sjiform10q093007.htm
 



 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

      (Mark one)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to __________________

Commission File Number 1-6364

SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

New Jersey
22-1901645 
(State of incorporation)
(IRS employer identification no.)

1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)

(609) 561-9000
(Registrant’s telephone number, including area code)
 
Common Stock
 
($1.25 par value per share)
New York Stock Exchange
(Title of each class)
(Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes [X]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
                                Large accelerated filer [X]                  Accelerated filer [   ]               Non-accelerated filer [   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [   ]     No [X]

  As of November 1, 2007, there were 29,572,416 shares of the registrant’s common stock outstanding.
 
 
 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements - See Pages 3 through 21
 
 
 
 
 
 
 
 
 
 


SJI - 2

 
             
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(In Thousands Except for Per Share Data)
 
             
   
Three Months Ended
 
   
September 30,
 
   
2007
   
2006
 
   
 
   
 
 
             
Operating Revenues:
           
  Utility
  $
83,385
    $
73,541
 
  Nonutility
   
72,843
     
81,164
 
                 
      Total Operating Revenues
   
156,228
     
154,705
 
                 
Operating Expenses:
               
  Cost of Sales - (Excluding depreciation)
               
                    - Utility
   
61,188
     
50,840
 
                    - Nonutility
   
47,976
     
46,110
 
  Operations
   
16,084
     
15,596
 
  Maintenance
   
1,544
     
1,454
 
  Depreciation
   
6,982
     
6,646
 
  Energy and Other Taxes
   
1,587
     
1,783
 
                 
      Total Operating Expenses
   
135,361
     
122,429
 
                 
Operating Income
   
20,867
     
32,276
 
                 
Other Income and Expense
   
303
     
639
 
                 
Interest Charges
    (6,966 )     (7,462 )
                 
Income Before Income Taxes
   
14,204
     
25,453
 
                 
Income Taxes
    (5,818 )     (10,584 )
                 
Equity in Affiliated Companies
   
178
     
196
 
                 
Income from Continuing Operations
   
8,564
     
15,065
 
                 
Loss from Discontinued Operations - (Net of tax benefit)
    (33 )     (149 )
                 
      Net Income
  $
8,531
    $
14,916
 
                 
Basic Earnings Per Common Share:
               
  Continuing Operations
  $
0.290
    $
0.515
 
  Discontinued Operations
    (0.001 )     (0.005 )
                 
      Basic Earnings Per Common Share
  $
0.289
    $
0.510
 
                 
Average Shares of Common Stock Outstanding - Basic
   
29,518
     
29,225
 
                 
Diluted Earnings Per Common Share:
               
  Continuing Operations
  $
0.289
    $
0.514
 
  Discontinued Operations
    (0.001 )     (0.005 )
                 
      Diluted Earnings Per Common Share
  $
0.288
    $
0.509
 
                 
Average Shares of Common Stock Outstanding - Diluted
   
29,627
     
29,320
 
                 
Dividends Declared per Common Share
  $
0.245
    $
0.225
 
                 
The accompanying notes are an integral part of the condensed consolidated financial statements.
         
 
SJI - 3
 
                 
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
 
                 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(In Thousands Except for Per Share Data)
 
                 
   
Nine Months Ended
 
   
September 30,
 
   
2007
   
2006
 
                 
                 
Operating Revenues:
               
  Utility
  $
441,073
    $
438,168
 
  Nonutility
   
255,241
     
242,917
 
                 
      Total Operating Revenues
   
696,314
     
681,085
 
                 
Operating Expenses:
               
  Cost of Sales - (Excluding depreciation)
               
                    - Utility
   
314,408
     
318,041
 
                    - Nonutility
   
198,830
     
177,195
 
  Operations
   
51,619
     
48,005
 
  Maintenance
   
4,446
     
4,224
 
  Depreciation
   
20,884
     
19,384
 
  Energy and Other Taxes
   
8,891
     
8,405
 
                 
      Total Operating Expenses
   
599,078
     
575,254
 
                 
Operating Income
   
97,236
     
105,831
 
                 
Other Income and Expense
   
1,184
     
1,434
 
                 
Interest Charges
    (20,123 )     (20,045 )
                 
Income Before Income Taxes
   
78,297
     
87,220
 
                 
Income Taxes
    (32,350 )     (36,216 )
                 
Equity in Affiliated Companies
   
600
     
906
 
                 
Income from Continuing Operations
   
46,547
     
51,910
 
                 
Loss from Discontinued Operations - (Net of tax benefit)
    (235 )     (378 )
                 
      Net Income
  $
46,312
    $
51,532
 
                 
Basic Earnings Per Common Share:
               
  Continuing Operations
  $
1.581
    $
1.781
 
  Discontinued Operations
    (0.008 )     (0.013 )
                 
      Basic Earnings Per Common Share
  $
1.573
    $
1.768
 
                 
Average Shares of Common Stock Outstanding - Basic
   
29,449
     
29,140
 
                 
Diluted Earnings Per Common Share:
               
  Continuing Operations
  $
1.575
    $
1.777
 
  Discontinued Operations
    (0.008 )     (0.013 )
                 
      Diluted Earnings Per Common Share
  $
1.567
    $
1.764
 
                 
Average Shares of Common Stock Outstanding - Diluted
   
29,561
     
29,215
 
                 
Dividends Declared per Common Share
  $
0.735
    $
0.675
 
                 
The accompanying notes are an integral part of the condensed consolidated financial statements.
         
                 


SJI - 4

 
             
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(In Thousands)
 
             
   
Three Months Ended
 
   
September 30,
 
   
2007
   
2006
 
             
             
             
             
Net Income
  $
8,531
    $
14,916
 
                 
Other Comprehensive Loss, Net of Tax:*
               
                 
  Unrealized Gain on Equity Investments
   
41
     
109
 
  Unrealized Loss on Derivatives - Other
    (1,277 )     (1,780 )
  Other Comprehensive Loss of Affiliated Companies
    (858 )    
-
 
                 
     Other Comprehensive Loss - Net of Tax*
    (2,094 )     (1,671 )
                 
Comprehensive Income
  $
6,437
    $
13,245
 
                 
                 
                 
                 
                 
   
Nine Months Ended
 
   
September 30,
 
   
2007
   
2006
 
                 
                 
                 
                 
Net Income
  $
46,312
    $
51,532
 
                 
Other Comprehensive (Loss) Income, Net of Tax:*
               
                 
  Unrealized Gain on Equity Investments
   
221
     
199
 
  Unrealized Gain on Derivatives - Other
   
64
     
323
 
  Other Comprehensive Loss of Affiliated Companies
    (858 )    
-
 
                 
     Other Comprehensive (Loss) Income - Net of Tax*
    (573 )    
522
 
                 
Comprehensive Income
  $
45,739
    $
52,054
 
                 
* Determined using a combined statutory tax rate of 41.08%.
               
                 
The accompanying notes are an integral part of the condensed consolidated financial statements.
         
                 


SJI - 5

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
 
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(In Thousands)
 
   
Nine Months Ended
 
   
September 30,
 
   
2007
   
2006
 
   
 
   
 
 
Net Cash Provided by Operating Activities
  $
104,733
    $
24,719
 
                 
Cash Flows from Investing Activities:
               
   Net Proceeds from Sale (Net Purchase) of Restricted Investments
   
14,449
      (22,797 )
   Capital Expenditures
    (40,915 )     (58,377 )
   Purchase of Company Owned Life Insurance
    (3,917 )    
-
 
   Investment in Affiliate
    (7,463 )    
-
 
   Other
   
-
      (650 )
                 
Net Cash Used in Investing Activities
    (37,846 )     (81,824 )
                 
Cash Flows from Financing Activities:
               
   Net (Repayments of) Borrowings from Lines of Credit
    (48,915 )    
28,300
 
   Proceeds from Issuance of Long-Term Debt
   
-
     
41,400
 
   Principal Repayments of Long-Term Debt
    (2,364 )     (2,405 )
   Dividends on Common Stock
    (14,431 )     (13,116 )
   Proceeds from Sale on Common Stock
   
5,105
     
4,271
 
   Payments for Issuance of Long-Term Debt
   
-
      (1,270 )
                 
Net Cash (Used in) Provided by Financing Activities
    (60,605 )    
57,180
 
                 
Net Increase in Cash and Cash Equivalents
   
6,282
     
75
 
Cash and Cash Equivalents at Beginning of Period
   
7,932
     
4,884
 
                 
Cash and Cash Equivalents at End of Period
  $
14,214
    $
4,959
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
               
                 
                 


SJI - 6

 
             
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(In Thousands)
 
             
             
   
September 30,
   
December 31,
 
   
2007
   
2006
 
   
 
   
 
 
             
Assets
           
             
Property, Plant and Equipment:
           
  Utility Plant, at original cost
  $
1,112,940
    $
1,079,614
 
    Accumulated Depreciation
    (271,925 )     (257,781 )
  Nonutility Property and Equipment, at cost
   
112,103
     
106,657
 
    Accumulated Depreciation
    (10,979 )     (8,485 )
                 
        Property, Plant and Equipment - Net
   
942,139
     
920,005
 
                 
Investments:
               
  Available-for-Sale Securities
   
6,794
     
6,356
 
  Restricted
   
8,602
     
23,051
 
  Investment in Affiliates
   
9,077
     
1,368
 
                 
        Total Investments
   
24,473
     
30,775
 
                 
Current Assets:
               
  Cash and Cash Equivalents
   
14,214
     
7,932
 
  Accounts Receivable
   
89,145
     
117,832
 
  Unbilled Revenues
   
10,240
     
39,397
 
  Provision for Uncollectibles
    (5,682 )     (5,224 )
  Natural Gas in Storage, average cost
   
150,864
     
145,130
 
  Materials and Supplies, average cost
   
2,927
     
2,895
 
  Prepaid Taxes
   
15,218
     
12,443
 
  Derivatives - Energy Related Assets
   
25,743
     
45,627
 
  Other Prepayments and Current Assets
   
6,660
     
5,692
 
                 
        Total Current Assets
   
309,329
     
371,724
 
                 
Regulatory and Other Noncurrent Assets:
               
  Regulatory Assets
   
197,529
     
196,962
 
  Derivatives - Energy Related Assets
   
13,777
     
23,537
 
  Unamortized Debt Issuance Costs
   
7,521
     
7,972
 
  Contract Receivables
   
13,000
     
13,654
 
  Other
   
12,999
     
8,403
 
                 
        Total Regulatory and Other Noncurrent Assets
   
244,826
     
250,528
 
                 
              Total Assets
  $
1,520,767
    $
1,573,032
 
                 
                 
                 
                 
The accompanying footnotes are an integral part of the condensed consolidated financial statements.
         
 
 
SJI - 7

 
                 
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
 
                 
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(In Thousands)
 
                 
                 
   
September 30,
   
December 31,
 
   
2007
   
2006
 
                 
                 
Capitalization and Liabilities
               
                 
Common Equity:
               
  Common Stock
  $
36,926
    $
36,657
 
  Premium on Common Stock
   
245,723
     
239,763
 
  Treasury Stock (at par)
    (186 )    
-
 
  Accumulated Other Comprehensive Loss
    (8,364 )     (7,791 )
  Retained Earnings
   
198,280
     
174,407
 
                 
        Total Common Equity
   
472,379
     
443,036
 
                 
Long-Term Debt
   
357,928
     
358,022
 
                 
        Total Capitalization
   
830,307
     
801,058
 
                 
Minority Interest
   
455
     
461
 
                 
Current Liabilities:
               
  Notes Payable
   
145,685
     
194,600
 
  Current Maturities of Long-Term Debt
   
99
     
2,369
 
  Accounts Payable
   
64,272
     
101,615
 
  Customer Deposits and Credit Balances
   
30,541
     
24,982
 
  Margin Account Liability
   
6,128
     
-
 
  Environmental Remediation Costs
   
25,154
     
26,439
 
  Taxes Accrued
   
2,625
     
1,967
 
  Derivatives - Energy Related Liabilities
   
14,431
     
42,124
 
  Deferred Income Taxes - Net
   
15,812
     
10,687
 
  Deferred Contract Revenues
   
5,737
     
5,066
 
  Dividends Payable
   
7,237
     
-
 
  Interest Accrued
   
5,422
     
6,458
 
  Pension and Other Postretirement Benefits
   
776
     
788
 
  Other Current Liabilities
   
4,097
     
5,699
 
                 
        Total Current Liabilities
   
328,016
     
422,794
 
                 
Deferred Credits and Other Noncurrent Liabilities:
               
  Deferred Income Taxes - Net
   
174,795
     
177,220
 
  Investment Tax Credits
   
2,230
     
2,470
 
  Pension and Other Postretirement Benefits
   
33,718
     
33,162
 
  Environmental Remediation Costs
   
56,726
     
45,391
 
  Asset Retirement Obligations
   
24,501
     
23,970
 
  Derivatives - Energy Related Liabilities
   
3,840
     
7,918
 
  Regulatory Liabilities
   
53,104
     
50,797
 
  Other
   
13,075
     
7,791
 
                 
        Total Deferred Credits
               
          and Other Noncurrent Liabilities
   
361,989
     
348,719
 
                 
Commitments and Contingencies  (Note 12)
               
                 
              Total Capitalization and Liabilities
  $
1,520,767
    $
1,573,032
 
                 
The accompanying notes are an integral part of the condensed consolidated financial statements.
               
                 


SJI - 8


Notes to Condensed Consolidated Financial Statements

1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

GENERAL - South Jersey Industries, Inc. (SJI or the Company) currently provides a variety of energy related products and services primarily through the following subsidiaries:

South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes natural gas in the seven southernmost counties of New Jersey.

South Jersey 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 2006 Annual Report on Form 10-K for a more complete discussion of the Company’s accounting policies and certain other information.

EQUITY INVESTMENTS -- In April 2007, Marina and a joint venture partner formed LVE Energy Partners, LLC (LVE), in which Marina has a 50% equity interest. LVE has entered into a contract to design, build, own and operate a district energy system and central energy center for a planned resort in Las Vegas, Nevada. SJI holds a significant variable interest in LVE but is not the primary beneficiary.  As a result, this investment is accounted for under the equity method (see Note 12 for further discussion). The operations of LVE will be included on a pre-tax basis in the condensed consolidated statements of income under Equity in Affiliated Companies.

REVENUE BASED TAXES — SJI collects certain revenue-based energy taxes from customers. Such taxes include New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. TEFA and PUA are included in both utility revenue and cost of sales and totaled $0.9 million in both the three months ended September 30, 2007 and 2006,  and  $6.3 million and $5.6 million for the nine months ended September 30, 2007 and 2006, respectively.

SJI - 9


CAPITALIZED INTEREST — SJG capitalizes interest on construction at the rate of return on rate base utilized by the New Jersey Board of Public Utilities (BPU) to set rates in its last base rate proceeding. Marina capitalizes interest on construction projects in progress based on the actual cost of borrowed funds. SJG’s amounts are included in Utility Plant and Marina’s amounts are included in Nonutility Property and Equipment on the condensed consolidated balance sheets. Interest Charges are presented net of capitalized interest on the condensed consolidated statements of income. SJI capitalized interest of $0.1 million and $0.2 million for the three months ended September 30, 2007 and 2006, and  $0.4 million and  $1.0 million for the nine months ended September 30, 2007 and 2006, respectively.

DERIVATIVE INSTRUMENTS — The Company manages its portfolio of purchases and sales, as well as natural gas in storage, using a variety of instruments that include forward contracts, swap agreements, options contracts and futures contracts.  These contracts are measured at fair value and recorded in Derivatives — Energy Related Assets or Derivatives — Energy Related Liabilities on the condensed consolidated balance sheets. The consolidated net unrealized pre-tax gain  of $17.8 million, and $23.0 million (previously disclosed in the notes as $21.0 million which included certain losses on settled contracts related to gas in storage) was recorded in earnings during the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, the net unrealized pre-tax  gain of  $8.8 million and $36.5 million, respectively (previously disclosed in the notes as $31.0 million which included certain losses on settled contracts related to gas in storage) was recorded in earnings. These unrealized gains and losses are included with realized gains and losses in Operating Revenues – Nonutility.

As part of its gas purchasing strategy, SJG uses financial contracts through SJRG to hedge against forward price risk. The costs or benefits of these short-term contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause, subject to BPU approval. As of September 30, 2007 and December 31, 2006, SJG had $4.7 million and $16.7 million of costs, respectively, included in its BGSS related to open financial contracts.

The Company has entered into interest rate derivatives and similar agreements to hedge exposure to increasing interest rates, and the impact of those rates on cash flows of variable-rate debt. These interest rate derivatives have been designated as cash flow hedges and are included in Other Noncurrent Assets and Other Noncurrent Liabilities. There have been no significant changes to the Company’s active interest rate swaps since December 31, 2006 which are described in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2006.

The differential to be paid or received as a result of these swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense. As of September 30, 2007 and December 31, 2006, the net market value of these swaps was not significant. The market value represents the amount SJI would have to pay the counterparty, or the counterparty would have to pay SJI, to terminate these contracts as of those dates.

TREASURY STOCK – SJI uses the par value method of accounting for treasury stock. As of September 30, 2007, SJI held 148,745 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 — On January 1, 2007 SJI adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This Interpretation provides guidance on the recognition and measurement of uncertain tax positions in the financial statements.

SJI - 10


As a result of the implementation of FIN 48, SJI recognized a $0.8 million reduction to beginning retained earnings as a cumulative effect adjustment and a noncurrent deferred tax asset of $1.8 million.  The total unrecognized tax benefits as of January 1, 2007 were $2.6 million including $0.5 million of accrued interest and penalties. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not significant.  The Company’s policy is to record interest and penalties related to unrecognized tax benefits as interest expense and other expense respectively. These amounts were not significant for the three and nine months ended September 30, 2007. There have been no material changes to the unrecognized tax benefits for the three and nine months ended September 30, 2007 and the Company does not anticipate any material changes in the total unrecognized tax benefits within the next 12 months.

The unrecognized tax benefits are primarily related to an uncertainty of state income tax issues and the timing of certain deductions taken on the Company’s income tax returns.  Federal income tax returns from 2004 forward and state income tax returns primarily from 2003 forward are open and subject to examination.
 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. This statement is effective in fiscal years beginning after November 15, 2007. Management is currently evaluating the impact that the adoption of this statement will have on the Company’s consolidated financial statements.

In January 2007, the FASB posted Statement 133 Implementation Issue No. G26, “Cash Flow Hedges: Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate.” This issue provides guidance on the designated risks that can be hedged in a cash flow hedge of a variable-rate financial asset or liability for which the interest rate is not based solely on an index, including situations in which an interest rate is reset through an auction process. This issue was effective April 1, 2007. The adoption of this issue did not have a material effect on the Company’s condensed consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The statement permits entities to choose to measure certain financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for the first fiscal year beginning after November 15, 2007. Management is currently evaluating the impact that the adoption of this statement will have on the Company’s consolidated financial statements.

In April 2007, the FASB posted FASB Staff Position FIN 39-1 “Amendment of FASB Interpretation No. 39” which addresses questions received by the FASB staff regarding Interpretation 39 relating to the offsetting of amounts recognized for forward, interest rate swap, currency swap, option, and other conditional or exchange contracts. The guidance in this FSP is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact that the adoption of this position will have on the Company’s consolidated financial statements.

SJI - 11


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 and nine months ended September 30, 2007 and no stock appreciation rights have been issued under the plan. During the nine months ended September 30, 2007, SJI granted 44,106 restricted shares to Officers and other key employees.  No shares were granted during the three months ended September 30, 2007. 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 and nine months ended September 30, 2007, SJI did not grant any restricted shares to Directors. Shares issued to Directors vest over a three-year service period but contain no performance conditions. As a result, 100% of the shares granted generally vest.

See Note 2 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2006 for related accounting policy.

The following table summarizes the nonvested restricted stock awards outstanding at September 30, 2007 and the assumptions used to estimate the fair value of the awards:

 
Grant
 
Shares
 
 Fair Value
 
Expected
 
Risk-Free
 
Date
 
Outstanding
 
 Per Share
 
Volatility
 
Interest Rate
 
 
 
 
 
 
 
 
 
 
 
 
Officers & Key Employees -
Jan. 2005
 
 
34,311
 
$
25.155
 
15.5%
 
3.4%
 
Jan. 2006
 
 
36,591
 
$
27.950
 
16.9%
 
4.5%
 
Jan. 2007
 
 
40,121
 
$
29.210
 
18.5%
 
4.9%
 
 
 
 
 
 
 
 
 
 
 
 
Directors -
Dec. 2004
 
 
  5,220
 
$
24.955
 
-
 
-
 
Dec. 2005
 
 
  6,340
 
$
29.970
 
-
 
-
 
Dec. 2006
 
 
  9,261
 
$
34.020
 
-
 
-

Expected volatility is based on the actual daily volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the Officers’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders, which are reinvested during the three-year service period, no reduction to the fair value of the award is required. As the Directors’ restricted stock awards contain no performance conditions and notional dividend equivalents are credited to the holder, as though they are reinvested during the three-year service period, the fair value of these awards are equal to the market value of shares on the date of grant.

SJI - 12

 
The following table summarizes the total compensation cost for the three and nine months ended September 30, 2007 and 2006 (in thousands):

 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Officers & Key Employees
 
$
249
 
 
$
230
   
$
747
   
$
689
 
Directors
 
 
52
 
 
 
33
     
156
     
99
 
Total Cost
 
 
301
 
 
 
263
     
903
     
788
 
 
 
 
 
 
 
 
                 
 
Capitalized
 
 
(28
)
 
 
(29
)
   
(81
)
   
(86
)
Net Expense
 
$
273
 
 
$
234
   
$
822
   
$
702
 

As of September 30, 2007, there was $1.6 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 2.1 years.

The following table summarizes information regarding restricted stock award activity during the nine months ended September 30, 2007 excluding accrued dividend equivalents:

 
 
Officers & Other
Key Employees
 
 
Directors
 
 
 
 
 
 
 
 
Nonvested Shares Outstanding, January 1, 2007
 
 
116,432
 
 
 
20,821
 
 
 
 
 
 
 
 
 
 
Granted
 
 
44,106
 
 
 
-
 
Vested*
 
 
(42,135
)
 
 
-
 
Forfeited
 
 
(7,380
)
 
 
-
 
Nonvested Shares Outstanding, September 30, 2007
 
 
111,023
 
 
 
20,821
 
 
 
 
 
 
 
 
 
 

* Actual shares awarded to officers upon vesting, including dividend equivalents and adjustments for performance measures totaled 69,781 shares.

During the nine months ended September 30, 2007 and 2006, SJI awarded 69,781 shares at a market value of $2.3 million and 101,009 shares at a market value of $2.9 million, respectively. The Company has a policy of issuing new shares to satisfy its obligations under these plans; therefore, there are no cash payment requirements resulting from the normal operation of this plan. However, a change in control could result in such shares becoming nonforefeitable or immediately payable in cash.  At the discretion of the Officers 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.

SJI - 13


3.           DISCONTINUED OPERATIONS:

Discontinued Operations consist of the environmental remediation activities related to the properties of South Jersey Fuel, Inc. (SJF) and the product liability litigation and environmental remediation activities related to the prior business of The Morie Company, Inc. (Morie). SJF is a subsidiary of Energy & Minerals, Inc. (EMI), an SJI subsidiary, which previously operated a fuel oil business. Morie is the former sand mining and processing subsidiary of EMI. EMI sold the common stock of Morie in 1996. 

SJI conducts tests annually to estimate the environmental remediation costs for these properties.

Summarized operating results of the discontinued operations for the three and nine months ended September 30, were (in thousands, except per share amounts):

 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
Loss before Income Taxes:
 
 
 
 
 
 
 
 
 
 
 
 
Sand Mining
 
$
(37
)
 
$
(218
)
 
$
(316
)
 
$
(447
)
Fuel Oil
 
 
(13
)
 
 
(11
)
   
(32
)
   
(134
)
Income Tax Benefits
 
 
17
 
 
 
80
     
113
     
203
 
Loss from Discontinued Operations — Net
 
$
(33
)
 
$
(149
)
 
$
(235
)
 
$
(378
)
Earnings Per Common Share from
 
 
 
 
 
 
                 
 
Discontinued Operations — Net:
 
 
 
 
 
 
                 
 
Basic and Diluted
 
$
(0.001
)
 
$
(0.005
)
 
$
(0.008
)
 
$
(0.013
)

 4.           COMMON STOCK:

The following shares were issued and outstanding at September 30:

 
 
2007
 
Beginning Balance, January 1
 
 
29,325,593
 
New Issues During Period:
 
 
 
 
Dividend Reinvestment Plan
 
 
145,191
 
Stock-Based Compensation Plan
 
 
69,781
 
Ending Balance, September 30
 
 
29,540,565
 

The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $6.7 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 108,703 and 94,735 shares for the three months and 112,199 and 75,537 shares for the nine months ended September 30, 2007 and 2006, respectively. These shares relate to SJI’s restricted stock as discussed in Note 2.

SJI - 14


DIVIDEND REINVESTMENT PLAN (DRP) — Newly issued shares of common stock offered through the DRP are issued directly by SJI. As of September 30, 2007, SJI reserved approximately 1.2 million shares of authorized, but unissued, common stock for future issuance through the DRP.
 
5.           RESTRICTED INVESTMENTS:

In accordance with the terms of the Marina and certain SJG loan agreements, unused proceeds are required to be escrowed pending approved construction expenditures. As of September 30, 2007 and December 31, 2006, the escrowed proceeds, including interest earned, totaled $8.6 million and $12.7 million, respectively.

SJRG maintains a margin account with a national investment firm to support its risk management activities. The balance required to be held in this margin account increases as the net value of the outstanding energy related financial contracts with this investment firm decreases. As of September 30, 2007, there was no balance in this account. As of December 31, 2006, the balance of this account was $10.4 million. As of September 30, 2007, the Company is holding $6.1 million in a margin account received from this investment firm as the value of the related financial contracts has increased. This balance is reflected in Margin Account Liability on the condensed consolidated balance sheets.

6.           SEGMENTS OF BUSINESS:

SJI operates in several different operating segments. Gas Utility Operations (SJG) consists primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Gas Operations include SJRG’s activities. SJE is involved in both retail gas and retail electric activities. Retail Gas and Other Operations include natural gas acquisition and transportation service business lines and other energy service projects. Retail Electric Operations consist of electricity acquisition and transportation to commercial and industrial customers. On-Site Energy Production consists of Marina’s thermal energy facility and other energy-related projects. Appliance Service Operations includes SJESP’s servicing of appliances via the sale of appliance service programs as well as on a time and materials basis, and the installation of residential and small commercial HVAC systems.

Information about SJI's operations in different operating segments for the three and nine months ended September 30 is presented below (in thousands):

 
 
 
 
 
 
 
           Three Months Ended
             September 30,
 
          Nine Months Ended
         September 30,
 
 
       2007
 
 
        2006
 
       2007
 
 
        2006
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
Gas Utility Operations
 
$
84,421
   
$
87,714
 
$
458,280
   
$
469,802
 
Wholesale Gas Operations
 
 
18,176
     
30,889
   
55,059
     
57,408
 
Retail Gas and Other Operations
 
 
29,393
     
26,044
   
128,126
     
119,816
 
Retail Electric Operations
 
 
13,502
     
14,263
   
39,079
     
38,928
 
On-Site Energy Production
 
 
11,419
     
9,550
   
30,601
     
23,620
 
Appliance Service Operations
 
 
4,228
     
3,611
   
11,924
     
10,961
 
Corporate & Services
 
 
3,203
     
2,910
   
9,989
     
9,099
 
Subtotal
 
 
164,342
     
174,981
   
733,058
     
729,634
 
Intersegment Sales
 
 
(8,114
)
   
(20,276
)
 
(36,744
)
   
(48,549
)
Total Operating Revenues
 
$
156,228
   
$
154,705
 
$
696,314
   
$
681,085
 


SJI - 15


 
 
 
                         
 
Operating Income:
 
 
                         
 
Gas Utility Operations
 
$
2,190
   
$
2,907
   
$
59,637
   
$
55,647
 
Wholesale Gas Operations
 
 
14,319
     
25,093
     
27,624
     
40,492
 
Retail Gas and Other Operations
 
 
164
     
(271
)
   
108
     
(1,996
)
Retail Electric Operations
 
 
412
     
1,412
     
1,789
     
3,494
 
On-Site Energy Production
 
 
2,925
     
2,621
     
7,049
     
6,128
 
Appliance Service Operations
 
 
602
     
426
     
531
     
1,676
 
Corporate and Services
 
 
255
     
88
     
498
     
390
 
Total Operating Income
 
$
20,867
   
$
32,276
   
$
97,236
   
$
105,831
 
 
 
 
                         
 
Depreciation and Amortization:
 
 
                         
 
Gas Utility Operations
 
$
7,305
   
$
6,381
   
$
21,751
   
$
18,905
 
Wholesale Gas Operations
 
 
2
     
2
     
5
     
7
 
Retail Gas and Other Operations
 
 
4
     
2
     
9
     
7
 
Appliance Services Operations
 
 
74
     
60
     
206
     
175
 
On-Site Energy Production
 
 
724
     
622
     
2,225
     
1,544
 
Corporate and Services
 
 
31
     
60
     
185
     
173
 
Total Depreciation and Amortization
 
$
8,140
   
$
7,127
   
$
24,381
   
$
20,811
 
 
 
 
                         
 
Interest Expense:
 
 
                         
 
Gas Utility Operations
 
$
5,371
   
$
5,736
   
$
15,403
   
$
16,069
 
Wholesale Gas Operations
 
 
563
     
609
     
1,758
     
1,519
 
Retail Gas and Other Operations
 
 
19
     
36
     
155
     
136
 
On-Site Energy Production
 
 
913
     
1,120
     
2,707
     
2,303
 
Corporate and Services
 
 
1,036
     
943
     
2,906
     
2,560
 
               Subtotal
 
 
7,902
     
8,444
     
22,929
     
22,587
 
Intersegment Borrowings
 
 
(936
)
   
(982
)
   
(2,806
)
   
(2,542
)
Total Interest Expense
 
$
6,966
   
$
7,462
   
$
20,123
   
$
20,045
 
 
 
 
                         
 
Property Additions:
 
 
                         
 
Gas Utility Operations
 
$
12,040
   
$
10,416
   
$
36,333
   
$
39,665
 
Wholesale Gas Operations
   
330
     
-
     
330
     
3
 
Retail Gas and Other Operations
 
 
18
     
3
     
49
     
8
 
Appliance Service Operations
 
 
29
     
72
     
173
     
242
 
On-Site Energy Production
 
 
1,334
     
305
     
4,734
     
9,765
 
Corporate and Services
 
 
230
     
61
     
883
     
449
 
Total Property Additions
 
$
13,981
   
$
10,857
   
$
42,502
   
$
50,132
 

  

SJI - 16


 
 
September 30,
 2007
 
 
December 31,
2006
 
 
 
 
 
 
 
 
Identifiable Assets:
 
 
 
 
 
 
Gas Utility Operations
 
$
1,201,245
 
 
$
1,228,076
 
Wholesale Gas Operations
 
 
140,693
 
 
 
181,257
 
Retail Gas and Other Operations
 
 
30,031
 
 
 
48,998
 
Retail Electric Operations
 
 
7,913
 
 
 
4,537
 
Appliance Service Operations
 
 
15,425
 
 
 
14,147
 
On-Site Energy Production
 
 
131,279
 
 
 
121,498
 
Discontinued Operations
 
 
745
 
 
 
415
 
Corporate and Services
 
 
86,406
 
 
 
109,201
 
Subtotal
 
 
1,613,737
 
 
 
1,708,129
 
Intersegment Assets
 
 
(92,970
)
 
 
(135,097
)
Total Identifiable Assets
 
$
1,520,767
 
 
$
1,573,032
 

7.           RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU. Other than the rate changes discussed in Note 13, there have been no significant regulatory actions or changes to SJG’s rate structure since December 31, 2006. See Note 9 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2006.

8.           REGULATORY ASSETS & REGULATORY LIABILITIES:

Other than the Deferred Gas Costs and Revenues — Net, discussed below, there have been no significant changes to the nature of the Company’s regulatory assets and liabilities since December 31, 2006 which are described in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2006.

Regulatory Assets consisted of the following items (in thousands):

 
 
September 30,
2007
 
 
December 31,
2006
 
Environmental Remediation Costs:
 
 
 
 
 
 
Expended - Net 
 
$
20,972
 
 
$
17,743
 
Liability for Future Expenditures
 
 
77,881
 
 
 
67,905
 
Income Taxes-Flowthrough Depreciation
 
 
3,952
 
 
 
4,685
 
Deferred Asset Retirement Obligation Costs
 
 
21,482
 
 
 
21,009
 
Deferred Gas Costs - Net
 
 
5,581
 
 
 
19,698
 
Deferred Pension and Other Postretirement Benefit Costs
 
 
39,075
 
 
 
39,359
 
Temperature Adjustment Clause Receivable
 
 
7,958
 
 
 
8,996
 
Conservation Incentive Program Receivable
 
 
15,327
 
 
 
7,747
 
Societal Benefit Costs Receivable
 
 
2,414
 
 
 
6,912
 
Premium for Early Retirement of Debt
 
 
1,411
 
 
 
1,532
 
Other Regulatory Assets
 
 
1,476
 
 
 
1,376
 
 
 
$
197,529
 
 
$
196,962
 


SJI - 17

Regulatory Liabilities consisted of the following items (in thousands):
 
 
 
September 30,
2007
 
 
December 31,
2006
 
Excess Plant Removal Costs
 
$
48,643
 
 
$
48,377
 
Other
 
 
4,461
 
 
 
2,420
 
 
 
 
 
 
 
 
 
 
Total Regulatory Liabilities
 
$
53,104
 
 
$
50,797
 
 
DEFERRED GAS COSTS AND REVENUES — NET — Over/under collections of gas costs are monitored through SJG’s Basic Gas Supply Service Clause mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge SJG’s natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS regulatory asset decreased from $19.7 million at December 31, 2006 to $5.6 million at September 30, 2007 primarily as a result of a change in the fair value of SJG’s energy related derivatives which accounted for $12.5 million of the fluctuation.

9.           PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended September 30, 2007 and 2006, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):

 
Pension Benefits
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
Service Cost
 
$
738
   
$
793
   
$
2,593
   
$
2,377
 
Interest Cost
 
 
1,737
     
1,804
     
6,049
     
5,411
 
Expected Return on Plan Assets
 
 
(2,201
)
   
(2,309
)
   
(7,817
)
   
(6,928
)
Amortizations:
 
 
                         
 
Prior Service Cost
 
 
64
     
114
     
229
     
342
 
Actuarial Loss
 
 
448
     
596
     
1,482
     
1,789
 
Net Periodic Benefit Cost