sjiform10q03312008.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, 2008

OR

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

Commission File Number 1-6364

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

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

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

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

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

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

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

  As of May 1, 2008, there were 29,728,697 shares of the registrant’s common stock outstanding.
 
 



 
 

 

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

 
SJI - 2

 

 
             
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(In Thousands Except for Per Share Data)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
             
             
Operating Revenues:
           
  Utility
  $ 236,412     $ 265,285  
  Nonutility
    111,635       103,142  
                 
      Total Operating Revenues
    348,047       368,427  
                 
Operating Expenses:
               
  Cost of Sales - (Excluding depreciation)
               
                    - Utility
    161,425       192,965  
                    - Nonutility
    105,331       90,505  
  Operations
    19,994       18,908  
  Maintenance
    1,852       1,472  
  Depreciation
    7,187       7,012  
  Energy and Other Taxes
    4,866       5,084  
                 
      Total Operating Expenses
    300,655       315,946  
                 
Operating Income
    47,392       52,481  
                 
Other Income and Expense
    281       364  
                 
Interest Charges
    (6,014 )     (6,969 )
                 
Income Before Income Taxes
    41,659       45,876  
                 
Income Taxes
    (17,164 )     (18,910 )
                 
Equity in Affiliated Companies
    217       205  
                 
Income from Continuing Operations
    24,712       27,171  
                 
Loss from Discontinued Operations - (Net of tax benefit)
    (24 )     (148 )
                 
      Net Income
  $ 24,688     $ 27,023  
                 
Basic Earnings Per Common Share:
               
  Continuing Operations
  $ 0.834     $ 0.925  
  Discontinued Operations
    (0.001 )     (0.005 )
                 
      Basic Earnings Per Common Share
  $ 0.833     $ 0.920  
                 
Average Shares of Common Stock Outstanding - Basic
    29,640       29,361  
                 
Diluted Earnings Per Common Share:
               
  Continuing Operations
  $ 0.830     $ 0.922  
  Discontinued Operations
    (0.001 )     (0.005 )
                 
      Diluted Earnings Per Common Share
  $ 0.829     $ 0.917  
                 
Average Shares of Common Stock Outstanding - Diluted
    29,764       29,483  
                 
Dividends Declared per Common Share
  $ 0.270     $ 0.246  
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
         
                 




 
SJI - 3

 

 
             
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(In Thousands)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
             
             
             
             
Net Income
  $ 24,688     $ 27,023  
                 
Other Comprehensive (Loss) Income, Net of Tax:*
               
                 
  Unrealized (Loss) Gain on Available-for-Sale Securities
    (238 )     66  
  Unrealized (Loss) Gain on Derivatives - Other
    (779 )     65  
  Unrealized Loss on Derivatives - Other from Affiliated Companies
    (1,931 )     -  
                 
     Other Comprehensive (Loss) Income - Net of Tax*
    (2,948 )     131  
                 
Comprehensive Income
  $ 21,740     $ 27,154  
                 
                 
                 
* Determined using a combined statutory tax rate of 41.08%.
               
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
         
                 


 
SJI - 4

 

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
 
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(In Thousands)
 
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
             
Net Cash Provided by Operating Activities
  $ 102,149     $ 119,524  
                 
Cash Flows from Investing Activities:
               
   Capital Expenditures
    (15,352 )     (12,074 )
   Net Proceeds from Sale of Restricted Investments in Margin Account
    -       10,404  
   Purchase of Restricted Investments with Escrowed Loan Proceeds
    (37 )     (163 )
   Merchandise Loans
    (1,166 )     (1,124 )
   Proceeds from Merchandise Loans
    928       1,099  
   Investment in Affiliate
    (411 )     -  
                 
Net Cash Used in Investing Activities
    (16,038 )     (1,858 )
                 
Cash Flows from Financing Activities:
               
   Net Repayments of Lines of Credit
    (86,490 )     (112,400 )
   Other
    614       726  
                 
Net Cash Used in Financing Activities
    (85,876 )     (111,674 )
                 
Net Increase in Cash and Cash Equivalents
    235       5,992  
Cash and Cash Equivalents at Beginning of Period
    11,678       7,932  
                 
Cash and Cash Equivalents at End of Period
  $ 11,913     $ 13,924  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
               
                 


 
SJI - 5

 

             
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
             
             
   
March 31,
   
December 31,
 
   
2008
   
2007
 
             
             
Assets
           
             
Property, Plant and Equipment:
           
  Utility Plant, at original cost
  $ 1,134,288     $ 1,123,992  
    Accumulated Depreciation
    (281,588 )     (276,301 )
  Nonutility Property and Equipment, at cost
    116,877       112,971  
    Accumulated Depreciation
    (12,681 )     (11,793 )
                 
        Property, Plant and Equipment - Net
    956,896       948,869  
                 
Investments:
               
  Available-for-Sale Securities
    6,271       6,734  
  Restricted
    6,497       6,460  
  Investment in Affiliates
    1,925       1,694  
                 
        Total Investments
    14,693       14,888  
                 
Current Assets:
               
  Cash and Cash Equivalents
    11,913       11,678  
  Accounts Receivable
    183,156       111,899  
  Unbilled Revenues
    34,924       48,304  
  Provision for Uncollectibles
    (5,548 )     (5,491 )
  Natural Gas in Storage, average cost
    49,933       123,790  
  Materials and Supplies, average cost
    3,037       2,777  
  Prepaid Taxes
    -       6,878  
  Derivatives - Energy Related Assets
    34,869       23,270  
  Other Prepayments and Current Assets
    5,675       5,225  
                 
        Total Current Assets
    317,959       328,330  
                 
Regulatory and Other Noncurrent Assets:
               
  Regulatory Assets
    184,702       188,688  
  Prepaid Pension
    7,622       1,970  
  Derivatives - Energy Related Assets
    5,847       10,941  
  Unamortized Debt Issuance Costs
    7,252       7,386  
  Contract Receivables
    13,236       13,220  
  Other
    15,159       15,149  
                 
        Total Regulatory and Other Noncurrent Assets
    233,818       237,354  
                 
              Total Assets
  $ 1,523,366     $ 1,529,441  
                 
                 
                 
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
         
 
 
SJI - 6

 
 
                 
                 
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
                 
                 
   
March 31,
   
December 31,
 
   
2008
   
2007
 
                 
                 
Capitalization and Liabilities
               
                 
Common Equity:
               
  Common Stock
  $ 37,108     $ 37,010  
  Premium on Common Stock
    249,326       248,449  
  Treasury Stock (at par)
    (180 )     (187 )
  Accumulated Other Comprehensive Loss
    (13,263 )     (10,315 )
  Retained Earnings
    222,796       206,123  
                 
        Total Common Equity
    495,787       481,080  
                 
Long-Term Debt
    357,871       357,896  
                 
        Total Capitalization
    853,658       838,976  
                 
Minority Interest
    439       440  
                 
Current Liabilities:
               
  Notes Payable
    31,800       118,290  
  Current Maturities of Long-Term Debt
    106       106  
  Accounts Payable
    123,256       101,154  
  Customer Deposits and Credit Balances
    14,940       18,475  
  Margin Account Liability
    2,888       4,112  
  Environmental Remediation Costs
    20,904       25,827  
  Taxes Accrued
    31,169       5,310  
  Derivatives - Energy Related Liabilities
    25,801       13,735  
  Deferred Income Taxes - Net
    10,182       20,251  
  Deferred Contract Revenues
    4,060       5,231  
  Dividends Payable
    8,015       -  
  Interest Accrued
    4,808       6,657  
  Pension and Other Postretirement Benefits
    841       805  
  Other Current Liabilities
    6,725       8,358  
                 
        Total Current Liabilities
    285,495       328,311  
                 
Deferred Credits and Other Noncurrent Liabilities:
               
  Deferred Income Taxes - Net
    177,507       175,686  
  Investment Tax Credits
    2,070       2,150  
  Pension and Other Postretirement Benefits
    28,916       29,036  
  Environmental Remediation Costs
    49,975       52,078  
  Asset Retirement Obligations
    23,950       24,604  
  Derivatives - Energy Related Liabilities
    2,519       4,190  
  Derivatives - Other
    4,803       2,484  
  Regulatory Liabilities
    75,908       55,779  
  Other
    18,126       15,707  
                 
        Total Deferred Credits
               
          and Other Noncurrent Liabilities
    383,774       361,714  
                 
Commitments and Contingencies  (Note 12)
               
                 
              Total Capitalization and Liabilities
  $ 1,523,366     $ 1,529,441  
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
         
                 


 
SJI - 7

 



Notes to Unaudited Condensed Consolidated Financial Statements

1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

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

 
South Jersey Resources Group, LLC (SJRG) markets wholesale natural gas storage, commodity and transportation in the mid-Atlantic and southern states.

 
Marina Energy, LLC (Marina) develops and operates on-site energy-related projects.

 
South Jersey Energy Company (SJE) acquires and markets natural gas and electricity to retail end users and provides total energy management services to commercial and industrial customers.

 
South Jersey Energy Service Plus, LLC (SJESP) installs residential and small commercial HVAC systems, provides plumbing services and services appliances via the sale of  appliance service programs.

BASIS OF PRESENTATION — The condensed consolidated financial statements include the accounts of SJI, its wholly owned subsidiaries and subsidiaries in which we have a controlling interest. All significant intercompany accounts and transactions have been eliminated. In management’s opinion, the condensed consolidated financial statements reflect all normal and recurring adjustments needed to fairly present SJI’s financial position and operating results at the dates and for the periods presented. SJI’s businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission, the accompanying unaudited condensed consolidated financial statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These financial statements should be read in conjunction with SJI’s 2007 Annual Report on Form 10-K for a more complete discussion of the Company’s accounting policies and certain other information.

REVENUE BASED TAXES — SJI collects certain revenue-based energy taxes from customers. Such taxes include New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. TEFA and PUA are included in both utility revenue and cost of sales and totaled $3.8 million and $4.0 million in the three months ended March 31, 2008 and 2007, respectively.

CAPITALIZED INTEREST — SJG capitalizes interest on construction at the rate of return on rate base utilized by the New Jersey Board of Public Utilities (BPU) to set rates in its last base rate proceeding. Marina capitalizes interest on construction projects in progress based on the actual cost of borrowed funds. SJG’s amounts are included in Utility Plant and Marina’s amounts are included in Nonutility Property and Equipment on the condensed consolidated balance sheets. Interest Charges are presented net of capitalized interest on the condensed consolidated statements of income. The amount of interest capitalized by SJI for the three months ended March 31, 2008 and 2007 was not significant.

DERIVATIVE INSTRUMENTS — The Company manages its portfolio of purchases and sales, as well as natural gas in storage, using a variety of derivative instruments that include forward contracts, swap agreements, options contracts and futures contracts.  These contracts are measured at fair value and recorded in Derivatives — Energy Related Assets or Derivatives — Energy Related Liabilities on the condensed consolidated balance sheets. The consolidated net unrealized pre-tax loss of $26.4 million and $19.2 million was recorded in earnings during the three months ended March 31, 2008 and 2007, respectively. These unrealized gains and losses are included with realized gains and losses in Operating Revenues – Nonutility.

 
SJI - 8

 


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, 2008 and December 31, 2007, SJG had $14.1 million of benefits and $2.1 million of costs, respectively, included in its BGSS related to open financial contracts.

The Company has entered into interest rate derivatives and similar agreements to hedge exposure to increasing interest rates, and the impact of those rates on cash flows of variable-rate debt. These interest rate derivatives are included in Derivatives-Other on the condensed consolidated balance sheets. There have been no significant changes to the Company’s active interest rate swaps since December 31, 2007 which are described in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007.

The differential to be paid or received as a result of these swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense. As of March 31, 2008 and December 31, 2007, the net  unrealized loss on these swaps was $4.8 million and $2.5 million, respectively. The market value represents the amount SJI would have to pay the counterparty to terminate these contracts as of those dates. For selected interest rate derivatives, the market value upon termination can be recovered in rates and has therefore been included in Other Regulatory Assets in the condensed consolidated balance sheets in accordance with FAS 71 “Accounting for the Effects of Certain Types of Regulation.” The remaining interest rate derivatives have been designated as cash flow hedges.

GAS EXPLORATION AND DEVELOPMENT - The Company capitalizes all costs associated with gas property acquisition, exploration and development activities under the full cost method of accounting. Capitalized costs include costs related to unproved properties, which are not amortized until proved reserves are found or it is determined that the unproved properties are impaired. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. As of March 31, 2008, $4.2 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, 2008, SJI held 143,648 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. This statement is effective in fiscal years beginning after November 15, 2007. However for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, FAS 157 is effective in fiscal years beginning after November 15, 2008.  The adoption of the initial phase of this statement did not have a material effect on the Company’s condensed consolidated financial statements. Management does not anticipate that the adoption of the remainder of this statement will have a material effect on the Company’s condensed consolidated financial statements.

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

In April 2007, the FASB posted FASB Staff Position FIN 39-1 “Amendment of FASB Interpretation No. 39” which addresses questions received by the FASB staff regarding Interpretation 39 relating to the offsetting of amounts recognized for forward, interest rate swap, currency swap, option, and other conditional or exchange contracts. The guidance in this FSP is effective for fiscal years beginning after November 15, 2007. The adoption of this position did not have a material effect on the Company’s condensed consolidated financial statements.

 
SJI - 9

 


In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations.” The statement requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This statement is effective for the first fiscal year beginning after December 15, 2008. Management is currently evaluating the impact that the adoption of this statement will have on the Company’s condensed consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” The statement requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements. Moreover, Statement No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. This statement is effective for the first fiscal year beginning after December 15, 2008. Management is currently evaluating the impact that the adoption of this statement will have on the Company’s condensed consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of SFAS No. 133” (FAS 161). This Statement requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact that the adoption of this statement will have on the Company’s condensed consolidated financial statements.

CORRECTION IN THE PRESENTATION OF THE STATEMENT OF CASH FLOWS - The following items represent corrections made to the three months ended March 31, 2007 on the statements of condensed consolidated cash flows:

·
Cash flows related to merchandise loans to customers for the purpose of attracting conversions to natural gas heating systems should have been classified under the caption Cash Flows from Investing Activities on the statements of condensed consolidated cash flows. Accordingly, cash outflows for loans originated of $1.1 million and cash inflows from the principal collection on these loans of $1.1 million during the three months ended March 31, 2007 are now included within Cash Flows from Investing Activities. The overall net impact resulted in an insignificant amount of Cash Flows from Operating Activities for the three months ended March 31, 2007 now being included within Cash Flows from Investing Activities.
·
Cash flows related to unused loan proceeds that are held in restricted escrow accounts were incorrectly presented on a net basis with the cash flows related to the restricted margin account that is used to support the Company’s risk management activities within Cash Flows from Investing Activities on the statements of condensed consolidated cash flows. Accordingly, purchases of restricted investments with unused loan proceeds of $0.2 million during the three months ended March 31, 2007 is now included in Purchase of Restricted Investments with Escrowed Loan Proceeds. The cash flows related to the restricted margin account remain in Net Proceeds from Sale of Restricted Investments in Margin Account. This change had no overall impact on total Cash Flows from Investing Activities on the statements of condensed consolidated cash flows. 

These changes did not impact previously reported revenue or net income and are considered immaterial to the overall presentation of the condensed consolidated financial statements.

 
SJI - 10

 

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, 2008 and 2007. No stock appreciation rights have been issued under the plan. During the three months ended March 31, 2008 and 2007, SJI granted 45,241 and 44,106 restricted shares to Officers and other key employees, respectively.   These restricted shares vest over a three-year period and are subject to SJI achieving certain market based performance targets as compared to a peer group average, which can cause the actual amount of shares that ultimately vest to range from between 0% to 150% of the original share units granted. During the three months ended March 31, 2008, SJI granted 8,667 restricted shares to Directors. Shares issued to Directors vest over a three-year service period but contain no performance conditions. As a result, 100% of the shares granted generally vest.

See Note 2 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007 for the related accounting policy.

The following table summarizes the nonvested restricted stock awards outstanding at March 31, 2008 and the assumptions used to estimate the fair value of the awards:

 
Grant
 
Shares
 
Fair Value
 
Expected
 
Risk-Free
 
Date
 
Outstanding
 
Per Share
 
Volatility
 
Interest Rate
                     
 Officers & Key Employees -
Jan. 2006
 
35,526
 
$
27.950
 
16.9%
 
4.5%
 
Jan. 2007
 
39,105
 
$
29.210
 
18.5%
 
4.9%
 
Jan. 2008
 
45,241
 
$
34.030
 
21.7%
 
2.9%
                     
 Directors -
Dec. 2005
 
  6,340
 
$
29.970
 
-
 
-
 
Dec. 2006
 
  9,261
 
$
34.020
 
-
 
-
 
Jan. 2008
 
  8,667
 
$
36.355
       

Expected volatility is based on the actual daily volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the Officers’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders, which are reinvested during the three-year service period, no reduction to the fair value of the award is required. As the Directors’ restricted stock awards contain no performance conditions and dividends  are paid or credited to the holder during the three-year service period, the market value of  these awards on the date of grant approximates the fair value.
 
The following table summarizes the total compensation cost for the three months ended March 31, 2008 and 2007 (in thousands):

   
Three Months Ended
March 31,
 
   
2008
   
2007
 
             
Officers & Key Employees
 
$
301
   
$
248
 
Directors
   
67
     
52
 
Total Cost
   
368
     
300
 
                 
Capitalized
   
(37
)
   
(27
)
Net Expense
 
$
331
   
$
273
 


 
SJI - 11

 

As of March 31, 2008, there was $2.7 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 2.3 years.

The following table summarizes information regarding restricted stock award activity during the three months ended March 31, 2008 excluding accrued dividend equivalents:

   
Officers & Other
Key Employees
 
Directors
 
Weighted Average
Grant Date
Fair Value
             
Nonvested Shares Outstanding, January 1, 2008
   
110,968
 
15,601
 
$
28.136
                 
Granted
   
45,241
 
8,667
   
34.404
Vested*
   
(34,311
)
-
   
25.155
Forfeited
   
(2,026
)
-
   
28.548
Nonvested Shares Outstanding, March 31, 2008
   
119,872
 
24,268
 
$
31.184
                 
* Actual shares awarded to officers upon vesting, including dividend equivalents and adjustments for performance measures totaled 51,838 shares.

During the three months ended March 31, 2008 and 2007, SJI awarded 51,838 shares at a market value of $1.9 million and 69,781 shares at a market value of $2.3 million, respectively. The Company has a policy of issuing new shares to satisfy its obligations under these plans; therefore, there are no cash payment requirements resulting from the normal operation of this plan. However, a change in control could result in such shares becoming nonforefeitable or immediately payable in cash.  At the discretion of the Officers, Directors and other key employees, the receipt of vested shares can be deferred until future periods.  These deferred shares are included in Treasury Stock on the condensed consolidated balance sheets.

3.           DISCONTINUED OPERATIONS:

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

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

Summarized operating results of the discontinued operations for the three months ended March 31, were (in thousands, except per share amounts):

   
Three Months Ended
March 31,
 
   
2008
   
2007
 
Loss before Income Taxes:
           
Sand Mining
 
$
(27
)
 
$
(217
)
Fuel Oil
   
(11
)
   
(11
)
Income Tax Benefits
   
14
     
80
 
Loss from Discontinued Operations — Net
 
$
(24
)
 
$
(148
)
Earnings Per Common Share from
               
Discontinued Operations — Net:
               
Basic and Diluted
 
$
(0.001
)
 
$
(0.005
)


 
SJI - 12

 


 4.           COMMON STOCK:

The following shares were issued and outstanding at March 31:

   
2008
 
Beginning Balance, January 1
   
29,607,802
 
New Issues During Period:
       
Dividend Reinvestment Plan
   
18,190
 
Stock-Based Compensation Plan
   
60,505
 
Ending Balance, March 31
   
29,686,497
 

The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $0.9 million, was recorded in Premium on Common Stock.
 
EARNINGS PER COMMON SHARE — Basic EPS is based on the weighted-average number of common shares outstanding. EPS is presented in accordance with FASB Statement No. 128, “Earnings Per Share,” which establishes standards for computing and presenting basic and diluted EPS. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 123,585 and  122,280 shares for the three months ended March 31, 2008 and 2007, respectively. These shares relate to SJI’s restricted stock as discussed in Note 2.

DIVIDEND REINVESTMENT PLAN (DRP) — Newly issued shares of common stock offered through the DRP have been issued directly by SJI. As of March 31, 2008, SJI reserved approximately 1.1 million shares of authorized, but unissued, common stock for future issuance through the DRP.
 
5.           RESTRICTED INVESTMENTS:

In accordance with the terms of the Marina and certain SJG loan agreements, unused proceeds are required to be escrowed pending approved construction expenditures. As of March 31, 2008 and December 31, 2007, the escrowed proceeds, including interest earned, totaled $6.5 million.

SJRG maintains a margin account with a national investment firm to support its risk management activities. The balance required to be held in this margin account increases as the net value of the outstanding energy related financial contracts with this investment firm decreases. As of March 31, 2008 and December 31, 2007, there was no balance in this account. As of March 31, 2008 and December 31, 2007, the Company is holding $2.9 million and $4.1 million, respectively 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 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.

 
SJI - 13

 


Information about SJI's operations in different reportable operating segments is presented below (in thousands):

   
Three Months Ended
March 31,
 
   
2008
   
2007
 
Operating Revenues:
           
Gas Utility Operations
 
$
237,904
   
$
277,864
 
Wholesale Gas Operations
   
26,264
     
21,094
 
Retail Gas and Other Operations
   
57,377
     
58,717
 
Retail Electric Operations
   
16,259
     
12,444
 
On-Site Energy Production
   
10,763
     
9,724
 
Appliance Service Operations
   
4,970
     
3,968
 
Corporate & Services
   
4,468
     
3,383
 
Subtotal
   
358,005
     
387,194
 
Intersegment Sales
   
(9,958
)
   
(18,767
)
Total Operating Revenues
 
$
348,047
   
$
368,427
 

Operating Income:
               
Gas Utility Operations
 
$
47,348
   
$
46,271
 
Wholesale Gas Operations
   
(6,007
)
   
3,667
 
Retail Gas and Other Operations
   
1,882
     
(307
)
Retail Electric Operations
   
461
     
555
 
On-Site Energy Production
   
2,434
     
2,005
 
Appliance Service Operations
   
996
     
203
 
Corporate and Services
   
278
     
87
 
Total Operating Income
 
$
47,392
   
$
52,481
 
                 
Depreciation and Amortization:
               
Gas Utility Operations
 
$
7,717
   
$
7,212
 
Wholesale Gas Operations
   
16
     
16
 
Retail Gas and Other Operations
   
4
     
2
 
On-Site Energy Production
   
752
     
782
 
Appliance Service Operations
   
77
     
62
 
Corporate and Services
   
97
     
57
 
Total Depreciation and Amortization
 
$
8,663
   
$
8,131
 
                 
Interest Expense:
               
Gas Utility Operations
 
$
4,975
   
$
5,241
 
Wholesale Gas Operations
   
144
     
751
 
Retail Gas and Other Operations
   
76
     
104
 
On-Site Energy Production
   
831
     
876
 
Corporate and Services
   
381
     
1,103
 
               Subtotal
   
6,407
     
8,075
 
Intersegment Borrowings
   
(393
)
   
(1,106
)
Total Interest Expense
 
$
6,014
   
$
6,969
 


 
SJI - 14

 


                 
Property Additions:
               
Gas Utility Operations
 
$
11,135
   
$
11,549
 
Wholesale Gas Operations
   
3,338
     
-
 
Retail Gas and Other Operations
   
-
     
9
 
On-Site Energy Production
   
229
     
1,748
 
Appliance Service Operations
   
2
     
28
 
Corporate and Services
   
366
     
207
 
Total Property Additions
 
$
15,070
   
$
13,541
 
  
   
March 31,
 2008
   
December 31,
2007
 
             
Identifiable Assets:
           
Gas Utility Operations
 
$
1,218,982
   
$
1,227,162
 
Wholesale Gas Operations
   
155,498
     
142,848
 
Retail Gas and Other Operations
   
51,443
     
42,735
 
Retail Electric Operations
   
10,066
     
7,082
 
On-Site Energy Production
   
122,435
     
124,982
 
Appliance Service Operations
   
15,260
     
16,060
 
Discontinued Operations
   
2,365
     
2,604
 
Corporate and Services
   
44,846
     
58,274
 
Subtotal
   
1,620,895
     
1,621,747
 
Intersegment Assets
   
(97,529
)
   
(92,306
)
Total Identifiable Assets
 
$
1,523,366
   
$
1,529,441
 

7.           RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU. There have been no significant regulatory actions or changes to SJG’s rate structure since December 31, 2007. See Note 9 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007.

8.           REGULATORY ASSETS & REGULATORY LIABILITIES:

Other than the Deferred Gas Costs and Revenues — Net, discussed below, there have been no significant changes to the nature of the Company’s regulatory assets and liabilities since December 31, 2007 which are described in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007.

 
SJI - 15

 


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

   
March 31,
2008
   
December 31,
2007
 
Environmental Remediation Costs:
           
Expended - Net 
 
$
29,738
   
$
25,960
 
Liability for Future Expenditures
   
66,902
     
73,880
 
Income Taxes-Flowthrough Depreciation
   
3,463
     
3,707
 
Deferred Asset Retirement Obligation Costs
   
21,757
     
21,572
 
Deferred Pension and Other Postretirement Benefit Costs
   
32,591
     
32,686
 
Temperature Adjustment Clause Receivable
   
2,580
     
6,516
 
Conservation Incentive Program Receivable
   
22,202
     
18,173
 
Societal Benefit Costs Receivable
   
1,253
     
2,952
 
Premium for Early Retirement of Debt
   
1,329
     
1,370
 
Other Regulatory Assets
   
2,887
     
1,872
 
   
$
184,702
   
$
188,688
 

Regulatory Liabilities consisted of the following items (in thousands):
 
   
March 31,
2008
   
December 31,
2007
 
Excess Plant Removal Costs
 
$
48,782
   
$
48,705
 
Liability for NJCEP
   
2,404
     
2,797
 
Deferred Gas Costs and Revenues - Net
   
23,014
     
2,586
 
Other
   
1,708
     
1,691
 
                 
Total Regulatory Liabilities
 
$
75,908
   
$
55,779
 
 
DEFERRED  GAS COSTS AND REVENUES — NET — Over/under collections of gas costs are monitored through SJG’s Basic Gas Supply Service Clause mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge SJG’s natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS regulatory liability increased from $2.6 million at December 31, 2007 to $23.0 million at March 31, 2008 primarily as a result of gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first quarter.  Gas cost recoveries are typically very high in the first and fourth quarters of the year as customers’ consumption is at its highest point during the winter months.  In addition, a change in the fair value of SJG’s energy related derivatives accounted for $16.2 million of the fluctuation.

 
SJI - 16

 


9.           PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three months ended March 31, 2008 and 2007, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):

 
Pension Benefits
Other Postretirement Benefits
 
   
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
 
2008
 
2007
   
2008
   
2007
 
Service Cost
$
838
 
$
912
   
$
265
   
$
267
 
Interest Cost
 
1,991
   
2,077
     
737
     
752
 
Expected Return on Plan Assets
 
(2,512
)
 
(2,561
)
   
(538
)
   
(527
)
Amortizations:
                           
Prior Service Cost (Credits)
 
72
   
73
     
(86
)
   
(87)
 
Actuarial Loss
 
398
   
471
     
184
     
170
 
Net Periodic Benefit Cost
 
787
   
972
     
562
     
575
 
Capitalized Benefit Costs
 
(256
)
 
(367
)
   
(209
)
   
(233
)
Total Net Periodic Benefit Expense
$
531
 
$
605
   
$
353
   
$
342
 

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, 2007.

See Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007, for additional information related to SJI’s pension and other postretirement benefits.

10.                 RETAINED EARNINGS:

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004 that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.2 million. SJG’s total common equity balance was $398.4 million at March 31, 2008.

Various loan agreements also contain potential restrictions regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of March 31, 2008, these loan restrictions did not affect the amount that may be distributed from either SJG’s or SJI’s retained earnings.

11.                 UNUSED LINES OF CREDIT:

Bank credit available to SJI totaled $416.0 million at March 31, 2008, of which $98.4 million, inclusive of $66.6 million of letters of credit, was used. Those bank facilities consist of a $100.0 million revolving credit facility and $76.0 million of uncommitted bank lines available to SJG; and a $200.0 million revolving credit facility and $40.0 million of uncommitted bank lines available to SJI. The revolving credit facilities expire in August 2011 and contain one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis. SJI and SJG were in compliance with this covenant as of March 31, 2008. Borrowings under these credit facilities are at market rates. The average borrowing cost, which changes daily, was 3.30% and  5.75% at March 31, 2008 and 2007, respectively.
 

 
SJI - 17

 


12.                 COMMITMENTS AND CONTINGENCIES:

GUARANTEES — The Company has recorded a liability of $2.0 million in Other Noncurrent Liabilities on the condensed consolidated balance sheets as of March 31, 2008 and December 31, 2007 for the fair value of the following guarantees:

·      In April 2007, SJI guaranteed certain obligations of LVE Energy Partners, LLC (LVE) an unconsolidated joint venture in which Marina has a 50% equity interest. LVE entered into a 25-year contract with a resort developer to design, build, own and operate a district energy system and central energy center for a planned resort in Las Vegas, Nevada. LVE began construction of the facility in 2007 and expects to provide full energy services when the resort is completed in 2010. SJI will invest at least $30.0 million during the construction period as discussed below.

SJI has issued a performance guaranty for up to $180.0 million to the resort developer to ensure that certain construction milestones relating to the development of the thermal facility are met. Concurrently, SJI is the beneficiary of a surety bond purchased by the project’s general contractor that provides SJI with assurance that construction of the thermal facility will meet those same milestones. 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 BCLE an unconsolidated joint venture in which Marina has a 50% equity interest. BCLE has entered into a 20 year agreement with a county government to lease and operate a facility that will produce electricity from landfill methane gas. The facility went online in the fourth quarter of 2007. Although unlikely, the maximum amount that SJI could be obligated for, in the event that BCLE does not meet minimum specified levels of operating performance and no mitigating action is taken, or is unable to meet certain financial obligations as they become due, is approximately $4.0 million each year.  SJI and the partner in this joint venture have entered into reimbursement agreements that secure reimbursement for SJI of a proportionate share of any payments made by SJI on these guarantees.  
 
CAPITAL CONTRIBUTION OBLIGATION - In December 2007, Marina and its joint venture partner agreed to each contribute approximately $30.0 million of equity to LVE as part of its construction period financing. LVE will initially use bank and bond financing to fund project construction and then expects to use contributed equity to complete the project. Marina’s obligation is secured by an irrevocable letter of credit from a bank. In the event of a default by LVE on its financing arrangements, the partners may be required to make equity contributions prior to the end of the construction period. However, an equity payment to LVE is not expected to be made prior to 2009.
 
STANDBY LETTERS OF CREDIT — As of March 31, 2008, SJI provided $66.6 million of standby letters of credit through SJI’s revolving credit facility. Letters of credit in the amount of $62.3 million support the variable-rate demand bonds issued through the New Jersey Economic Development Authority (NJEDA) to finance Marina’s thermal plant project. SJI has six additional letters of credit outstanding totaling $4.3 million, two of which were posted to different utilities and one was posted to the PJM Interconnection to enable SJE to market retail electricity. The remaining letters were posted for various construction activities.


 
SJI - 18

 


 
ENVIRONMENTAL REMEDIATION COSTS — SJI incurred and  recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also accrued costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage. There have been no changes to the status of the Company’s environmental remediation efforts since December 31, 2007 as described in Note 14 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007.   However, the lower end of the range of expected remediation costs, which is recorded as a liability on the condensed consolidated balance sheets, has decreased $7.0 million since December 31, 2007.  This decrease is the result of expenditures of $4.8 million during the first quarter of 2008 and revised forecasts of expected remediation costs for all sites as additional information has become available.

13.            FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Effective January 1, 2008, SJI adopted the provisions of FAS 157 that relate to financial assets and financial liabilities as discussed in Note 1.  FAS 157 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques.  The levels of the hierarchy are described below:
 
·
Level 1:  Observable inputs such as quoted prices in active markets for identical assets or liabilities.
 
·
Level 2:  Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
 
·
Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions.
Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category as of March 31, 2008 is a follows (in thousands):

   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets
 
                       
Available-for-Sale Securities (A)
  $ 6,271     $ 6,271     $ -     $ -  
Derivatives – Energy Related Assets (B)
    40,716       29,820       10,896       -  
    $ 46,987     $ 36,091     $ 10,896     $ -  
                                 
Liabilities
                               
                                 
Derivatives – Energy Related Liabilities (B)
  $ 28,320     $ 21,855     $ 6,465     $ -  
Derivatives – Other (C)
    4,803       -       4,803       -  
    $ 33,123     $ 21,855     $ 11,268     $ -  
                                 


 
SJI - 19

 


(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 valued using quoted market sources in active markets. When this pricing is not available, contracts are valued using broker or dealer quotes or auction prices.

(C) Derivatives – Other are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.  

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and Risk Factors — Certain statements contained in this Quarterly Report may qualify as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report should be considered forward-looking statements made in good faith and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Words such as “anticipate”, “believe”, “expect”, “estimate”, “forecast”, “goal”, “intend”, “objective”, “plan”, “project”, “seek”, “strategy” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include, but are not limited to, the following: general economic conditions on an international, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; changes in the availability of natural gas; “non-routine” or “extraordinary” disruptions in our distribution system; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; and changes in business strategies.

A discussion of these and other risks and uncertainties may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and in other filings made by us with the Securities and Exchange Commission. These cautionary statements should not be construed by you to be exhaustive and they are made only as of the date of this Quarterly Report on Form 10-Q, or in any document incorporated by reference, at the date of such document. While SJI believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, SJI undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies — Estimates and Assumptions — Management must make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement employee benefit costs, and revenue recognition. A discussion of these estimates and assumptions may be found in our Form 10-K for the year ended December 31, 2007.

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 —There have been no significant regulatory actions since December 31, 2007. See detailed discussion concerning Regulatory Actions in Note 9 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007.

Environmental Remediation —Other than the changes discussed in Note 12 to the Condensed Consolidated Financial Statements, there have been no significant changes to the status of the Company’s environmental remediation efforts since December 31, 2007. See detailed discussion concerning Environmental Remediation in Note 14 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007.
 

 
SJI - 20

 


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

A significant portion of the volatility in operating results is due to the impact of the accounting methods associated with SJRG’s storage activities. SJRG purchases and holds natural gas in storage to earn a profit margin from its ultimate sale in the future. SJRG uses derivatives to mitigate commodity price risk in order to substantially lock-in the profit margin that will ultimately be realized. However, gas stored in inventory is accounted for at the lower of average cost or market; the derivatives used to reduce the risk associated with a change in the value of the inventory are accounted for at fair value, with changes in fair value recorded in operating results in the period of change. As a result, earnings are subject to volatility as the market prices of derivatives change, even when the underlying hedged value of the inventory is unchanged. This volatility can be significant from period to period. Over time, gains or losses on the sale of gas in storage will be offset by losses or gains on the derivatives, resulting in the realization of the profit margin expected when the transactions were initiated.
 
Net Income for the three months ended March 31, 2008 decreased $2.3 million, or 9% to $24.7 million compared to the three months ended March 31, 2007. This decrease is primarily due to a decrease in gross margin generated by SJRG.
 
 These changes are discussed in more detail below.

The following tables summarize the composition of SJG’s volumes, revenues, margin and degree days for the three months ended March 31 (in thousands, except for degree day data):

   
2008
   
2007
 
Utility Throughput – dth:
                       
Firm Sales -
                       
     Residential
   
10,183
     
28
%
   
11,281
     
30
%
     Commercial
   
2,584
     
7
%
   
2,929
     
8
%
     Industrial
   
75
     
-
     
106
     
-
 
     Cogeneration and electric generation
   
16
     
-
     
31
     
-
 
Firm Transportation -
                               
     Residential
   
952
     
3
%
   
871
     
2
%
     Commercial
   
2,460
     
7
%
   
2,610
     
7
%
     Industrial
   
3,280
     
9
%
   
3,111
     
8
%
     Cogeneration and electric generation
   
352
     
-
     
414
     
1
%
                                 
     Total Firm Throughput
   
19,902
     
54
%
   
21,353
     
56
%
                                 
Interruptible Sales
   
9
     
-
     
10
     
-
 
Interruptible Transportation
   
912
     
3
%
   
651
     
3
%
Off-System
   
4,239
     
12
%
   
6,835
     
18
%
Capacity Release
   
11,230
     
31
%
   
8,814
     
23
%
                                 
     Total Throughput
   
36,292
     
100
%
   
37,663
     
100
%


 
SJI - 21

 


Utility Operating Revenues:
                       
Firm Sales-
                       
     Residential
 
$
143,468
   
60
%
 
$
168,072
   
60
%
     Commercial
   
31,186
   
13
%
   
36,578
   
13
%
     Industrial
   
3,555
   
2
%
   
3,983
   
1
%
     Cogeneration and electric generation
   
327
   
-
     
449
   
-
 
Firm Transportation -
                           
     Residential
   
4,469
   
2
%
   
3,574
   
2
%
     Commercial
   
7,653
   
3
%
   
7,028
   
3
%
     Industrial
   
3,192
   
2
%
   
3,090
   
1
%
     Cogeneration and electric generation
   
322
   
-
     
394
   
-
 
                             
     Total Firm Revenues
   
194,172
   
82
%
   
223,168
   
80
%
                             
Interruptible Sales
   
125
   
-
     
140
   
-
 
Interruptible Transportation
   
596
   
-
     
463
   
-
 
Off-System
   
39,990
   
17
%
   
52,066
   
19
%
Capacity Release
   
2,800
   
1
%
   
1,744
   
1
%
Other
   
221
   
-
     
283
   
-
 
                             
     
237,904
   
100
%
   
277,864
   
100
%
Less: Intercompany Sales
   
(1,492
)
         
(12,579
)
     
Total Utility Operating Revenues
   
236,412
           
265,285
       
                             
Less:
                           
Cost of sales
   
161,425
           
192,965
       
Conservation recoveries *
   
3,065
           
1,213
       
RAC recoveries *
   
695
           
472
       
    Revenue taxes
   
3,790
           
4,035
       
Utility Margin
 
$
67,437
         
$
66,600
       
                             
Margin:
                           
Residential
 
$
40,982
   
61
%
 
$
44,262
   
67
%
Commercial and industrial
   
14,318
   
21
%
   
15,360
   
23
%
Cogeneration and electric generation
   
289
   
-
     
359
   
-
 
Interruptible
   
65
   
-
     
57
   
-
 
Off-system & capacity release
   
1,081
   
2
%
   
991
   
2
%
Other revenues
   
220
   
-
     
282
   
-
 
Margin before weather  normalization & decoupling
   
56,955
   
84
%
   
61,311
   
92
%
CIP mechanism
   
10,482
   
16
%
   
5,289
   
8
%
Utility Margin
 
$
67,437