sjiform10q033109.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 March
31, 2009
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 May
4, 2009, there were 29,796,232 shares of the registrant’s common stock
outstanding.
PART I -
FINANCIAL INFORMATION
Item
1. Financial Statements - See Pages 3 through 22
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
(In
Thousands Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues:
|
|
|
|
|
|
|
Utility
|
|
$ |
240,109 |
|
|
$ |
236,412 |
|
Nonutility
|
|
|
122,067 |
|
|
|
111,635 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
|
362,176 |
|
|
|
348,047 |
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Cost
of Sales - (Excluding depreciation)
|
|
|
|
|
|
|
|
|
-
Utility
|
|
|
162,973 |
|
|
|
161,425 |
|
-
Nonutility
|
|
|
102,535 |
|
|
|
105,331 |
|
Operations
|
|
|
22,913 |
|
|
|
19,994 |
|
Maintenance
|
|
|
2,155 |
|
|
|
1,852 |
|
Depreciation
|
|
|
7,660 |
|
|
|
7,187 |
|
Energy
and Other Taxes
|
|
|
5,167 |
|
|
|
4,866 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
303,403 |
|
|
|
300,655 |
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
58,773 |
|
|
|
47,392 |
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
461 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
Interest
Charges
|
|
|
(4,893 |
) |
|
|
(6,014 |
) |
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
54,341 |
|
|
|
41,658 |
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(20,218 |
) |
|
|
(17,164 |
) |
|
|
|
|
|
|
|
|
|
Equity
in Earnings of Affiliated Companies
|
|
|
(2,435 |
) |
|
|
217 |
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
31,688 |
|
|
|
24,711 |
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations - (Net of tax benefit)
|
|
|
(19 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
31,669 |
|
|
|
24,687 |
|
|
|
|
|
|
|
|
|
|
Less:
Net (Income) Loss Attributable to Noncontrolling Interest in
Subsidiaries
|
|
|
(66 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Net
Income - Attributable to South Jersey Industries, Inc.
|
|
$ |
31,603 |
|
|
$ |
24,688 |
|
|
|
|
|
|
|
|
|
|
Amounts
Attributable to South Jersey Industries, Inc. Shareholders
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
$ |
31,622 |
|
|
$ |
24,712 |
|
Loss
from Discontinued Operations - (Net of tax benefit)
|
|
|
(19 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
31,603 |
|
|
$ |
24,688 |
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share Attributable to South Jersey Industries, Inc.
Shareholders:
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
1.063 |
|
|
$ |
0.834 |
|
Discontinued
Operations
|
|
|
(0.001 |
) |
|
|
(0.001 |
) |
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$ |
1.062 |
|
|
$ |
0.833 |
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Basic
|
|
|
29,752 |
|
|
|
29,640 |
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share Attributable to South Jersey Industries, Inc.
Shareholders:
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
1.059 |
|
|
$ |
0.830 |
|
Discontinued
Operations
|
|
|
(0.000 |
) |
|
|
(0.001 |
) |
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$ |
1.059 |
|
|
$ |
0.829 |
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Diluted
|
|
|
29,851 |
|
|
|
29,764 |
|
|
|
|
|
|
|
|
|
|
Dividends
Declared per Common Share
|
|
$ |
0.298 |
|
|
$ |
0.270 |
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
31,669 |
|
|
$ |
24,687 |
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net of Tax:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Loss on Available-for-Sale Securities
|
|
|
(170 |
) |
|
|
(238 |
) |
Unrealized
Gain (Loss) on Derivatives - Other
|
|
|
373 |
|
|
|
(779 |
) |
Other
Comprehensive Income (Loss) of Affiliated Companies
|
|
|
1,323 |
|
|
|
(1,931 |
) |
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss) - Net of Tax*
|
|
|
1,526 |
|
|
|
(2,948 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
33,195 |
|
|
|
21,739 |
|
|
|
|
|
|
|
|
|
|
Less:
Comprehensive (Income) Loss Attributable to Noncontrolling Interest in
Subsidiaries
|
|
|
(66 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income Attributable to South Jersey Industries, Inc.
|
|
$ |
33,129 |
|
|
$ |
21,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
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)
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
$ |
119,845 |
|
|
$ |
102,149 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(17,115 |
) |
|
|
(15,352 |
) |
Net
Purchase of Restricted Investments in Margin Account
|
|
|
(3,572 |
) |
|
|
- |
|
Purchase
of Restricted Investments with Escrowed Loan Proceeds
|
|
|
- |
|
|
|
(37 |
) |
Investment
in Long-Term Receivables
|
|
|
(2,044 |
) |
|
|
(1,166 |
) |
Proceeds
from Long-Term Receivables
|
|
|
2,869 |
|
|
|
928 |
|
Investment
in Affiliate
|
|
|
(1,781 |
) |
|
|
(411 |
) |
Advances
on Notes Receivable - Affiliate
|
|
|
(650 |
) |
|
|
- |
|
Repayment
of Notes Receivable - Affiliate
|
|
|
1,100 |
|
|
|
- |
|
Other
|
|
|
175 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(21,018 |
) |
|
|
(16,038 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net
Repayments of Lines of Credit
|
|
|
(97,875 |
) |
|
|
(86,490 |
) |
Other
|
|
|
(37 |
) |
|
|
614 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Financing Activities
|
|
|
(97,912 |
) |
|
|
(85,876 |
) |
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
915 |
|
|
|
235 |
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
5,775 |
|
|
|
11,678 |
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
6,690 |
|
|
$ |
11,913 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
Utility
Plant, at original cost
|
|
$ |
1,184,032 |
|
|
$ |
1,172,014 |
|
Accumulated
Depreciation
|
|
|
(299,095 |
) |
|
|
(295,432 |
) |
Nonutility
Property and Equipment, at cost
|
|
|
123,192 |
|
|
|
121,658 |
|
Accumulated
Depreciation
|
|
|
(16,462 |
) |
|
|
(15,632 |
) |
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment - Net
|
|
|
991,667 |
|
|
|
982,608 |
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
|
4,533 |
|
|
|
4,859 |
|
Restricted
|
|
|
34,670 |
|
|
|
31,098 |
|
Investment
in Affiliates
|
|
|
2,139 |
|
|
|
1,966 |
|
|
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
41,342 |
|
|
|
37,923 |
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
6,690 |
|
|
|
5,775 |
|
Accounts
Receivable
|
|
|
188,067 |
|
|
|
121,683 |
|
Unbilled
Revenues
|
|
|
34,551 |
|
|
|
52,907 |
|
Provision
for Uncollectibles
|
|
|
(6,265 |
) |
|
|
(5,757 |
) |
Natural
Gas in Storage, average cost
|
|
|
61,848 |
|
|
|
162,387 |
|
Materials
and Supplies, average cost
|
|
|
13,544 |
|
|
|
12,778 |
|
Prepaid
Taxes
|
|
|
28 |
|
|
|
14,604 |
|
Derivatives
- Energy Related Assets
|
|
|
61,937 |
|
|
|
63,201 |
|
Other
Prepayments and Current Assets
|
|
|
6,172 |
|
|
|
7,506 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
366,572 |
|
|
|
435,084 |
|
|
|
|
|
|
|
|
|
|
Regulatory
and Other Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Regulatory
Assets
|
|
|
254,090 |
|
|
|
270,434 |
|
Derivatives
- Energy Related Assets
|
|
|
18,767 |
|
|
|
19,712 |
|
Unamortized
Debt Issuance Costs
|
|
|
7,027 |
|
|
|
7,166 |
|
Notes
Receivables-Affiliates
|
|
|
7,007 |
|
|
|
7,457 |
|
Contract
Receivables
|
|
|
11,928 |
|
|
|
13,565 |
|
Other
|
|
|
20,428 |
|
|
|
19,478 |
|
|
|
|
|
|
|
|
|
|
Total
Regulatory and Other Noncurrent Assets
|
|
|
319,247 |
|
|
|
337,812 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,718,828 |
|
|
$ |
1,793,427 |
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization and
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
$ |
37,245 |
|
|
$ |
37,161 |
|
Premium
on Common Stock
|
|
|
252,818 |
|
|
|
252,495 |
|
Treasury
Stock (at par)
|
|
|
(180 |
) |
|
|
(176 |
) |
Accumulated
Other Comprehensive Loss
|
|
|
(22,673 |
) |
|
|
(24,199 |
) |
Retained
Earnings
|
|
|
272,712 |
|
|
|
249,973 |
|
|
|
|
|
|
|
|
|
|
Total
South Jersey Industries, Inc. Shareholders' Equity
|
|
|
539,922 |
|
|
|
515,254 |
|
|
|
|
|
|
|
|
|
|
Noncontrolling
Interest in Subsidiaries
|
|
|
1,260 |
|
|
|
1,194 |
|
|
|
|
|
|
|
|
|
|
Total
Equity
|
|
|
541,182 |
|
|
|
516,448 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
332,747 |
|
|
|
332,784 |
|
|
|
|
|
|
|
|
|
|
Total
Capitalization
|
|
|
873,929 |
|
|
|
849,232 |
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Notes
Payable
|
|
|
114,675 |
|
|
|
212,550 |
|
Current
Portion of Long-Term Debt
|
|
|
25,112 |
|
|
|
25,112 |
|
Accounts
Payable
|
|
|
96,143 |
|
|
|
120,162 |
|
Customer
Deposits and Credit Balances
|
|
|
14,965 |
|
|
|
14,449 |
|
Environmental
Remediation Costs
|
|
|
9,300 |
|
|
|
13,670 |
|
Taxes
Accrued
|
|
|
26,990 |
|
|
|
5,510 |
|
Derivatives
- Energy Related Liabilities
|
|
|
55,262 |
|
|
|
50,925 |
|
Deferred
Income Taxes - Net
|
|
|
18,228 |
|
|
|
25,009 |
|
Deferred
Contract Revenues
|
|
|
4,820 |
|
|
|
5,840 |
|
Dividends
Payable
|
|
|
8,864 |
|
|
|
- |
|
Interest
Accrued
|
|
|
4,922 |
|
|
|
6,519 |
|
Pension
and Other Postretirement Benefits
|
|
|
1,031 |
|
|
|
1,031 |
|
Other
Current Liabilities
|
|
|
15,590 |
|
|
|
19,130 |
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
395,902 |
|
|
|
499,907 |
|
|
|
|
|
|
|
|
|
|
Deferred
Credits and Other Noncurrent Liabilities:
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes - Net
|
|
|
189,766 |
|
|
|
184,294 |
|
Investment
Tax Credits
|
|
|
1,753 |
|
|
|
1,832 |
|
Pension
and Other Postretirement Benefits
|
|
|
83,350 |
|
|
|
80,835 |
|
Environmental
Remediation Costs
|
|
|
52,839 |
|
|
|
54,495 |
|
Asset
Retirement Obligations
|
|
|
22,711 |
|
|
|
22,553 |
|
Derivatives
- Energy Related Liabilities
|
|
|
14,805 |
|
|
|
15,699 |
|
Derivatives
- Other
|
|
|
11,651 |
|
|
|
14,088 |
|
Regulatory
Liabilities
|
|
|
52,481 |
|
|
|
50,447 |
|
Other
|
|
|
19,641 |
|
|
|
20,045 |
|
|
|
|
|
|
|
|
|
|
Total
Deferred Credits
|
|
|
|
|
|
|
|
|
and
Other Noncurrent Liabilities
|
|
|
448,997 |
|
|
|
444,288 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities
|
|
$ |
1,718,828 |
|
|
$ |
1,793,427 |
|
|
|
|
|
|
|
|
|
|
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 2008 Annual
Report on Form 10-K for a more complete discussion of the Company’s accounting
policies and certain other information.
REVENUE
BASED TAXES — SJI collects certain revenue-based energy taxes from customers.
Such taxes include New Jersey State Sales Tax, Transitional Energy Facility
Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is
recorded as a liability when billed to customers and is not included in revenue
or operating expenses. TEFA and PUA are included in both utility revenue and
cost of sales and totaled $4.1 million and $3.8 million in the three month
periods ended March 31, 2009 and 2008,
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 months ended March 31, 2009 and 2008 was not significant.
DERIVATIVE
INSTRUMENTS — Certain SJI subsidiaries are involved in buying, selling,
transporting and storing natural gas and buying and selling retail electricity
for their own accounts as well as managing these activities for other third
parties. These subsidiaries are subject to market risk on expected future
purchases and sales due to commodity price fluctuations. The Company uses a
variety of derivative instruments to limit this exposure to market risk in
accordance with strict corporate guidelines. These derivative instruments
include forward contracts, swap agreements, options contracts and futures
contracts. As of March 31, 2009, the Company had outstanding derivative
contracts intended to limit the exposure to market risk on 35.8 MMdts of
expected future purchases of natural gas, 26.1 MMdts of expected future sales of
natural gas and 2.7 MMmwh of expected future purchases of electricity. These
contracts, which have not been designated as hedging instruments under FAS 133,
are measured at fair value and recorded in Derivatives — Energy Related Assets
or Derivatives — Energy Related Liabilities on the condensed consolidated
balance sheets. The net unrealized pre-tax gains and losses for these
energy related commodity contracts are included with realized gains and losses
in Operating Revenues – Nonutility.
As part
of its gas purchasing strategy, SJG uses financial contracts through SJRG to
hedge against forward price risk. The costs or benefits of these short-term
contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause,
subject to BPU approval. As of March 31, 2009 and December 31, 2008, SJG had
$31.5 million and $29.0 million of unrealized losses, respectively, included in
its BGSS related to open financial contracts.
The
Company has also entered into interest rate derivatives to hedge exposure to
increasing interest rates and the impact of those rates on cash flows of
variable-rate debt. These interest rate derivatives, some of which have been
designated as hedging instruments under FAS 133, are measured at fair value and
recorded in Derivatives-Other on the condensed consolidated balance sheets.
The fair value represents the amount SJI would have to pay the counterparty to
terminate these contracts as of those dates. There have been no significant
changes to the Company’s active interest rate swaps since December 31, 2008
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, 2008.
The
interest rate derivatives that have been designated as cash flow hedges have
been determined to be highly effective. Therefore, the changes in
fair value of the effective portion of these swaps along with the cumulative
unamortized costs, net of taxes, have been recorded in Accumulated Other
Comprehensive Loss. These unrealized gains and losses will be reclassified into
earnings when the forecasted cash flows of the related variable-rate debt
occurs, or when it is probable that it will not occur. The ineffective portion
of these swaps have been included in Interest Charges.
The
unrealized gains and losses on the interest rate derivatives that have not been
designated as cash flow hedges have also been included in Interest Charges.
However, for selected interest rate derivatives at SJG, management believes
that, subject to BPU approval, the market value upon termination can be
recovered in rates and therefore these unrealized losses have 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 fair
values of all derivative instruments, as reflected in the condensed consolidated
balance sheets as of March 31, 2009 and December 31, 2008, are as follows (in
thousands):
|
Fair
Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
Asset
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under Statement 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
related commodity contracts
|
Derivatives
- Energy Related Assets-Current
|
|
$ |
61,937 |
|
Derivatives
- Energy Related Assets-Current
|
|
$ |
63,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
18,767 |
|
Noncurrent
|
|
|
19,712 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
asset derivatives
|
|
|
$ |
80,704 |
|
|
|
$ |
82,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
Derivatives |
|
|
|
|
|
|
|
March
31, 2009
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as hedging instruments under Statement 133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts |
Derivatives
- Other
|
|
$ |
2,928 |
|
Derivatives
- Other
|
|
$ |
3,551 |
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under Statement 133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
related commodity contracts
|
Derivatives
- Energy Related Liabilities-Current
|
|
|
55,262 |
|
Derivatives
- Energy Related Liabilities-Current
|
|
|
50,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
14,805 |
|
Noncurrent
|
|
|
15,699 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts |
Derivatives
- Other
|
|
|
8,723 |
|
Derivatives
- Other
|
|
|
10,537 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives not designated as hedging instruments under Statement
133 |
|
|
|
78,790 |
|
|
|
|
77,161 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liability derivatives |
|
|
$ |
81,718 |
|
|
|
$ |
80,712 |
|
The
effect of derivative instruments on the condensed consolidated statements of
income for the three months ended March 31, 2009 and 2008 are as follows (in
thousands):
Derivatives in Statement 133 Cash Flow Hedging
Relationships
|
|
Amount
of Gain or (Loss) Recognized in OCI on Derivative (Effective
Portion)
|
|
Location
of Gain or (Loss) Reclassified From Accumulated OCI into Income (Effective
Portion)
|
|
Amount
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
Location
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
Amount
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
Three
Months Ended
|
|
|
|
Three
Months Ended
|
|
|
|
Three
Months Ended
|
|
March
31,
|
|
|
|
March
31,
|
|
|
|
March
31,
|
|
2009
|
2008
|
|
|
|
2009
|
2008
|
|
|
|
2009
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$ |
373 |
|
|
$ |
(779 |
) |
Interest
Charges
|
|
$ |
(172 |
) |
|
$ |
(112 |
) |
Interest
Charges
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging
Instruments under Statement 133
|
|
|
|
|
Location
of Gain or (Loss)
Recognized
in Income on Derivative
|
|
Amount
of Gain or (Loss)
Recognized
in Income on Derivative
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Energy
related commodity contracts
|
Operating
Revenues - Nonutility
|
|
$ |
(16,279 |
) |
|
$ |
(26,400 |
) |
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
Interest
Charges
|
|
|
203 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
(16,076 |
) |
|
$ |
(26,400 |
) |
|
|
|
|
|
|
|
|
|
|
Certain
of the Company's derivative instruments contain provisions that require
immediate payment or demand immediate and ongoing collateralization on
derivative instruments in net liability positions in the event of a material
adverse change in the credit standing of the Company. The aggregate fair value
of all derivative instruments with credit-risk-related contingent features that
are in a liability position on March 31, 2009, is $31.3
million. If the credit-risk-related contingent features
underlying these agreements were triggered on March 31, 2009, the Company would
have been required to settle the intstruments immediately or post collateral to
its counterparties of approximately $25.4 million after offsetting asset
positions with the same counterparties under master netting
arrangements.
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 March 31, 2009, $3.5 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
March 31, 2009, SJI held 143,962 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 was effective in fiscal years beginning after
November 15, 2008. The adoption of this statement 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. The adoption of this statement
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.
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 was effective
for the first fiscal year beginning after December 15, 2008. As
a result of adopting this statement, we have disclosed on the face of our
financial statements the portion of equity and net income attributable to the
noncontrolling interests in consolidated subsidiaries. Additionally, we
reclassified $1.2 million of noncontrolling interests from Minority
Interest to Equity on the December 31, 2008 condensed consolidated balance
sheet. The amount of net income attributable to noncontrolling interests for the
three months ended March 31, 2008 that was reclassed from Other Income and
Expense to Net Loss Attributable to Noncontrolling Interest in Subsidiaries was
not material. The adoption of this statement modified our financial statement
presentation, but did not have an impact on our financial statement
results.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161 (FAS
161), “Disclosures about Derivative Instruments and Hedging Activities - an
amendment of SFAS No. 133”. 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.
The adoption of this statement did not have a material effect on the Company’s
condensed consolidated financial statements. See disclosures in Note
1.
In
December 2008, the FASB issued FASB Staff Position (FSP) No. 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets,” which amends
Statement 132(R) to require more detailed disclosures about employers’ plan
assets, including employers’ investment strategies, major categories of plan
assets, concentrations of risk within plan assets, and valuation techniques used
to measure the fair value of plan assets. The provisions of this FSP are
effective for reporting periods ending after December 15, 2009. Management is
currently evaluating the impact that the adoption of this position will have on
the Company’s condensed consolidated financial statements.
In
December 2008, the Emerging Issue Task Force issued EITF Issue No. 08-5,
“Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party
Credit Enhancement”. The Task Force reached a consensus that an
issuer of a liability with a third-party credit enhancement that is inseparable
from the liability must treat the liability and the credit enhancement as two
units of accounting. Under the consensus, the fair value measurement of the
liability does not include the effect of the third-party credit enhancement;
therefore, changes in the issuer’s credit standing without the support of the
credit enhancement affect the fair value measurement of the issuer’s liability.
Entities will need to disclose the existence of any third-party credit
enhancements related to their liabilities that are within the scope of this
Issue (i.e., that are measured at fair value). The consensus is effective in the
first reporting period beginning on or after December 15, 2008. The adoption of
this consensus did not have a material effect on the Company’s condensed
consolidated financial statements.
In
December 2008, the Emerging Issue Task Force issued EITF Issue No. 08-6, “Equity
Method Investment Accounting Considerations”. In this Issue, the Task Force
considered the effects of the issuances of Statements 141(R) and 160 on an
entity’s application of the equity method under Opinion 18. Statements 141(R)
and 160, which are effective for fiscal years beginning on or after December 15,
2008, amend the accounting for consolidated subsidiaries. Questions have arisen
regarding the application of equity method accounting guidance because of the
significant changes to the guidance on business combinations and subsidiary
equity transactions and the increased use of fair value measurements as a result
of these Statements.The Task Force reached a consensus clarifying the
application of equity method accounting. The consensus is effective for
transactions occurring in fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The adoption of this consensus
did not have a material effect on the Company’s condensed consolidated financial
statements.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2— “Recognition and Presentation
of Other-Than-Temporary Impairments.” This FSP amends the other-than-temporary
impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. The
FSP shall be effective for interim and annual reporting periods ending after
June 15, 2009. Management is currently evaluating the impact that the adoption
of this FSP will have on the Company’s condensed consolidated financial
statements.
In April
2009, the FASB issued FSP FAS 157-4— “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” This FSP provides additional
guidance for estimating fair value in accordance with FASB Statement No. 157,
“Fair Value Measurements,” when the volume and level of activity for the asset
or liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This FSP
shall be effective for interim and annual reporting periods ending after June
15, 2009, and shall be applied prospectively. Management is currently evaluating
the impact that the adoption of this FSP will have on the Company’s 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 three months ended March 31, 2009
and 2008. No stock appreciation rights have been issued under the plan. During
the three months ended March 31, 2009 and 2008, SJI granted 41,437 and 45,241
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
three months ended March 31, 2009 and 2008, SJI granted 9,559 and 8,667
restricted shares to Directors, respectively. 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
1 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on
Form 10-K as of December 31, 2008 for the related accounting
policy.
The
following table summarizes the nonvested restricted stock awards outstanding at
March 31, 2009 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.
2007
|
|
38,624
|
|
$
|
29.210
|
|
18.5%
|
|
4.9%
|
|
Jan.
2008
|
|
44,479
|
|
$
|
34.030
|
|
21.7%
|
|
2.9%
|
|
Jan.
2009
|
|
41,437
|
|
$
|
39.350
|
|
28.6%
|
|
1.2%
|
|
|
|
|
|
|
|
|
|
|
|
Directors
-
|
Dec.
2006
|
|
9,261
|
|
$
|
34.020
|
|
-
|
|
-
|
|
Jan.
2008
|
|
8,667
|
|
$
|
36.355
|
|
-
|
|
-
|
|
Jan.
2009
|
|
9,559
|
|
$
|
40.265
|
|
-
|
|
-
|
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 months
ended March 31, 2009 and 2008 (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Officers
& Key Employees
|
|
$
|
335
|
|
|
$
|
301
|
|
Directors
|
|
|
82
|
|
|
|
67
|
|
Total
Cost
|
|
|
417
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
(43
|
)
|
|
|
(37
|
)
|
Net
Expense
|
|
$
|
374
|
|
|
$
|
331
|
|
As of
March 31, 2009, there was $3.1 million of total unrecognized compensation cost
related to nonvested share-based compensation awards granted under the
restricted stock plans. That cost is expected to be recognized over a weighted
average period of 2.2 years.
The
following table summarizes information regarding restricted stock award activity
during the three months ended March 31, 2009 excluding accrued dividend
equivalents:
|
|
Officers
& Other
Key
Employees
|
|
|
Directors
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
|
|
|
|
|
|
|
Nonvested
Shares Outstanding, January 1, 2009
|
|
|
83,103
|
|
|
17,928
|
|
|
$
|
32.386
|
Granted
|
|
|
41,437
|
|
|
9,559
|
|
|
|
39.522
|
Nonvested
Shares Outstanding, March 31, 2009
|
|
|
124,540
|
|
|
27,487
|
|
|
$
|
34.779
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three months ended March 31, 2009 and 2008, SJI awarded 57,976 shares, which
had vested at December 31, 2008, at a market value of $2.3 million, and 51,838
shares, which had vested at December 31, 2007, at a market value of $1.9
million, respectively. The Company has a policy of issuing new shares to satisfy
its obligations under these plans; therefore, there are no cash payment
requirements resulting from the normal operation of this plan. However, a change
in control could result in such shares becoming nonforefeitable or immediately
payable in cash. 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 months ended
March 31, were (in thousands, except per share amounts):
|
Three
Months Ended
March
31,
|
|
|
2009
|
|
|
2008
|
|
Loss
before Income Taxes:
|
|
|
|
|
|
Sand
Mining
|
$
|
(27
|
)
|
|
$
|
(27
|
)
|
Fuel
Oil
|
|
(2
|
)
|
|
|
(11
|
)
|
Income
Tax Benefits
|
|
10
|
|
|
|
14
|
|
Loss
from Discontinued Operations — Net
|
$
|
(19
|
)
|
|
$
|
(24
|
)
|
Earnings
Per Common Share from
|
|
|
|
|
|
|
|
Discontinued
Operations — Net:
|
|
|
|
|
|
|
|
Basic
|
$
|
(.001
|
)
|
|
$
|
(.001
|
)
|
Diluted
|
$
|
(.000
|
)
|
|
$
|
(.001
|
)
|
4. COMMON
STOCK:
The
following shares were issued and outstanding at March 31:
|
|
2009
|
|
Beginning
Balance, January 1
|
|
|
29,728,697
|
|
New
Issues During Period:
|
|
|
|
|
Stock-Based
Compensation Plan
|
|
|
67,535
|
|
Ending
Balance, March 31
|
|
|
29,796,232
|
|
The par
value ($1.25 per share) of stock issued was recorded in Common Stock and the net
excess over par value of approximately $0.3 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 98,416 and
123,585 shares for the three months ended March 31, 2009 and 2008, 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 were issued directly by SJI. Beginning in April 2008, shares of
common stock offered by the DRP have been purchased in open market
transactions.
5. FINANCIAL
INSTRUMENTS:
RESTRICTED
INVESTMENTS - In accordance with the terms of the Marina and certain SJG loan
agreements, unused proceeds are required to be escrowed pending approved
construction expenditures. As of March 31, 2009 and December 31, 2008, the
escrowed proceeds, including interest earned, totaled $1.4
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 March 31, 2009 and
December 31, 2008, the balance in this account was $33.3 million and $29.7
million, respectively.
LONG-TERM
RECEIVABLES — SJG provides financing to customers for the purpose of attracting
conversions to natural gas heating systems from competing fuel sources.
The terms of these loans call for customers to make monthly payments over a
period of up to five years with no interest. The carrying amounts of such
loans were $10.7 million and $10.1 million as of March 31, 2009 and December 31,
2008, respectively. The current portion of these receivables is reflected in
Accounts Receivable and the non-current portion is reflected in Contract
Receivables on the condensed consolidated balance sheets. The carrying amounts
noted above are net of unamortized discounts resulting from imputed interest in
the amounts of $1.4 million and $1.2 million as of March 31, 2009 and December
31, 2008, respectively. The annual amortization to interest is not
material to the Company’s condensed consolidated financial
statements.
CONCENTRATION
OF CREDIT RISK - As of March 31, 2009, approximately 44.3% of the current and
noncurrent Derivatives – Energy Related Assets or $35.8 million are with a
single retail counterparty. This counterparty has contracts with a large number
of diverse customers which minimizes the concentration of this risk. A portion
of these contracts may be assigned to SJI in the event of a default by the
counterparty.
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. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Intersegment sales and transfers are
treated as if the sales or transfers were to third parties at current market
prices.
Information
about SJI's operations in different reportable operating segments is presented
below (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Operating
Revenues:
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
243,113
|
|
|
|
237,904
|
|
Wholesale
Gas Operations
|
|
|
63,868
|
|
|
|
26,264
|
|
Retail
Gas and Other Operations
|
|
|
38,040
|
|
|
|
57,377
|
|
Retail
Electric Operations
|
|
|
8,268
|
|
|
|
16,259
|
|
On-Site
Energy Production
|
|
|
10,013
|
|
|
|
10,763
|
|
Appliance
Service Operations
|
|
|
5,003
|
|
|
|
4,970
|
|
Corporate
& Services
|
|
|
4,900
|
|
|
|
4,468
|
|
Subtotal
|
|
|
373,205
|
|
|
|
358,005
|
|
Intersegment
Sales
|
|
|
(11,029
|
)
|
|
|
(9,958
|
)
|
Total
Operating Revenues
|
|
$
|
362,176
|
|
|
|
348,047
|
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
46,367
|
|
|
|
47,348
|
|
Wholesale
Gas Operations
|
|
|
10,400
|
|
|
|
(6,007
|
)
|
Retail
Gas and Other Operations
|
|
|
661
|
|
|
|
1,882
|
|
Retail
Electric Operations
|
|
|
(1,620
|
)
|
|
|
461
|
|
On-Site
Energy Production
|
|
|
2,059
|
|
|
|
2,434
|
|
Appliance
Service Operations
|
|
|
704
|
|
|
|
996
|
|
Corporate
and Services
|
|
|
202
|
|
|
|
278
|
|
Total
Operating Income
|
|
$
|
58,773
|
|
|
|
47,392
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
8,453
|
|
|
|
7,717
|
|
Wholesale
Gas Operations
|
|
|
(87
|
)
|
|
|
16
|
|
Retail
Gas and Other Operations
|
|
|
5
|
|
|
|
4
|
|
Appliance
Services Operations
|
|
|
71
|
|
|
|
77
|
|
On-Site
Energy Production
|
|
|
883
|
|
|
|
752
|
|
Corporate
and Services
|
|
|
118
|
|
|
|
97
|
|
Total Depreciation
and Amortization
|
|
$
|
9,443
|
|
|
|
8,663
|
|
`
|
|
|
|
|
|
|
|
|
Interest
Charges:
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
4,097
|
|
|
|
4,975
|
|
Wholesale
Gas Operations
|
|
|
200
|
|
|
|
144
|
|
Retail
Gas and Other Operations
|
|
|
-
|
|
|
|
76
|
|
On-Site
Energy Production
|
|
|
525
|
|
|
|
831
|
|
Corporate
and Services
|
|
|
262
|
|
|
|
381
|
|
Subtotal
|
|
|
5,084
|
|
|
|
6,407
|
|
Intersegment
Borrowings
|
|
|
(191
|
)
|
|
|
(393
|
)
|
Total
Interest Charges
|
|
$
|
4,893
|
|
|
|
6,014
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes:
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
17,615
|
|
|
|
17,530
|
|
Wholesale
Gas Operations
|
|
|
4,323
|
|
|
|
(2,430
|
)
|
Retail
Gas and Other Operations
|
|
|
278
|
|
|
|
759
|
|
Retail
Electric Operations
|
|
|
(666
|
)
|
|
|
181
|
|
On-Site
Energy Production
|
|
|
(1,765
|
)
|
|
|
568
|
|
Appliance
Service Operations
|
|
|
296
|
|
|
|
430
|
|
Corporate
and Services
|
|
|
137
|
|
|
|
126
|
|
Total
Income Taxes
|
|
$
|
20,218
|
|
|
|
17,164
|
|
|
|
|
|
|
|
|
|
|
Property
Additions:
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
14,822
|
|
|
|
11,135
|
|
Wholesale
Gas Operations
|
|
|
3
|
|
|
|
3,338
|
|
Retail
Gas and Other Operations
|
|
|
5
|
|
|
|
-
|
|
Appliance
Service Operations
|
|
|
325
|
|
|
|
2
|
|
On-Site
Energy Production
|
|
|
1,264
|
|
|
|
229
|
|
Corporate
and Services
|
|
|
61
|
|
|
|
366
|
|
Total
Property Additions
|
|
$
|
16,480
|
|
|
|
15,070
|
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Identifiable
Assets:
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
1,337,172
|
|
|
$
|
1,354,015
|
|
Wholesale
Gas Operations
|
|
|
199,343
|
|
|
|
196,487
|
|
Retail
Gas and Other Operations
|
|
|
46,663
|
|
|
|
42,939
|
|
Retail
Electric Operations
|
|
|
4,038
|
|
|
|
5,594
|
|
On-Site
Energy Production
|
|
|
123,293
|
|
|
|
123,913
|
|
Appliance
Service Operations
|
|
|
16,761
|
|
|
|
17,704
|
|
Discontinued
Operations
|
|
|
1,204
|
|
|
|
1,409
|
|
Corporate
and Services
|
|
|
25,348
|
|
|
|
91,641
|
|
Subtotal
|
|
|
1,753,822
|
|
|
|
1,833,702
|
|
Intersegment
Assets
|
|
|
(34,994
|
)
|
|
|
(40,275
|
)
|
Total
Identifiable Assets
|
|
$
|
1,718,828
|
|
|
$
|
1,793,427
|
|
7.
|
RATES
AND REGULATORY ACTIONS:
|
In
January 2009 SJG filed a petition with the BPU for approval of an accelerated
infrastructure investment program and an associated rate tracker, which would
allow the Company to accelerate $103.0 million of capital spending into 2009 and
2010. The petition requested the Company earn a return of, and return on,
investment at the time the investment is made. The petition was approved
by the BPU in April 2009. SJG also agreed to file a full base rate
case with the NJBPU no later than April 2011 as part of the infrastructure
program. Also in January 2009, SJG filed a petition requesting
approval of an energy efficiency program to invest $17.0 million over 2 years in
energy efficiency programs for residential, commercial and industrial
customers.
There
have been no other significant regulatory actions or changes to SJG’s rate
structure since December 31, 2008. See Note 9 to the Consolidated Financial
Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31,
2008.
8. REGULATORY
ASSETS & REGULATORY LIABILITIES:
There
have been no significant changes to the nature of the Company’s regulatory
assets and liabilities since December 31, 2008 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, 2008.
Regulatory
Assets consisted of the following items (in thousands):
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Environmental
Remediation Costs:
|
|
|
|
|
|
|
Expended
- Net
|
|
$
|
47,756
|
|
|
$
|
48,143
|
|
Liability
for Future Expenditures
|
|
|
58,086
|
|
|
|
64,093
|
|
Income
Taxes-Flowthrough Depreciation
|
|
|
2,485
|
|
|
|
2,729
|
|
Deferred
Asset Retirement Obligation Costs
|
|
|
22,033
|
|
|
|
21,901
|
|
Deferred
Gas Costs - Net
|
|
|
17,202
|
|
|
|
18,406
|
|
Deferred
Pension and Other Postretirement Benefit Costs
|
|
|
80,067
|
|
|
|
80,162
|
|
Conservation
Incentive Program Receivable
|
|
|
16,287
|
|
|
|
22,048
|
|
Societal
Benefit Costs Receivable
|
|
|
622
|
|
|
|
1,753
|
|
Premium
for Early Retirement of Debt
|
|
|
1,167
|
|
|
|
1,208
|
|
Other
Regulatory Assets
|
|
|
8,385
|
|
|
|
9,991
|
|
|
|
|
|
|
|
|
|
|
Total
Regulatory Assets
|
|
$
|
254,090
|
|
|
$
|
270,434
|
|
Regulatory
Liabilities consisted of the following items (in thousands):
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Excess
Plant Removal Costs
|
|
$
|
48,854
|
|
|
$
|
48,820
|
|
Other
Regulatory Liabilities
|
|
|
3,627
|
|
|
|
1,627
|
|
|
|
|
|
|
|
|
|
|
Total
Regulatory Liabilities
|
|
$
|
52,481
|
|
|
$
|
50,447
|
|
9. PENSION
AND OTHER POSTRETIREMENT BENEFITS:
For the
three months ended March 31, 2009 and 2008, net periodic benefit cost related to
the employee and officer pension and other postretirement benefit plans
consisted of the following components (in thousands):
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
|
Three
Months Ended
March
31,
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
Cost
|
|
$
|
878
|
|
|
$
|
838
|
|
|
$
|
268
|
|
|
$
|
265
|
|
Interest
Cost
|
|
|
2,165
|
|
|
|
1,991
|
|
|
|
763
|
|
|
|
737
|
|
Expected
Return on Plan Assets
|
|
|
(1,913
|
)
|
|
|
(2,512
|
)
|
|
|
(388
|
)
|
|
|
(538
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
Service Cost
|
|
|
70
|
|
|
|
72
|
|
|
|
(88
|
)
|
|
|
(86
|
)
|
Actuarial
Loss
|
|
|
1,367
|
|
|
|
398
|
|
|
|
453
|
|
|
|
184
|
|
Net
Periodic Benefit Cost
|
|
|
2,567
|
|
|
|
787
|
|
|
|
1,008
|
|
|
|
562
|
|
Capitalized
Benefit Costs
|
|
|
(992
|
)
|
|
|
(256
|
)
|
|
|
(388
|
)
|
|
|
(209
|
)
|
Total
Net Periodic Benefit Expense
|
|
$
|
1,575
|
|
|
$
|
531
|
|
|
$
|
620
|
|
|
$
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
benefit costs reflected in the table above relate to SJG’s construction
program.
During
the three months ended March 31, 2008 SJI contributed $5.9 million to its
pension plans. No contribution was made during the three months ended
March 31, 2009. However, SJI expects to make a contribution during
the 2nd quarter
in order to improve the funded status of the plans and partially offset the
increase in expense in 2009 caused by the amortization of unprecedented losses
realized on plan assets during 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, 2008, for additional information related to SJI’s
pension and other postretirement benefits.
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 $424.1 million at March 31, 2009.
Various
loan agreements also contain potential restrictions regarding the amount of cash
dividends or other distributions that SJG may pay on its common stock. As of
March 31, 2009, 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:
Credit
facilities and available liquidity as of March 31, 2009 were as
follows:
Company
|
|
Total
Facility
|
|
|
Usage
(A)
|
|
|
Available
Liquidity
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
|
$
|
100,000
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
August
2011
|
Line
of Credit
|
|
|
40,000
|
|
|
|
—
|
|
|
|
40,000
|
|
December
2009
|
Line
of Credit
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
—
|
|
August
2009
|
Uncommitted
Bank Lines
|
|
|
53,000
|
|
|
|
21,575
|
|
|
|
31,425
|
|
Various
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
SJG
|
|
|
203,000
|
|
|
|
81,575
|
|
|
|
121,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
|
$
|
200,000
|
|
|
$
|
102,575
|
|
|
$
|
97,425
|
|
August
2011
|
Uncommitted
Bank Lines
|
|
|
40,000
|
|
|
|
13,135
|
|
|
|
26,865
|
|
Various
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
SJI
|
|
|
240,000
|
|
|
|
115,710
|
|
|
|
124,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
443,000
|
|
|
$
|
197,285
|
|
|
$
|
245,715
|
|
|
(A)
|
Includes
letters of credit in the amount of $82.6
million.
|
The SJG
facilities are restricted as to use and availability specifically to SJG;
however, if necessary the SJI facilities can also be used to support SJG’s
liquidity needs. All committed 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 March
31, 2009. Borrowings under these credit facilities are at market rates. The
weighted average borrowing cost, which changes daily, was 1.09% and 3.30% at
March 31, 2009 and 2008, respectively.
12.
|
COMMITMENTS
AND CONTINGENCIES:
|
GUARANTEES
— The Company has recorded a liability of $2.0 million in Other
Noncurrent Liabilities with a corresponding increase in Investment in Affiliates
on the condensed consolidated balance sheets as of March 31, 2009 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. LVE suspended construction of the
district energy system and central energy center in January 2009 after the
resort developer’s August 2008 announcement that it was delaying the
completion of construction of the resort due to the difficult environment
in the capital markets and weak economic conditions. The resort
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. LVE is currently in discussions with the banks
that are financing the energy facilities to address defaults under the financing
agreements. These LVE defaults have been caused by the resort developer’s
construction delay and the termination of an energy services agreement by a
hotel operator associated with the project. Those discussions include revising
the timetable and funding schedule for the completion of construction of the
energy facilities to reflect the suspension by the resort developer, and the
potential contribution of additional equity. SJI, through its subsidiary
Marina, is obligated to invest at least $30.4 million of
equity during the construction period as discussed below and may
contribute additional funds in the project to cover the incremental debt
service and other related costs to be incurred during the suspension period
resulting from the delay. However, we are unable to definitively quantify our
incremental costs at this time, if any, as negotiations over the new terms are
ongoing. LVE has proposed a new construction schedule in the form of a work
around plan. LVE and the resort developer will discuss the work around
plan which must then be acted upon by an independent engineer. The Energy
Sales Agreement between LVE and the resort developer includes
a payment obligation by the resort developer of certain fixed payments to
be made to LVE until the project begins commercial operations. A portion of this
payment obligation is guaranteed by the parent of the resort developer. As
of March 31, 2009, the Company had a net liability of approximately $10.2
million included in Other Current and Noncurrent Liabilities on the consolidated
balance sheets related to this project and unsecured Notes Receivable –
Affiliate of approximately $3.5 million due from LVE. SJI's risk of loss is
limited to its equity contribution, contribution obligations and the unsecured
notes receivable totaling approximately $35.4 million. During the first quarter
of 2009, SJI and the partner in this joint venture each provided support to LVE
of approximately $1.6 million to cover project related costs. It is expected
that the notes receivable will represent a portion of the total incremental
contribution described previously.
SJI
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. As a result of achieving certain milestones, the
guaranty has been reduced to $94.0 million as of March 31, 2009. 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 resort 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 $30.4 million of equity to LVE as part
of its construction period financing. The equity contribution is expected to be
made in 2009, and is secured by an irrevocable letter of credit from a
bank.
COLLECTIVE
BARGAINING AGREEMENTS — Unionized personnel
represent 56% of our workforce at March 31, 2009. The Company has
collective bargaining agreements with two unions that represent these employees:
the International Brotherhood of Electrical Workers (“IBEW”) and the
International Association of Machinists and Aerospace Workers (“IAM”). SJG
and SJESP employees represented by the IBEW operate under a new collective
bargaining agreement that runs through February 2013. The IAM is
asserting that the labor agreement which the Company believes expired on January
14, 2009 is evergreen for one year from that expiration date. The Company
disagrees and has filed a charge with the National Labor Relations Board for a
determination on the matter.
STANDBY
LETTERS OF CREDIT — As of March 31, 2009, SJI provided $82.6 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 $20.3 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; 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,
2008 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,
2008. 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 $6.0 million since December 31,
2008. This decrease is the result of expenditures of $3.3 million
during 2009 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:
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 March 31, 2009 is as follows (in thousands):
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities (A)
|
|
$
|
4,533
|
|
|
$
|
4,533
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivatives
– Energy Related Assets (B)
|
|
|
80,704
|
|
|
|
61,293
|
|
|
|
18,010
|
|
|
|
1,401
|
|
|
|
$
|
85,237
|
|
|
$
|
65,826
|
|
|
$
|
18,010
|
|
|
$
|
1,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
– Energy Related Liabilities (B)
|
|
$
|
70,067
|
|
|
$
|
65,657
|
|
|
$
|
551
|
|
|
$
|
3,859
|
|
Derivatives
– Other (C)
|
|
|
11,651
|
|
|
|
-
|
|
|
|
11,651
|
|
|
|
-
|
|
|
|
$
|
81,718
|
|
|
$
|
65,657
|
|
|
$
|
12,202
|
|
|
$
|
3,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
For non-exchange-based derivatives that trade in less liquid markets with
limited pricing information, model inputs generally would include both
observable and unobservable inputs. In instances where observable data is
unavailable, management considers the assumptions that market participants would
use in valuing the asset or liability. This includes assumptions about market
risks such as liquidity, volatility and contract duration. Such instruments are
categorized in Level 3 as the model inputs generally are not observable.
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.
The
changes in fair value measurements of Derivatives – Energy Related Assets and
Liabilities at March 31, 2009 using significant unobservable inputs (Level 3)
are as follows (in thousands):
Balance
at January 1, 2009
|
|
$
|
101
|
|
Total
losses (realized/unrealized) included in earnings
|
|
|
(2,273
|
)
|
Transfers
in and/or out of Level 3, net
|
|
|
-
|
|
Purchases,
sales, issuances and settlements, net
|
|
|
(286
|
)
|
Balance
at March 31, 2009
|
|
$
|
(2,458
|
)
|
Total
losses for 2009 included in earnings that are attributable to the change in
unrealized losses relating to those assets and liabilities still held as of
March 31, 2009, is $2.3 million. These losses are included in
Operating Revenues-Nonutility on the condensed consolidated statements of
income.
14.
|
AVAILABLE–FOR–SALE
SECURITIES:
|
The
Company's portfolio of investments consists of five highly diversified funds
which are not used for working capital purposes. These funds are in an
unrealized loss position as of March 31, 2009. Due to the nature of the
underlying securities, these funds as a whole are susceptible to changes in the
economy and have been adversely affected by the economic slowdown, particularly
during the fourth quarter of 2008 when the Company's investments became
impaired. The Company has evaluated the near-term prospects of the overall funds
in relation to the severity and duration of the impairment. Based on that
evaluation, the Company recorded an insignificant impairment loss during the
fourth quarter of 2008. Due to the Company's ability and intent to hold the
remaining funds for a reasonable period of time sufficient for a forecasted
recovery of fair value, the Company does not consider these remaining
investments to be other-than-temporarily impaired at March 31,
2009.
The
following table shows the gross unrealized losses and fair value of the
Company's Available-for-Sale Securities with unrealized losses that are not
deemed to be other-than-temporarily impaired (in thousands), aggregated by
length of time that the individual funds have been in a continuous unrealized
loss position at March 31, 2009.
|
|
Less
than 12 Months
|
|
|
Greater
Than 12 Months
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Marketable
Equity Securities
|
|
$
|
2,054
|
|
|
$
|
632
|
|
|
$
|
1,284
|
|
|
$
|
875
|
|
|
$
|
3,338
|
|
|
$
|
1,507
|
|
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, 2008 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,
2008.
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, 2008. 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, 2008.
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, 2008. 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, 2008.
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 attributable to SJI for the three months ended March 31, 2009 increased
$6.9 million, or 28% to net income of $31.6 million compared to the three months
ended March 31, 2008. This increase is primarily due to the change in
unrealized losses 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
months ended March 31 (in thousands, except for degree day
data):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Utility Throughput – dth:
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
Residential
|
|
|
11,517
|
|
|
|
10,183
|
|
Commercial
|
|
|
2,877
|
|
|
|
2,584
|
|
Industrial
|
|
|
149
|
|
|
|
75
|
|
Cogeneration
& Electric Generation
|
|
|
14
|
|
|
|
16
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,007
|
|
|
|
952
|
|
Commercial
|
|
|
2,571
|
|
|
|
2,460
|
|
Industrial
|
|
|
3,052
|
|
|
|
3,280
|
|
Cogeneration
& Electric Generation
|
|
|
433
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
Total
Firm Throughput
|
|
|
21,620
|
|
|
|
19,902
|
|
|
|
|
|
|
|
|
|
|
Interruptible
Sales
|
|
|
2
|
|
|
|
2
|
|
Interruptible
Transportation
|
|
|
636
|
|
|
|
912
|
|
Off-System
|
|
|
2,694
|
|
|
|
4,239
|
|
Capacity
Release
|
|
|
8,499
|
|
|
|
11,230
|
|
|
|
|
|
|
|
|
|
|
Total
Throughput - Utility
|
|
|
33,451
|
|
|
|
36,292
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Utility Operating Revenues:
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
Residential
|
|
$
|
168,638
|
|
|
$
|
143,468
|
|
Commercial
|
|
|
36,526
|
|
|
|
31,186
|
|
Industrial
|
|
|
1,811
|
|
|
|
3,555
|
|
Cogeneration
& Electric Generation
|
|
|
273
|
|
|
|
327
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
|
Residential
|
|
|
4,695
|
|
|
|
4,469
|
|
Commercial
|
|
|
7,914
|
|
|
|
7,653
|
|
Industrial
|
|
|
3,587
|
|
|
|
3,192
|
|
Cogeneration
& Electric Generation
|
|
|
459
|
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
Total
Firm Revenues
|
|
|
223,903
|
|
|
|
194,172
|
|
|
|
|
|
|
|
|
|
|
Interruptible
Sales
|
|
|
40
|
|
|
|
125
|
|
Interruptible
Transportation
|
|
|
557
|
|
|
|
596
|
|
Off-System
|
|
|
16,902
|
|
|
|
39,990
|
|
Capacity
Release
|
|
|
1,440
|
|
|
|
2,800
|
|
Other
|
|
|
271
|
|
|
|
221
|
|
|
|
|
243,113
|
|
|
|
237,904
|
|
Less:
Intercompany Sales
|
|
|
3,004
|
|
|
|
1,492
|
|
Total
Utility Operating Revenues
|
|
|
240,109
|
|
|
|
236,412
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
$
|
162,973
|
|
|
$
|
161,425
|
|
Conservation
Recoveries*
|
|
|
3,265
|
|
|
|
3,065
|
|
RAC
Recoveries*
|
|
|
1,209
|
|
|
|
695
|
|
Revenue
Taxes
|
|
|
4,071
|
|
|
|
3,790
|
|
Utility
Margin
|
|
$
|
68,591
|
|
|
$
|
67,437
|
|
|
|
|
|
|
|
|
|
|
Margin:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
45,590
|
|
|
$
|
40,982
|
|
Commercial
and Industrial
|
|
|
15,429
|
|
|
|
14,318
|
|
Cogeneration
and Electric Generation
|
|
|
340
|
|
|
|
289
|
|
Interruptible
|
|
|
46
|
|
|
|
65
|
|
Off-system
& Capacity Release
|
|
|
702
|
|
|
|
1,081
|
|
Other
Revenues
|
|
|
270
|
|
|
|
220
|
|
Margin
Before Weather Normalization & Decoupling
|
|
|
62,377
|
|
|
|
56,955
|
|
CIP
Mechanism
|
|
|
6,214
|
|
|
|
10,482
|
|
Utility
Margin
|
|
$
|
68,591
|
|
|
$
|
67,437
|
|
|
|
|
|
|
|
|
|
|
Degree
Days:
|
|
|
2,518
|
|
|
|
2,264
|
|
*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 2.8 MMdts, or 7.8%, for the three months ended
March 31, 2009, compared with the same period in 2008. 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, 2008. First quarter
firm throughput increased in both the residential and commercial markets as
a result of 11.2% colder weather, as reflected by the degree day data in
the table above, and the addition of 4,441 customers during the 12-month period
ended March 31, 2009.
Conservation
Incentive Program (CIP) - The effects of the CIP on SJG’s net income for
the three months ended March 31, 2009 and 2008 and the associated weather
comparisons were as follows ($’s in millions):
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
Income Benefit:
|
|
|
|
|
|
|
CIP
– Weather Related
|
|
$
|
(0.6
|
)
|
|
$
|
1.6
|
|
CIP
– Usage Related
|
|
|
4.3
|
|
|
|
4.6
|
|
Total
Net Income Benefit
|
|
$
|
3.7
|
|
|
$
|
6.2
|
|
|
|
|
|
|
|
|
|
|
Weather Compared to 20-Year Average
|
|
3.7% colder
|
|
|
6.8%
warmer
|
|
Weather Compared to Prior Year
|
|
11.2%
colder
|
|
|
6.4%
warmer
|
|
Operating
Revenues – Utility - Revenues increased $3.7
million, or 1.6%, during the three months ended March 31, 2009 compared to the
same period in the prior year. Firm sales revenue increased $29.7
million, or 15.3%. This increase was driven by several factors
including 11.2% colder weather, the addition of 4,441 customers over the last
twelve months, and a higher Basic Gas Supply Service
(BGSS) rate. During the first quarter of 2009, the BGSS rate was
11.1% higher than the rate in effect during the same time last
year. This increase was necessary to fully recover higher gas costs
incurred through most of 2008. However, as the Company does not
profit from the sale of the commodity, the BGSS rate increase did not have an
impact on Company profitability. Partially offsetting the increase in
firm sales was a substantial decrease in off-system sales (OSS) and capacity
release revenue, which decreased by $23.1 million and $1.4 million,
respectively, before eliminating intercompany transactions. These
decreases were primarily related to a reduction of SJG’s portfolio of assets
available for such activities under the provisions of the CIP, as noted above
under “Throughput.” Further, for those OSS transacted during the
first quarter of 2009, the average cost per unit sold had dropped considerably,
thus resulting in an additional decline in revenues during the
period.
Operating
Revenues — Nonutility — Combined revenues for SJI’s nonutility
businesses, net of intercompany transactions, increased by $10.4 million, or
9.3% in the three months ended March 31, 2009 compared with the same period in
2008.
SJE’s
revenues from retail gas, net of intercompany transactions, decreased by $18.6
million or 33.3% in the three months ended March 31, 2009 compared with the same
period in 2008 due mainly to a 39.1% decrease in the average monthly NYMEX
settle price during the quarter ended March 31, 2009 compared with the same
period in 2008. The majority of SJE’s natural gas customer contracts are
market-priced. In addition, as of March 31, 2009, SJE was serving 9,891
residential customers compared with 12,754 as of March 31, 2008. Market
conditions continue to make it difficult to be competitive in this market. SJE’s
commercial customer count also declined from 1,361 as of March 31, 2008 to 1,039
as of March 31, 2009, driven mainly by the expiration of a large municipal bid
early in the fourth quarter of 2008. We continue to focus our marketing efforts
on the pursuit of non-heat-sensitive commercial customers in an effort to
mitigate price volatility and weather risk.
SJE’s
revenues from retail electricity, net of intercompany transactions, decreased
$7.7 million in the three months ended March 31, 2009, compared with the same
period in 2008. Excluding the impact of the net change in unrealized losses
recorded on forward financial contracts of $2.0 million due to price volatility,
SJE’s revenues from retail electricity decreased $5.7 million or 41.4% due
mainly to a 67% decrease in the average monthly Locational Marginal Price (LMP)
per megawatt hour in the quarter ended March 31, 2009 compared with the same
period in 2008. Essentially all of SJE’s retail electric customer contracts are
market-priced.
SJRG’s
revenues, net of intercompany transactions, increased $37.5 million in the three
months ended March 31, 2009 compared with the same period in 2008. Excluding the
impact of the net change in unrealized gains and losses recorded on forward
financial contracts of $(12.2) million due to price volatility, SJRG’s revenues
increased $25.3 million. A summary of SJRG’s revenue for the three months ended
March 31 is as follows (in millions):
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
SJRG
Revenue
|
|
$
|
63.6
|
|
|
$
|
26.1
|
|
|
$
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Unrealized losses
|
|
|
14.2
|
|
|
|
26.4
|
|
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJRG
Revenue, Excluding unrealized losses
|
|
$
|
77.8
|
|
|
$
|
52.5
|
|
|
$
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This
increase in revenues is mainly attributable to a 32.8% increase in sales of
storage volumes in the first three months of 2009 compared with the same period
in 2008. As discussed in Note 1 to the Consolidated Financial Statements in Item
8 of SJI’s Annual Report on Form 10-K as of December 31, 2008, revenues and
expenses related to the energy trading activities of SJRG are presented on a net
basis in Operating Revenues – Nonutility.
Revenues
for Marina decreased $0.8 million or 7.0% in the three months ended March 31,
2009 compared with the same period in 2008 due mainly to lower rates on chilled
and hot water. Lower rates were driven by lower underlying commodity prices.
Volumetric hot water production increased 13.2% and chilled water production
decreased 5.3% in the quarter ended March 31, 2009 compared with the same period
in 2008, respectively. Additional production was mainly attributable to the
opening of Borgata’s new Water Club tower in June 2008 and offset by lower
demand at Borgata’s other facilities mainly driven by the impact of current
economic conditions on resort occupancy.
Revenues
for SJESP remained relatively unchanged in the three months ended March 31, 2009
compared with the same period in 2008. However, SJESP did recognize revenues
from a large commercial HVAC job that for the most part offset a decline in
revenues from time and materials (T&M) and installation jobs. T&M and
installation revenues were negatively impacted by current depressed economic
conditions.
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 $1.2 million, or 1.7%, for the three months ended March 31,
2009 compared with the same period in 2008 due to customer additions as noted
above. Partially offsetting these increases were lower margins from
OSS and capacity release resulting from decreased volumes as discussed above
under “Throughput” and “Operating Revenues - Utility”. The CIP protected
$6.2 million of pre-tax margin in the first three months of 2009 that would have
been lost due to lower customer usage, compared to $10.5 million in the same
period last year. Of these amounts, $(1.1) million and $2.7 million
were related to weather variations and $7.3 million and $7.8 million were
related to other customer usage variations in 2009 and 2008,
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 Consolidated Financial Statements in Item 8 of SJI’s
Annual Report on Form 10-K as of December 31, 2008, revenues and expenses
related to the energy trading activities of SJRG are presented on a net basis in
Operating Revenues – Nonutility.
For the
three months ended March 31, 2009 combined gross margins for the nonutility
businesses, net of intercompany transactions, increased $13.2 million to $19.5
million compared with the same period in 2008. This increase is primarily due to
the following:
|
·
|
Gross
margin for SJRG increased $16.4 million in the three months ended March
31, 2009 compared with the same period in 2008. 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
$4.2 million in the three months ended March 31, 2009 compared with the
same period in 2008. Operationally, margins increased significantly in
2009 due primarily to favorable seasonal time spreads on storage and
transportation asset positions that were locked in and/or improved upon.
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. Similar to storage, transportation assets allow us to lock
in the differential of transporting natural gas from one delivery point to
another. Future margins could fluctuate significantly due to the volatile
nature of wholesale gas prices.
|
|
·
|
Gross
margin for Marina decreased $0.1 million in the three months ended March
31, 2009 compared with the same period in 2008. Gross margin as a
percentage of Operating Revenues increased 3.0 percentage points in the
quarter ended March 31, 2009 compared with the same period in 2008 due
mainly to the lower rates on low-margin electric sales to
Borgata.
|
|
·
|
Gross
margin from SJE’s retail gas sales decreased $1.0 million in the three
months ended March 31, 2009 compared with the same period in 2008. Gross
margin as a percentage of Operating Revenues did not change significantly
for the quarter ended March 31, 2009 compared with the same period in
2008. However, two main factors essentially offset each other. First,
during the first quarter of 2008, SJE partially recovered losses from a
full requirements customer in the commercial market that were recognized
in 2006. Second, the 2009 margin reflects the impact of our efforts to
reduce our exposure to changes in customer usage
patterns.
|
|
·
|
Gross
margin from SJE’s retail electricity sales decreased $2.1 million in the
three months ended March 31, 2009 compared with the same period in 2008.
Excluding the impact of a $2.0 million increase in unrealized losses
recorded on forward financial contracts, gross margin decreased $0.1
million in the three months ended March 31, 2009 compared with the same
period in 2008. Gross margin as a percentage of Operating Revenues
increased 2.5 percentage points in the quarter ended March 31, 2009
compared with the same period in 2008 as the LMP rate is a pass through to
our customers while our margin is based on volumetric and transmission
components of the customer
contracts.
|
|
·
|
Gross
margin for SJESP did not change significantly in the three months ended
March 31, 2009 compared with the same period in 2008. Gross
margin as a percentage of Operating Revenues also did not change
significantly for the quarter ended March 31, 2009 compared with the same
period in 2008. Commercial margins essentially offset T&M and
installation margins as discussed in Operating Revenues –
Nonutility.
|
Operations
Expense — A summary of net changes in operations expense, for the three
months ended March 31, follows (in thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
vs. 2008
|
|
|
|
|
|
Utility
|
|
$
|
2,235
|
|
Nonutility:
|
|
|
|
|
Wholesale
Gas
|
|
|
45
|
|
Retail
Gas and Other
|
|
|
149
|
|
Retail
Electricity
|
|
|
11
|
|
On-Site
Energy Production
|
|
|
155
|
|
Appliance
Service
|
|
|
281
|
|
Total
Nonutility
|
|
|
641
|
|
Intercompany
Eliminations and Other
|
|
|
43
|
|
Total
Operations
|
|
$
|
2,919
|
|
Utility
operations expense increased $2.2 million for the three months ended March 31,
2009, as compared with the same period in 2008. The increase is
primarily due to the cost of providing pension and other postretirement benefit
plans which increased by $1.0 million as a result of significant losses in the
assets of those plans during 2008. The company also experienced moderate
increases in governance, compliance, employee compensation costs and expenses
associated with uncollectible customer accounts as a result of normal
fluctuations in customer account receivable balances due to colder weather in
2009.
Nonutility
operations expense increased $0.6 million in the three months ended March 31,
2009 compared with the same period in 2008 due mainly to increases in
governance, compliance and employee compensation costs.
Other
changes in operations expense during 2009 were not significant.
Other
Operating Expenses —Changes in other
consolidated operating expenses which consist of Maintenance, Depreciation, and
Energy and Other Taxes for the three months ended March 31, 2009 compared with
the same period in 2008, were not significant.
Equity in
Earnings of Affiliated Companies - Pre-tax earnings from
subsidiaries accounted for under the equity method has decreased by
approximately $2.7 million for the three months ended March 31, 2009 compared
with the same period in 2008. This decrease is primarily attributable to debt
service costs incurred by LVE Energy Partners, LLC. A significant portion of
these costs were previously being capitalized to the cost of the project during
the construction period. As discussed further under “Commitments and
Contingencies”, LVE has suspended its construction activities and as a result,
all current period debt service costs have been recognized in
earnings.
Interest
Charges – Interest charges decreased by $1.1 million for the
three-month period ended March 31, 2009 compared with the same period in 2008,
due primarily to significantly lower interest rates on short-term debt during
2009.
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 $119.8 million and $102.1 million in the first
quarters of 2009 and 2008, 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. Net cash provided by operating activities
in the first quarter of 2009 compared favorably to the same period in 2008 as
the price of natural gas in storage at the end of 2008 was much higher than at
the prior year end. Those higher prices were reflected in prices charged to
customers. The withdrawal of that gas from inventory, coupled with higher
weather related customer demand, significantly increased cash inflows in the
2009 quarter. The higher weather related demand also increased collections from
customers under regulatory clauses. The first quarter of 2008 was also impacted
by a $5.9 million pension contribution that was not duplicated in the first
quarter of 2009. The company also incurred lower environmental remediation costs
in 2009 compared to 2008. SJI also ends each calendar year in a prepaid tax
position due to mandatory prepayment requirements on all state taxes. Such
prepayments are credited against amounts otherwise due during the first quarter
of the subsequent year; improving first quarter liquidity.
Cash
Flows from Investing Activities — SJI has a continuing need
for cash resources and capital, primarily to invest in new and replacement
facilities and equipment. Net cash outflows for capital expenditures, which are
primarily construction projects, for the first quarter of 2009 and 2008
amounted to $17.1 million and $15.4 million, respectively. We estimate the net
cash outflows for construction projects for fiscal years 2009, 2010 and
2011 to be approximately $140.3 million, $95.4 million and $58.5 million,
respectively.
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. Margin posted by SJRG
increased by $3.6 million in the first quarter of 2009, compared with the first
quarter of 2008 when the Margin Account Liability was reduced by $1.2
million.
Cash
Flows from Financing Activities — Short-term
borrowings under lines of credit from commercial banks are used to supplement
cash flows 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 of 2008. No other
long-term debt was issued during 2008.
Credit
facilities and available liquidity as of March 31, 2009 were as
follows:
Company
|
|
Total
Facility
|
|
|
Usage
(A)
|
|
|
Available
Liquidity
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
|
$
|
100,000
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
August
2011
|
Line
of Credit
|
|
|
40,000
|
|
|
|
—
|
|
|
|
40,000
|
|
December
2009
|
Line
of Credit
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
—
|
|
August
2009
|
Uncommitted
Bank Lines
|
|
|
53,000
|
|
|
|
21,575
|
|
|
|
31,425
|
|
Various
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
SJG
|
|
|
203,000
|
|
|
|
81,575
|
|
|
|
121,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
|
$
|
200,000
|
|
|
$
|
102,575
|
|
|
$
|
97,425
|
|
August
2011
|
Uncommitted
Bank Lines
|
|
|
40,000
|
|
|
|
13,135
|
|
|
|
26,865
|
|
Various
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
SJI
|
|
|
240,000
|
|
|
|
115,710
|
|
|
|
124,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
443,000
|
|
|
$
|
197,285
|
|
|
$
|
245,715
|
|
|
(A)
Includes letters of credit in the amount of $82.6 million.
The SJG
facilities are restricted as to use and availability specifically to SJG;
however, if necessary the SJI facilities can also be used to support SJG’s
liquidity needs. All committed 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 March
31, 2009. Borrowings under these credit facilities are at market rates. The
weighted average borrowing cost, which changes daily, was 1.09% and 3.30% at
March 31, 2009 and 2008, respectively.
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.
SJI
raised equity capital in the past three years through its Dividend Reinvestment
Plan (DRP). Historically, 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. Due to our continued strong equity position,
beginning in April 2008, DRP participants began receiving shares purchased
in the open market. In such open market purchases, the 2% discount is
not available to participants. SJI raised $0.6 million of equity
capital through the DRP in the first quarter of 2008. No equity capital was
raised through the DRP in the first quarter of 2009. 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
March
31, 2009
|
|
|
As
of
December
31, 2008
|
|
|
|
|
|
|
|
|
Common
Equity
|
|
|
53.4
|
%
|
|
|
47.4
|
%
|
Long-Term
Debt
|
|
|
35.3
|
|
|
|
33.0
|
|
Short-Term
Debt
|
|
|
11.3
|
|
|
|
19.6
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
SJG’s
long-term, senior secured debt is rated “A” and “A3” by Standard & Poor’s
and Moody’s Investor Services, respectively. These ratings had not changed in at
least the past five years until Moody’s Investor Services raised SJG’s senior
secured debt rating to “A3” from “Baal” in February of 2009.
In the
first quarters of 2009 and 2008, SJI declared quarterly dividends to its common
shareholders. SJI has paid dividends on its common stock for 57 consecutive
years and has increased that dividend each year for the last ten 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 three months of 2009 amounted to $17.1 and
$1.0 million, respectively. Management estimates net cash outflows for
construction projects for 2009, 2010 and 2011, to be approximately $140.3
million, $95.4 million and $58.5 million, respectively. Total cash outflows for
remediation projects are expected to be $7.0 million, $18.5 million and $11.4
million for 2009, 2010 and 2011, respectively. As discussed in Notes
9 and 14 to the Financial Statements in Item 8 of SJI’s 10-K as of December 31,
2008, certain environmental costs are subject to recovery from insurance
carriers and ratepayers.
As of
March 31, 2009, SJI provided $82.6 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 $20.3 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; and a $30.7 million letter
of credit provided by Marina to support a capital contribution obligation as
discussed below. These letters of credit expire in August 2009 and November
2010, respectively.
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, 2008, except for commodity supply
purchase obligations which increased by approximately $90.7 million in total
since December 31, 2008, due to the origination of new contracts during the
first quarter.
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 March 31, 2009 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. LVE suspended construction of the
district energy system and central energy center in January 2009 after the
resort developer’s August 2008 announcement that it was delaying the
completion of construction of the resort due to the difficult environment
in the capital markets and weak economic conditions. The resort
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. LVE is currently in discussions with the banks
that are financing the energy facilities to address defaults under the financing
agreements. These LVE defaults have been caused by the resort developer’s
construction delay and the termination of an energy services agreement by a
hotel operator associated with the project. Those discussions include revising
the timetable and funding schedule for the completion of construction of the
energy facilities to reflect the suspension by the resort developer, and the
potential contribution of additional equity. SJI, through its subsidiary
Marina, is obligated to invest at least $30.4 million of
equity during the construction period as discussed below and may
contribute additional funds in the project to cover the incremental debt
service and other related costs to be incurred during the suspension period
resulting from the delay. However, we are unable to definitively quantify our
incremental costs at this time, if any, as negotiations over the new terms are
ongoing. LVE has proposed a new construction schedule in the form of a work
around plan. LVE and the resort developer will discuss the work around
plan which must then be acted upon by an independent engineer. The Energy
Sales Agreement between LVE and the resort developer includes
a payment obligation by the resort developer of certain fixed payments to
be made to LVE until the project begins commercial operations. A portion of this
payment obligation is guaranteed by the parent of the resort developer. As
of March 31, 2009, the Company had a net liability of approximately $10.2
million included in Other Current and Noncurrent Liabilities on the consolidated
balance sheets related to this project and unsecured Notes Receivable –
Affiliate of approximately $3.5 million due from LVE. SJI's risk of loss is
limited to its equity contribution, contribution obligations and the unsecured
notes receivable totaling approximately $35.4 million. During the first quarter
of 2009, SJI and the partner in this joint venture each provided support to LVE
of approximately $1.6 million to cover project related costs. It is expected
that the notes receivable will represent a portion of the total incremental
contribution described previously.
SJI
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. As a result of achieving certain milestones, the
guaranty has been reduced to $94.0 million as of March 31, 2009. 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 resort 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.
|
·
|
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 $30.4 million of equity to LVE as part of its construction period
financing. Marina’s obligation is secured by an irrevocable letter of
credit from a bank. The equity contribution is expected to be made in
2009.
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 in the natural gas
markets 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 of changes in value of a
particular transaction is substantially offset by an opposite change in the
related hedge transaction.
SJI has
entered into certain contracts to buy, sell, and transport natural gas and to
buy and sell retail electricity. For those derivatives not designated as
hedges, we recorded the net unrealized pre-tax loss of $16.3 million
and $26.4 million in earnings during the three months ended March 31, 2009
and 2008, respectively, which are 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
March 31, 2009 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
|
|
$
|
47,471
|
|
|
$
|
13,581
|
|
|
$
|
241
|
|
|
$
|
61,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
provided by other external sources
|
|
|
13,478
|
|
|
|
4,532
|
|
|
|
-
|
|
|
|
18,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
based on internal models or other valuation methods
|
|
|
988
|
|
|
|
413
|
|
|
|
-
|
|
|
|
1,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,937
|
|
|
$
|
18,526
|
|
|
$
|
241
|
|
|
$
|
80,704
|
|
Liabilities
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
Source
of
|
|
Maturity
|
|
|
Maturity
|
|
|
Beyond
|
|
|
|
|
Fair
Value
|
|
<
1 Year
|
|
|
1 -
3 Years
|
|
|
3
Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
actively quoted
|
|
$
|
52,088
|
|
|
$
|
13,493
|
|
|
$
|
76
|
|
|
$
|
65,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
provided by other external sources
|
|
|
988
|
|
|
|
(550
|
)
|
|
|
113
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
based on internal models or other valuation methods
|
|
|
2,186
|
|
|
|
1,302
|
|
|
|
371
|
|
|
|
3,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,262
|
|
|
$
|
14,245
|
|
|
$
|
560
|
|
|
$
|
70,067
|
|
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 7.8 million
decatherms (dts) with a weighted-average settlement price of $6.98 per
dt. Contracted volumes of our basis contracts are 20.1 million dts
with a weighted average settlement price of $0.56 per dt. Contracted
volumes of electric are 2.7 million mwh with a weighted average settlement price
of $66 per mwh.
A
reconciliation of SJI's estimated net fair value of energy-related derivatives
follows (in thousands):
Net
Derivatives — Energy Related Assets, January 1, 2009
|
|
$
|
16,289
|
|
Contracts
Settled During Three Months Ended March 31, 2009, Net
|
|
|
(23,450
|
)
|
Other
Changes in Fair Value from Continuing and New Contracts,
Net
|
|
|
17,798
|
|
|
|
|
|
|
Net
Derivatives — Energy Related Assets March 31,
2009
|
|
$
|
10,637
|
|
Interest
Rate Risk —
Our exposure to interest-rate risk relates primarily to short-term,
variable-rate borrowings. Short-term, variable-rate debt outstanding at March
31, 2009 was $114.7 million and averaged $176.5 million during the
first three months of 2009. A hypothetical 100 basis point (1%) increase in
interest rates on our average variable-rate debt outstanding would result in
a $1.0 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: 2008 - 397 b.p. decrease; 2007 – 45 b.p. decrease; 2006 —
67 b.p. increase; 2005 — 194 b.p. increase; and 2004 — 115 b.p.
decrease. For March 2009, our average interest rate on variable-rate
debt was 1.10%.
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 March 31, 2009, 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 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. In addition, during
the fourth quarter of 2008 and the first quarter of 2009, as a result of unusual
market conditions, the interest rate derivatives on Marina’s variable rate
demand bonds were not completely effective in mitigating the risks resulting
from changes in interest rates. Consequently, the Company incurred approximately
$0.2 million of additional interest income and $2.2 million of additional
interest expense related to the ineffective portion of these interest rate
derivatives during the first quarter of 2009 and the fourth quarter of 2008,
respectively. All of these interest rate derivatives remain in place
and are expected to substantially offset future changes in interest rates on the
respective securities.
As of
March 31, 2009, 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
|
Concentration
of Credit Risk - As of March 31, 2009, approximately 44.3% of the current and
noncurrent Derivatives – Energy Related Assets or $35.8 million are with a
single retail counterparty. This counterparty has contracts with a large number
of diverse customers which minimizes the concentration of this risk. A portion
of these contracts may be assignable to SJI in the event of a default by the
counterparty.
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 March 31, 2009. 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 March 31, 2009 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 32.
Item
1A. Risk Factors
There
have been no material changes to our risk factors from those disclosed in Part
I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
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 March 31, 2009:
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
|
|
January
2009
|
|
|
4,062
|
|
|
$
|
37.87
|
|
|
|
-
|
|
|
|
-
|
|
February
2009
|
|
|
3,219
|
|
|
$
|
36.44
|
|
|
|
-
|
|
|
|
-
|
|
March
2009
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
7,281
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
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 March 31, 2009, 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:
May 11, 2009
|
By:
/s/ Edward J.
Graham
|
|
Edward J. Graham
|
|
Chairman, President & Chief Executive Officer
|
|
|
|
|
|
|
Dated:
May 11, 2009
|
By:
/s/ David A.
Kindlick
|
|
David A. Kindlick
|
|
Vice President & Chief Financial
Officer
|