|
393,262
|
|
|
|
441,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
$
|
40,324
|
|
|
$
|
61,188
|
|
|
$
|
261,604
|
|
|
$
|
314,408
|
|
Conservation
Recoveries*
|
|
|
1,116
|
|
|
|
633
|
|
|
|
6,149
|
|
|
|
2,888
|
|
RAC
Recoveries*
|
|
|
695
|
|
|
|
472
|
|
|
|
2,084
|
|
|
|
1,417
|
|
Revenue
Taxes
|
|
|
871
|
|
|
|
883
|
|
|
|
5,913
|
|
|
|
6,316
|
|
Utility
Margin
|
|
$
|
20,681
|
|
|
$
|
20,209
|
|
|
$
|
117,512
|
|
|
$
|
116,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
12,094
|
|
|
$
|
11,841
|
|
|
$
|
69,230
|
|
|
$
|
73,593
|
|
Commercial
and Industrial
|
|
|
6,185
|
|
|
|
6,360
|
|
|
|
27,334
|
|
|
|
29,345
|
|
Cogeneration
and Electric Generation
|
|
|
641
|
|
|
|
793
|
|
|
|
1,540
|
|
|
|
1,772
|
|
Interruptible
|
|
|
11
|
|
|
|
31
|
|
|
|
92
|
|
|
|
129
|
|
Off-system
& Capacity Release
|
|
|
572
|
|
|
|
596
|
|
|
|
2,160
|
|
|
|
2,186
|
|
Other
Revenues
|
|
|
1,085
|
|
|
|
603
|
|
|
|
1,868
|
|
|
|
1,429
|
|
Margin
Before Weather Normalization & Decoupling
|
|
|
20,588
|
|
|
|
20,224
|
|
|
|
102,224
|
|
|
|
108,454
|
|
CIP
Mechanism
|
|
|
93
|
|
|
|
(15
|
)
|
|
|
15,288
|
|
|
|
7,590
|
|
Utility
Margin
|
|
$
|
20,681
|
|
|
$
|
20,209
|
|
|
$
|
117,512
|
|
|
$
|
116,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Degree
Days:
|
|
|
18
|
|
|
|
21
|
|
|
|
2,753
|
|
|
|
2,986
|
|
*Represents
revenues for which there is a corresponding charge in operating
expenses. Therefore, such recoveries have no impact on our financial
results.
Throughput
- Total gas throughput decreased 17.7% and 15.2% for the three and nine months
ended September 30, 2008, respectively, compared with the same periods in
2007. Firm throughput declined in both the residential and commercial
markets as a result of warmer weather as reflected by the degree day data
in the table above, and customer conservation. Off-System sales (OSS)
and capacity release volume decreased substantially as SJG’s portfolio of assets
available for such activities has been reduced under the Conservation Incentive
Program, as discussed under “Rates and Regulation” in Item 7 of SJI’s Annual
Report on Form 10-K as of December 31, 2007.
Conservation
Incentive Program (CIP) - The effects of the CIP on SJG’s net income for
the three and nine months ended September 30, 2008 and 2007 and the associated
weather comparisons were as follows ($’s in millions):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
Income Benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
CIP
– Weather Related
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1.6 |
|
|
$ |
0.2 |
|
CIP
– Usage Related
|
|
|
0.1 |
|
|
|
- |
|
|
|
7.4 |
|
|
|
4.2 |
|
Total
Net Income Benefit
|
|
$ |
0.1 |
|
|
$ |
- |
|
|
$ |
9.0 |
|
|
$ |
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather Compared to 20-Year Average
|
|
62.5%
warmer
|
|
|
56.2%
warmer
|
|
|
9.0%
warmer
|
|
|
1.3%
warmer
|
|
Weather Compared to Prior Year
|
|
14.3%
warmer
|
|
|
40.0%
warmer
|
|
|
7.8%
warmer
|
|
|
14.9%
colder
|
|
Operating
Revenues – Utility - Revenues for SJG, net of intercompany
transactions decreased $19.7 million, or 23.6% during the third quarter of 2008
compared with the same period in the prior year. Off-System sales
(OSS) revenue decreased $7.6 million, prior to eliminating intercompany
transactions, due to the reduction of SJG’s portfolio of assets available
for OSS that has been reduced under the CIP as discussed above. In
addition, total firm revenues decreased during the third quarter of 2008
compared to the same period in the prior year primarily due to lower residential
revenues resulting from a lower Basic Gas Supply Service (BGSS) rate in
effect during the first nine months of 2008. The 2008 BGSS rate was
12.7% lower than the rate in effect during the same time last
year. SJG reduced its BGSS rate in October 2007 primarily due to a
combination of actual and forecasted decreases in wholesale gas
costs. However, as the Company does not profit from the sale of the
commodity, the BGSS rate decrease did not have an impact on Company
profitability. Finally, SJG experienced lower sales to the region’s electric
utility as demand for natural gas to generate electricity during the summer
months decreased substantially. Since the majority of SJG’s profits from
electric generation sales are contractually fixed, the decrease in volume and
revenue had little impact on profitability.
During
the first nine months of 2008, revenues for SJG, net of intercompany
transactions, decreased $47.8 million, or 10.8%, compared with the same period
in the prior year. OSS revenue decreased $25.3 million, prior to
eliminating intercompany transactions, due to the reduction of SJG’s
portfolio of assets available for OSS as discussed above. Next, weather
was 7.8% warmer than last year during this nine-month period which
contributed significantly to a $37.4 million, or 10.7%, reduction in firm sales
revenue. Further, the Basic Gas Supply Service (BGSS) rate in effect
during the first nine months of 2008 was 12.7% lower than the rate in effect
during the same time last year. As previously mentioned, SJG reduced
its BGSS rate in October 2007; however, the rate decrease did not have an impact
on Company profitability. Partially offsetting these decreases, SJG
added 4,214 customers during the 12-month period ended September 30, 2008, which
represents a 1.3% increase in total customers.
Operating
Revenues — Nonutility — Combined revenues for
SJI’s nonutility businesses, net of intercompany transactions, increased
by $73.9 million and $45.8 million for the three and nine months
ended September 30, 2008, respectively, compared with the same periods of
2007.
SJE’s
revenues from retail gas, net of intercompany transactions, increased by $8.0
million and $9.4 million for the three and nine months ended September 30, 2008,
respectively, compared with the same periods of 2007. This increase is due
mainly to substantially higher natural gas prices in 2008 partially offset by
the decline in residential and commercial customer counts. SJE had 11,181
residential customers as of September 30, 2008, compared with 15,129 residential
customers as of September 30, 2007. Market conditions and utility pricing are
making it difficult to acquire and retain these customers. SJE’s commercial
customer count also decreased from 1,663 as of September 30, 2007 to 1,316 as of
September 30, 2008. During 2007, we strategically reduced our exposure in the
heat-sensitive market due to price volatility and weather risk. Prospective
marketing efforts are focused on the pursuit of non-heat-sensitive commercial
customers.
SJE’s
revenues from retail electricity, net of intercompany transactions, increased
$0.9 million and $6.7 million for the three and nine months ended September 30,
2008, respectively, compared with the same periods of 2007, due mainly to higher
electricity commodity prices and the addition of several new commercial
customers in the New England area.
SJRG’s
revenues, net of intercompany transactions, increased $61.7 million and $21.2
million for the three and nine months ended September 30, 2008, respectively,
compared with the same periods of 2007. Excluding the impact of the net change
in unrealized gains and losses recorded on forward financial contracts due to
price volatility, SJRG’s revenues increased $7.7 million and $28.0 million for
the three and nine months ended September 30, 2008, respectively, compared with
the same periods of 2007. A summary of SJRG’s revenue for the three and nine
months ended September 30 is as follows (in millions):
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
2008
|
2007
|
Change
|
|
2008
|
|
2007
|
|
Change
|
SJRG
Revenue
|
|
$
|
79.8
|
|
|
$
|
18.1
|
|
|
$
|
61.7
|
|
|
$
|
75.9
|
|
|
$
|
54.7
|
|
|
$
|
21.2
|
|
Subtract: Unrealized
Gains
|
|
|
(71.7
|
)
|
|
|
(17.7
|
)
|
|
|
(54.0
|
)
|
|
|
(2.0
|
)
|
|
|
(8.8
|
)
|
|
|
6.8
|
|
SJRG
Revenue, Excluding Unrealized
Gains
|
|
$
|
8.1
|
|
|
$
|
0.4
|
|
|
$
|
7.7
|
|
|
$
|
73.9
|
|
|
$
|
45.9
|
|
|
$
|
28.0
|
|
The
increase in revenues for the three months ended September 30, 2008 compared with
the same period of 2007 is mainly due to realized gains on storage injection
hedges recorded in 2008 versus realized losses recorded in 2007. These hedge
gains and losses are a product of market conditions and represent a temporary
inventory cycle timing difference. The increase in revenues for the comparative
nine-month periods is also attributable to a 47.4% increase in sales of storage
volumes. As discussed in Note 1 to the condensed consolidated financial
statements, revenues and expenses related to the energy trading activities of
SJRG are presented on a net basis in Operating Revenues –
Nonutility.
Revenues
for Marina increased $2.7 million and $6.5 million for the three and nine months
ended September 30, 2008, respectively, compared with the same periods of 2007
due mainly to higher rates on chilled and hot water, and increased chilled water
consumption. Higher rates were driven by higher underlying commodity prices. The
opening of Borgata’s new Water Club tower and record warm temperatures in June
and July were the principal drivers of the increased chilled water consumption.
For the three months ended September 30, 2008 hot water consumption increased
30.1% and chilled water consumption increased 10.2% compared to the same period
of 2007. For the nine months ended September 30, 2008, hot water consumption
decreased 0.8% and chilled water consumption increased 9.7% compared to the same
period of 2007. Typically, revenues from chilled water sales are substantially
higher than revenues from hot water sales.
Revenues
for SJESP increased $0.7 million and $2.2 million for the three and nine months
ended September 30, 2008, respectively, compared with the same periods of 2007
due mainly to the increase in sales across all main product lines.
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 $0.5 million, or 2.3%, for the three months ended September 30,
2008 compared with the same period in 2007 due to customer additions, as noted
above, and increased profits earned through SJG’s Storage Incentive Mechanism
(SIM). The SIM allows SJG to retain 20% of storage-related gains and
losses as measured against an established benchmark. The balance of
these gains and losses are passed through to customers as part of the BGSS.
Partially offsetting these increases were lower margins from electric utility
sales discussed above.
Total
margin increased $1.5 million, or 1.3%, for the nine months ended September 30,
2008 compared with the same period in 2007 primarily due to customer additions
and higher SIM profits, as noted above. Partially offsetting these
increases were lower electric utility sales margins as noted
above. The CIP protected $15.3 million of pre-tax margin
in the first nine months of 2008 that would have been lost due to lower customer
usage, compared to $7.6 million in the same period last year. Of
these amounts, $2.7 million and $0.5 million were related to weather variations
and $12.6 million and $7.1 million were related to other customer usage
variations in 2008 and 2007, respectively.
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 certain payroll and related benefits. On the statements of condensed
consolidated 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 Condensed Consolidated Financial Statements, revenues and expenses related
to the energy trading activities of SJRG are presented on a net basis in
Operating Revenues - Nonutility.
For the
three and nine months ended September 30, 2008, combined gross margins for the
nonutility businesses, net of intercompany transactions, increased $59.9 million
and $13.5 million, respectively, compared with the same periods in 2007. This
increase is primarily due to the following:
|
· Gross Margin for
SJRG increased $58.0 million and $7.5 million for the three and nine
months ended September 30, 2008, respectively, compared with the same
periods of 2007. Excluding the impact of the net change in unrealized
gains and losses recorded on forward financial contracts as discussed
above, gross margin for SJRG increased $4.1 million and $14.4 million for
the three and nine months ended September 30, 2008, respectively, compared
with the same periods of 2007. These increases are mainly due to the
recognition of storage hedge gains and losses – See Operating Revenues –
Nonutility and a refund of previously expensed transportation charges.
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 seasonal pricing
differentials. Future margins could fluctuate significantly due to the
volatile nature of wholesale gas
prices.
|
|
· Gross Margin for
Marina increased $1.6 million and $3.1 million for the three and nine
months ended September 30, 2008, respectively, compared with the same
periods of 2007. These increases are due mainly to higher chilled
water sales – See Operating Revenues - Nonutility. Gross margin as a
percentage of Operating Revenues remained relatively unchanged for the
three and nine months ended 2008, respectively, compared with the same
periods of 2007.
|
|
· Gross
margin from SJE’s retail gas sales for the three months ended September
30, 2008 did not change significantly compared with the same period in
2007. Retail gas margins increased $1.8 million for the nine months ended
September 30, 2008 compared with the same period of 2007. Gross margin as
a percentage of Operating Revenues decreased 1.2 percentage points for the
three months ended September 30, 2008 compared to the same period in 2007.
This decrease is due mainly to compressed margins across all customer
classes resulting from increased competition. Gross margin as a percentage
of Operating Revenues increased 1.1 percentage points for the nine months
ended September 30, 2008 compared to the same period in 2007. The increase
is due mainly to the partial recovery of losses from a full
requirements customer in the commercial market that were recognized in
2006. The 2008 margin also includes the impact of our initiatives to
actively capitalize on market volatility which resulted in securing more
attractive spreads particularly in the first
quarter.
|
|
· Gross
margin from SJE’s retail electricity sales during the three and nine
months ended September 30, 2008 did not change significantly as compared
with the same periods of 2007. Gross margin as a percentage of
Operating Revenues remained relatively unchanged for the three and nine
months ended September 30, 2008, respectively, compared to the same
periods of 2007.
|
|
· Gross
margin for SJESP during the three months ended September 30, 2008 did not
change significantly as compared with the same period of 2007. Gross
margins increased $1.0 million for the nine months ended September 30,
2008 compared with the same period of 2007. Gross margin as a percentage
of Operating Revenues remained relatively unchanged from the three and
nine months ended September 30, 2008, respectively, compared to the same
periods of 2007. Higher margins resulted from strong installation, time
and materials and heater and air conditioner maintenance contracts sales
and impact of several cost-cutting
initiatives.
|
Operations
Expense — A summary of net changes in operations expense, for the three
and nine months ended September 30, follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
vs. 2007
|
|
|
2008
vs. 2007
|
|
|
|
|
|
|
|
|
Utility
|
|
$
|
1,520
|
|
|
$
|
4,721
|
|
Nonutility:
|
|
|
|
|
|
|
|
|
Wholesale
Gas
|
|
|
233
|
|
|
|
746
|
|
Retail
Gas and Other
|
|
|
(163
|
)
|
|
|
(177
|
)
|
Retail
Electricity
|
|
|
(63
|
)
|
|
|
(8
|
)
|
On-Site
Energy Production
|
|
|
343
|
|
|
|
1,022
|
|
Appliance
Service
|
|
|
(3
|
)
|
|
|
(290
|
)
|
Total
Nonutility
|
|
|
347
|
|
|
|
1,293
|
|
Intercompany
Eliminations and Other
|
|
|
(28
|
)
|
|
|
(828
|
)
|
Total
Operations
|
|
$
|
1,839
|
|
|
$
|
5,186
|
|
Utility
operations expense increased $1.5 million and $4.7 million for the three and
nine months ended September 30, 2008, respectively, as compared with the same
periods in 2007. These increases are primarily the result of
increased spending under the New Jersey Clean Energy Programs (NJCEP) which
increased $0.5 million and $3.3 million during the three and nine months ended
September 30, 2008 compared to the same periods last year,
respectively. Such costs are recovered on a dollar-for-dollar basis;
therefore, SJG experienced an offsetting increase in revenues during the period.
The BPU-approved NJCEP allows for full recovery of costs, including carrying
costs when applicable. As a result, the increase in expense had no
impact on net income. Other increases in utility operations expense were
not significant.
Nonutility
Wholesale Gas Operations expense increased $0.2 million and $0.7 million for the
three and nine months ended September 30, 2008, respectively, compared with the
same periods of 2007 due mainly to additional personnel costs to support
continued growth.
Nonutility
On-Site Energy Production Operations expense increased $0.3 million and $1.0
million for the three and nine months ended September 30, 2008, respectively,
compared with the same periods of 2007 due mainly to increased engine
maintenance costs at our landfill sites and additional personnel costs to
support continued growth.
Nonutility
Appliance Service Operations expense decreased $0.3 million in the nine months
ended September 30, 2008 compared with the same period in 2007 due mainly to the
benefit of several cost cutting initiatives that were implemented towards the
end of 2007.
Other
changes in Operations Expense were not significant.
Maintenance
– Maintenance expense increased during both the three and nine months ended
September 30, 2008, compared with the same periods in 2007, primarily due to
higher levels of Remediation Adjustment Clause (RAC)
amortization. RAC-related expenses do not affect earnings as SJG
recognizes an offsetting amount in revenues.
Other
Operating Expenses —Changes in other
consolidated operating expenses which consist of Maintenance, Depreciation, and
Energy and Other Taxes for the three and nine months ended September 30, 2008
compared with the same period in 2007, were not significant.
Interest
Charges – Interest charges decreased by $1.2 million for the
three-month period ended September 30, 2008 compared with the same period in
2007, due primarily to lower interest rates on short-term debt and lower total
debt levels. For the nine-month period ended September 30, 2008, interest
charges decreased by $2.9 million compared with the same period in 2007, due
primarily to lower average levels of short-term debt over the entire period,
coupled with lower interest rates on short-term debt. Short-term debt declined
primarily due to lower natural gas inventory levels at our commodity marketing
business during much of the year. Partially offsetting these factors
were higher interest rates incurred on SJG’s auction-rate debt.
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; the timing of equity
contributions to unconsolidated affiliates; 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 $32.1 million and $104.5 million for the
first nine months of 2008 and 2007, 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 decrease in cash
provided by operating activities for the nine months ended September 30, 2008
compared to the same period in 2007 is primarily the result of higher natural
gas prices during the first half of 2008 which resulted in an increase of $50.7
million of costs in 2008 to fill our natural gas inventories. In
addition, the Company incurred an additional $15.6 million in planned
environmental remediation costs during the first nine months of 2008 compared to
the same period in 2007.
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 capital expenditures, which are primarily
construction projects, for the first nine months of 2008 and 2007 amounted
to $45.0 million and $40.9 million, respectively. We estimate the net cash
outflows for construction projects for fiscal years 2008, 2009 and 2010 to
be approximately $78.0 million, $71.5 million and $52.2 million, respectively.
The estimated cash outflows for 2008 and 2009 increased from prior estimates due
to additional planned expenditures for delivery system infrastructure
improvements. Included in the 2008 estimates is $4.8 million in capital costs
accrued but not paid as of December 31, 2007.
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 condensed
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 are 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. In June 2008, SJG repurchased
$25.0 million of its auction- rate securities at par by drawing under its lines
of credit. That action resulted in a $25.0 million reduction in
long-term debt on SJG’s balance sheet. SJG converted these
auction-rate securities to variable rate demand bonds and remarketed them to the
public during the third quarter.
Bank
facilities available to SJI totaled $403.0 million at September 30, 2008, of
which $225.7 million, inclusive of $66.6 million of letters of credit, was
used. Those bank facilities consist of a $100.0 million revolving credit
facility, a $10.0 million line of credit and $53.0 million of uncommitted bank
lines available to SJG; and a $200.0 million revolving credit facility and $40.0
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 September 30, 2008.
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. Other
than the conversion of the auction-rate bonds into variable rate demand bonds
discussed in Note 11 to the Condensed Consolidated Financial Statements, no
long-term debt has been issued since 2006.
SJI has
raised equity capital over the years through its Dividend Reinvestment Plan
(DRP). Participants in SJI's DRP received newly issued shares. Through the end
of March 2008, we offered a 2% discount on DRP investments as it was the most
cost-effective way to raise equity capital in the quantities we were seeking.
Beginning in April 2008, the 2% discount was eliminated and DRP
participants began receiving shares purchased in the market. Through the DRP,
SJI raised $2.1 million of equity capital by issuing 60,390 shares during the
first nine months of 2008, and $5.1 million of equity capital by issuing 145,191
shares in the first nine months of 2007. We do not anticipate raising
significant amounts of additional equity capital through the DRP in
2008. In September 2008 we announced our intent to establish a stock
repurchase program for SJI that could result in the repurchase of up to 1.5
million shares of SJI common stock at any time prior to October
2012. No purchases have been made to date.
SJI’s
capital structure was as follows:
|
|
As
of
September
30, 2008
|
|
|
As
of
December
31, 2007
|
|
|
|
|
|
|
|
|
Common
Equity
|
|
|
49.9
|
%
|
|
|
50.3
|
%
|
Long-Term
Debt
|
|
|
34.7
|
|
|
|
37.3
|
|
Short-Term
Debt
|
|
|
15.4
|
|
|
|
12.4
|
|
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.
SJI has
paid dividends on its common stock for 56 consecutive years and has increased
that dividend each year for the last nine 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, working capital, and for environmental
remediation costs. Net cash outflows for capital expenditures and
remediation projects for the first nine months of 2008 amounted to $45.0 and
$20.7 million, respectively. Management estimates net cash outflows for
construction projects for 2008, 2009 and 2010, to be approximately $78.0
million, $71.5 million and $52.2 million, respectively, which has increased from
prior estimates due to additional planned expenditures for delivery system
infrastructure improvements. Total cash outflows for remediation projects are
expected to be $28.1 million, $15.0 million and $16.0 million for 2008, 2009 and
2010, respectively. As discussed in Notes 9 and 14 to the Financial
Statements in Item 8 of SJI’s 10-K as of December 31, 2007, certain
environmental costs are subject to recovery from insurance carriers and
ratepayers.
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 September 30, 2008, average
$45.8 million annually and total $166.8 million over the contracts’ lives.
Approximately 47% 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.
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, 2007, except for commodity supply
purchase obligations which increased by approximately $57.5 million in total
since December 31, 2007, due to the origination of new contracts during the
third quarter.
In
addition, as discussed in Note 7, SJG’s contractual cash obligation under the
NJCEP increased by $32.8 million for the years 2009 through
2012. Expenditures made for this program are recoverable through
rates and do not directly affect earnings.
Off-Balance
Sheet Arrangements–
An off-balance sheet arrangement is any contractual arrangement involving
an unconsolidated entity under which the company has either made
guarantees, or has certain other interests or obligations.
The
Company has recorded a liability of $2.0 million in Other Noncurrent Liabilities
on the condensed consolidated balance sheets as of September 30, 2008 for the
fair value of the following guarantees:
|
·
|
In
April 2007, SJI guaranteed certain obligations of LVE Energy Partners, LLC
(LVE) an unconsolidated joint venture in which Marina has a 50% equity
interest. LVE 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 began construction
of the facility in 2007 and expected to provide full energy services in
2010 when the resort was originally scheduled to be completed. However,
the developer of the resort recently announced that it was delaying
construction of the project due to the difficult environment in the
capital markets and weak economic conditions. The developer has indicated
that they are considering different strategies to move the project
forward, including opening the project in phases and obtaining a partner,
but that it was unlikely construction would resume during 2009. The
district energy system and central energy center are being financed by LVE
with debt that is non-recourse to SJI and includes a guaranty by the
developer of certain fixed payments to be made under the Energy Sales
Agreement until the project begins commercial operations. LVE is currently
in discussions with the banks that are financing the energy facilities
regarding a plan to address the developer’s construction delay. Those
discussions include a revised timetable and funding schedule for the
completion of construction of the energy facilities, and the potential
contribution of additional equity. SJI is obligated to invest at
least $30.0 million of equity during the construction period as discussed
below and may invest up to an additional $9.0 million. The
Company holds a significant variable interest in LVE but is not the
primary beneficiary. SJI's risk of loss is limited to its
equity contribution and the unsecured Note Receivable. SJI has issued a
performance guarantee for up to $180.0 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 assurance that construction of the thermal facility
will meet those same milestones. Those milestones are currently
being revised due to delays announced by the project developer. In
addition, SJI has guaranteed the obligations of LVE under certain
insurance policies during the construction period. The maximum
amount that SJI could be obligated for, in the event that LVE does not
have sufficient resources to make deductible payments on future claims
under these insurance policies, is approximately $6.0
million. SJI has also guaranteed certain performance
obligations of LVE under the operating agreements between LVE and the
resort, up to $20 million each year for the term of the agreement,
commencing with the first year of operations. SJI and the
partner in this joint venture have entered into reimbursement agreements
that secure reimbursement for SJI of a proportionate share of any payments
made by SJI on these guarantees.
|
|
·
|
SJI
has also guaranteed certain obligations of BC Landfill Energy, LLC (BCLE),
an unconsolidated joint venture in which Marina has a 50% equity
interest. BCLE has entered into a 20-year agreement with a
county government to lease and operate a facility that will produce
electricity from landfill methane gas. The facility went online
in the fourth quarter of 2007. Although unlikely, the maximum
amount that SJI could be obligated for, in the event that BCLE does not
meet minimum specified levels of operating performance and no mitigating
action is taken, or is unable to meet certain financial obligations as
they become due, is approximately $4.0 million each year. SJI
and the partner in this joint venture have entered into reimbursement
agreements that secure reimbursement for SJI of a proportionate share of
any payments made by SJI on these guarantees. SJI holds a
variable interest in BCLE but is not the primary
beneficiary.
|
Capital
Contribution Obligation - In December 2007, Marina and
its joint venture partner agreed to each contribute approximately $30 million of
equity to LVE as part of its construction period financing. LVE will initially
use bank and bond financing to fund project construction and then expects to use
contributed equity to complete the project. Marina’s obligation is secured by an
irrevocable letter of credit from a bank. In the event of a default by LVE on
its financing arrangements, the partners may be required to make the equity
contributions prior to the end of the construction period.
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 economic impact to SJRG of changes in value of a particular
transaction is substantially offset by an opposite change in the related hedge
transaction.
SJI
entered into certain contracts to purchase, sell, and transport natural gas. For
those derivatives not designated as hedges, the net unrealized pre-tax gain of
$71.9 million and $17.8 million during the three months ended September 30, 2008
and 2007, respectively is included with realized gains and losses in Operating
Revenues — Nonutility. For the nine months ended September 30, 2008 and 2007,
the net unrealized pre-tax gain of $2.1 million and $8.8 million,
respectively is included with realized gains and losses in Operating Revenues -
Nonutility. The fair value and maturity of these energy-trading
contracts determined under the mark-to-market method as of September 30, 2008 is
as follows (in thousands):
Assets
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
Source
of
Fair
Value
|
|
Maturity
<
1 Year
|
|
|
Maturity
1 -
3 Years
|
|
|
Beyond
3
Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
Actively Quoted
|
NYMEX
|
|
$
|
21,728
|
|
|
$
|
6,237
|
|
|
$
|
549
|
|
|
$
|
28,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
External Sources
|
Basis
|
|
|
22,720
|
|
|
|
9,325
|
|
|
|
189
|
|
|
|
32.234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
44,448
|
|
|
$
|
15,562
|
|
|
$
|
738
|
|
|
$
|
60,748
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
Liabilities
|
Source
of
|
|
Maturity
|
|
|
Maturity
|
|
|
Beyond
|
|
|
|
|
|
Fair
Value
|
|
<
1 Year
|
|
|
1 -
3 Years
|
|
|
3
Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
Actively Quoted
|
NYMEX
|
|
$
|
12,031
|
|
|
$
|
4,928
|
|
|
$
|
54
|
|
|
$
|
17,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
External Sources
|
Basis
|
|
|
19,268
|
|
|
|
5,206
|
|
|
|
89
|
|
|
|
24,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
31,299
|
|
|
$
|
10,134
|
|
|
$
|
143
|
|
|
$
|
41,576
|
|
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 contracts are 4.0 million
decatherms (dth) with a weighted-average settlement price of $8.95 per
dth. Contracted volumes of our basis contracts are 22.4 million dth
with a weighted average settlement price of $1.29 per dth.
A
reconciliation of SJI's estimated net fair value of energy-related derivatives
follows (in thousands):
Net
Derivatives — Energy Related Assets, January 1, 2008
|
|
$
|
16,286
|
|
Contracts
Settled During Nine Months Ended September 30, 2008, Net
|
|
|
(18,460
|
)
|
Other
Changes in Fair Value from Continuing and New Contracts,
Net
|
|
|
21,346
|
|
|
|
|
|
|
Net
Derivatives — Energy Related Assets September 30,
2008
|
|
$
|
19,172
|
|
Interest
Rate Risk —
Our exposure to interest-rate risk relates primarily to short-term,
variable-rate borrowings. Short-term, variable-rate debt outstanding at
September 30, 2008 was $159.1 million and averaged $75.8 million
during the first nine months of 2008. A hypothetical 100 basis point (1%)
increase in interest rates on our average variable-rate debt outstanding would
result in a $0.4 million 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: 2007 – 45 b.p. decrease; 2006 — 67 b.p.
increase; 2005 — 194 b.p. increase; 2004 — 115 b.p. decrease; and 2003 — 28 b.p.
decrease. For September 2008, our average interest rate on variable-rate
debt was 2.99%.
We issue
long-term debt either at fixed rates or use interest rate derivatives to limit
our exposure to changes in interest rates on variable-rate, long-term debt. As
of September 30, 2008, the interest costs on all but $7.1 million of our
long-term debt was either at a fixed-rate or hedged via an interest rate
derivative. Consequently, interest expense on existing long-term debt is not
significantly impacted by changes in market interest rates. However, due to
general market conditions during 2008, the demand for auction-rate securities
was disrupted resulting in increased interest rate volatility for tax-exempt
auction-rate debt. As a result, the $25.0 million of tax-exempt
auction-rate debt issued by the Company (and repurchased in June 2008) was
exposed to changes in interest rates that were not completely mitigated by the
related interest rate derivatives. The auction rate debt was converted to
another form of variable rate debt and resold in the public market in August
2008. The original interest rate derivatives remain in place and are expected to
substantially offset changes in interest rates on the security.
As of
September 30, 2008, SJI’s active interest rate swaps were as
follows:
Amount
|
|
Fixed
Interest
Rate
|
|
Start
Date
|
|
Maturity
|
|
Type
|
|
Obligor
|
$
|
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
Evaluation
of Disclosure Controls and Procedures
The
Company’s management, with the participation of its chief executive officer and
chief financial officer, evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2008. Based
on that evaluation, the Company’s chief executive officer and chief financial
officer concluded that the disclosure controls and procedures employed at
the Company are effective.
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 September 30, 2008 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 31.
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, 2007:
The
inability to obtain capital, particularly short-term capital from commercial
banks, could negatively impact the daily operations and financial performance of
SJI.
SJI uses
short-term borrowings under committed and uncommitted credit facilities provided
by commercial banks to supplement cash provided by operations, to support
working capital needs, and to finance capital expenditures, as incurred. If the customary sources
of short-term capital were no longer available due to market conditions, SJI may
not be able to meet its working capital and capital expenditure requirements and
borrowing costs could increase.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity
Securities
The
following table presents information about purchases by SJI of its own common
stock during the three months ended September 30, 2008:
Period
|
|
Total
Number of
Shares
Purchased¹
|
|
|
Average
Price
Paid
Per Share¹
|
|
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans
or Programs²
|
|
|
Maximum
Number
of Shares that
May
Yet be
Purchased
Under the
Plans
or Programs²
|
|
July
2008
|
|
|
23,782
|
|
|
$
|
37.63
|
|
|
|
-
|
|
|
|
-
|
|
August
2008
|
|
|
2,784
|
|
|
$
|
35.86
|
|
|
|
-
|
|
|
|
-
|
|
September
2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
26,566
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
1The total
number of shares purchased and the average price paid per share represent shares
purchased in open market transactions under the South Jersey Industries Dividend
Reinvestment Plan (the “DRP”) by the administrator of the DRP.
²On
September 22, 2008, SJI publicly announced a share repurchase program under
which the Company can purchase up to 5% of its currently outstanding common
stock over the next four years. As of September 30, 2008, no shares
have been purchased under this program.
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:
November 7, 2008
|
By:
/s/ Edward J.
Graham
|
|
Edward J. Graham
|
|
Chairman, President & Chief Executive Officer
|
|
|
|
|
|
|
Dated:
November 7, 2008
|
By:
/s/ David A.
Kindlick
|
|
David A. Kindlick
|
|
Vice President & Chief Financial
Officer
|