sjiform10q093008.htm
 
 
 



 
  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

OR

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

Commission File Number 1-6364

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

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[X]
 
Accelerated filer
[   ]
Non-accelerated filer
[   ] (Do not check if a smaller reporting company)
 
Smaller reporting company
[   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [X]

As of November 3, 2008, there were 29,728,697 shares of the registrant’s common stock outstanding.
 






 
 

 
 





 
 
 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements - See Pages 3 through 20

 






 
SJI - 2

 

 
             
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(In Thousands, Except for Per Share Data)
 
             
   
Three Months Ended
 
   
September 30,
 
   
2008
   
2007
 
             
             
Operating Revenues:
           
  Utility
  $ 63,687     $ 83,385  
  Nonutility
    146,726       72,843  
                 
      Total Operating Revenues
    210,413       156,228  
                 
Operating Expenses:
               
  Cost of Sales - (Excluding depreciation)
               
                    - Utility
    40,324       61,188  
                    - Nonutility
    61,935       47,976  
  Operations
    17,923       16,084  
  Maintenance
    1,925       1,544  
  Depreciation
    7,333       6,982  
  Energy and Other Taxes
    1,646       1,587  
                 
      Total Operating Expenses
    131,086       135,361  
                 
Operating Income
    79,327       20,867  
                 
Other Income and Expense
    496       303  
                 
Interest Charges
    (5,745 )     (6,966 )
                 
Income Before Income Taxes
    74,078       14,204  
                 
Income Taxes
    (30,367 )     (5,818 )
                 
Equity in Earnings of Affiliated Companies
    147       178  
                 
Income from Continuing Operations
    43,858       8,564  
                 
Loss from Discontinued Operations - (Net of tax benefit)
    (76 )     (33 )
                 
      Net Income
  $ 43,782     $ 8,531  
                 
Basic Earnings Per Common Share:
               
  Continuing Operations
  $ 1.475     $ 0.290  
  Discontinued Operations
    (0.002 )     (0.001 )
                 
      Basic Earnings Per Common Share
  $ 1.473     $ 0.289  
                 
Average Shares of Common Stock Outstanding - Basic
    29,729       29,518  
                 
Diluted Earnings Per Common Share:
               
  Continuing Operations
  $ 1.469     $ 0.289  
  Discontinued Operations
    (0.003 )     (0.001 )
                 
      Diluted Earnings Per Common Share
  $ 1.466     $ 0.288  
                 
Average Shares of Common Stock Outstanding - Diluted
    29,865       29,627  
                 
Dividends Declared per Common Share
  $ 0.270     $ 0.245  
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
         
 
 
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,
 
   
2008
   
2007
 
             
             
Operating Revenues:
           
  Utility
  $ 393,262     $ 441,073  
  Nonutility
    301,038       255,241  
                 
      Total Operating Revenues
    694,300       696,314  
                 
Operating Expenses:
               
  Cost of Sales - (Excluding depreciation)
               
                    - Utility
    261,604       314,408  
                    - Nonutility
    231,141       198,830  
  Operations
    56,805       51,619  
  Maintenance
    5,412       4,446  
  Depreciation
    21,758       20,884  
  Energy and Other Taxes
    8,628       8,891  
                 
      Total Operating Expenses
    585,348       599,078  
                 
Operating Income
    108,952       97,236  
                 
Other Income and Expense
    1,235       1,184  
                 
Interest Charges
    (17,246 )     (20,123 )
                 
Income Before Income Taxes
    92,941       78,297  
                 
Income Taxes
    (38,245 )     (32,350 )
                 
Equity in Earnings of Affiliated Companies
    593       600  
                 
Income from Continuing Operations
    55,289       46,547  
                 
Loss from Discontinued Operations - (Net of tax benefit)
    (101 )     (235 )
                 
      Net Income
  $ 55,188     $ 46,312  
                 
Basic Earnings Per Common Share:
               
  Continuing Operations
  $ 1.862     $ 1.581  
  Discontinued Operations
    (0.004 )     (0.008 )
                 
      Basic Earnings Per Common Share
  $ 1.858     $ 1.573  
                 
Average Shares of Common Stock Outstanding - Basic
    29,699       29,449  
                 
Diluted Earnings Per Common Share:
               
  Continuing Operations
  $ 1.854     $ 1.575  
  Discontinued Operations
    (0.004 )     (0.008 )
                 
      Diluted Earnings Per Common Share
  $ 1.850     $ 1.567  
                 
Average Shares of Common Stock Outstanding - Diluted
    29,828       29,561  
                 
Dividends Declared per Common Share
  $ 0.810     $ 0.735  
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
         


 
SJI - 4

 


 
             
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(In Thousands)
 
             
   
Three Months Ended
 
   
September 30,
 
   
2008
   
2007
 
             
             
             
             
Net Income
  $ 43,782     $ 8,531  
                 
Other Comprehensive Income, Net of Tax:*
               
                 
  Unrealized (Loss) Gain on Available-for-Sale Securities
    (355 )     41  
  Unrealized Loss on Derivatives - Other
    (20 )     (1,277 )
  Unrealized Loss on Derivatives - Other from Affiliated Companies
    (347 )     (858 )
                 
     Other Comprehensive Loss - Net of Tax*
    (722 )     (2,094 )
                 
Comprehensive Income
  $ 43,060     $ 6,437  
                 
                 
   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2007
 
                 
                 
                 
                 
Net Income
  $ 55,188     $ 46,312  
                 
Other Comprehensive Income, Net of Tax:*
               
                 
  Unrealized (Loss) Gain on Available-for-Sale Securities
    (635 )     221  
  Unrealized Gain on Derivatives - Other
    499       64  
  Unrealized Loss on Derivatives - Other from Affiliated Companies
    (154 )     (858 )
                 
     Other Comprehensive Loss - Net of Tax*
    (290 )     (573 )
                 
Comprehensive Income
  $ 54,898     $ 45,739  
                 
* Determined using a combined statutory tax rate of 41.08%.
               
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
       
                 


 
SJI - 5

 



 
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(In Thousands)
 
   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2007
 
             
Net Cash Provided by Operating Activities
  $ 32,072     $ 104,453  
                 
Cash Flows from Investing Activities:
               
   Capital Expenditures
    (45,048 )     (40,915 )
   Net (Purchase) Proceeds from Sale of Restricted Investments in Margin Account
    (11,150 )     10,404  
   Proceeds from Sale of Restricted Investments from Escrowed Loan Proceeds
    -       4,172  
   Purchase of Restricted Investments with Escrowed Loan Proceeds
    (75 )     (127 )
   Merchandise Loans
    (2,857 )     (2,695 )
   Proceeds from Merchandise Loans
    2,923       2,975  
   Purchase of Company Owned Life Insurance
    (4,287 )     (3,917 )
   Investment in Affiliate
    (781 )     (7,463 )
   Advances on Notes Receivable - Affiliate
    (4,832 )     -  
                 
Net Cash Used in Investing Activities
    (66,107 )     (37,566 )
                 
Cash Flows from Financing Activities:
               
   Net Borrowings (Repayments) of Lines of Credit
    40,835       (48,915 )
   Proceeds from Issuance of Long-Term Debt
    25,000       -  
   Payments for Issuance of Long-Term Debt
    (247 )     -  
   Principal Repayments of Long-Term Debt
    (25,079 )     (2,364 )
   Dividends on Common Stock
    (16,042 )     (14,431 )
   Proceeds from Sale of Common Stock
    2,076       5,105  
                 
Net Cash Provided by (Used in) Financing Activities
    26,543       (60,605 )
                 
Net (Decrease) Increase in Cash and Cash Equivalents
    (7,492 )     6,282  
Cash and Cash Equivalents at Beginning of Period
    11,678       7,932  
                 
Cash and Cash Equivalents at End of Period
  $ 4,186     $ 14,214  
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
               
                 


 
SJI - 6

 



             
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
             
             
   
September 30,
   
December 31,
 
   
2008
   
2007
 
             
             
Assets
           
             
Property, Plant and Equipment:
           
  Utility Plant, at original cost
  $ 1,156,565     $ 1,123,992  
    Accumulated Depreciation
    (290,215 )     (276,301 )
  Nonutility Property and Equipment, at cost
    120,225       112,971  
    Accumulated Depreciation
    (14,483 )     (11,793 )
                 
        Property, Plant and Equipment - Net
    972,092       948,869  
                 
Investments:
               
  Available-for-Sale Securities
    5,653       6,734  
  Restricted
    17,685       6,460  
  Investment in Affiliates
    2,058       1,694  
                 
        Total Investments
    25,396       14,888  
                 
Current Assets:
               
  Cash and Cash Equivalents
    4,186       11,678  
  Accounts Receivable
    93,291       111,899  
  Unbilled Revenues
    9,788       48,304  
  Provision for Uncollectibles
    (5,839 )     (5,491 )
  Natural Gas in Storage, average cost
    179,330       123,790  
  Materials and Supplies, average cost
    3,730       2,777  
  Prepaid Taxes
    18,594       6,878  
  Derivatives - Energy Related Assets
    44,448       23,270  
  Other Prepayments and Current Assets
    7,382       5,225  
                 
        Total Current Assets
    354,910       328,330  
                 
Regulatory and Other Noncurrent Assets:
               
  Regulatory Assets
    212,743       188,688  
  Prepaid Pension
    7,046       1,970  
  Derivatives - Energy Related Assets
    16,300       10,941  
  Unamortized Debt Issuance Costs
    7,231       7,386  
  Notes Receivable - Affiliate
    4,832       -  
  Contract Receivables
    12,678       13,220  
  Other
    20,083       15,149  
                 
        Total Regulatory and Other Noncurrent Assets
    280,913       237,354  
                 
              Total Assets
  $ 1,633,311     $ 1,529,441  
                 
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
         
 
 
SJI - 7

 
                 
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
                 
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
                 
                 
   
September 30,
   
December 31,
 
   
2008
   
2007
 
                 
                 
Capitalization and Liabilities
               
                 
Common Equity:
               
  Common Stock
  $ 37,161     $ 37,010  
  Premium on Common Stock
    251,340       248,449  
  Treasury Stock (at par)
    (182 )     (187 )
  Accumulated Other Comprehensive Loss
    (10,605 )     (10,315 )
  Retained Earnings
    237,242       206,123  
                 
        Total Common Equity
    514,956       481,080  
                 
Long-Term Debt
    357,818       357,896  
                 
        Total Capitalization
    872,774       838,976  
                 
Minority Interest
    1,255       440  
                 
Current Liabilities:
               
  Notes Payable
    159,125       118,290  
  Current Maturities of Long-Term Debt
    106       106  
  Accounts Payable
    88,095       101,154  
  Customer Deposits and Credit Balances
    30,323       18,475  
  Margin Account Liability
    -       4,112  
  Environmental Remediation Costs
    20,035       25,827  
  Taxes Accrued
    3,632       5,310  
  Derivatives - Energy Related Liabilities
    31,299       13,735  
  Deferred Income Taxes - Net
    19,661       20,251  
  Deferred Contract Revenues
    5,701       5,231  
  Dividends Payable
    8,027       -  
  Interest Accrued
    4,831       6,657  
  Pension and Other Postretirement Benefits
    841       805  
  Other Current Liabilities
    6,715       8,358  
                 
        Total Current Liabilities
    378,391       328,311  
                 
Deferred Credits and Other Noncurrent Liabilities:
               
  Deferred Income Taxes - Net
    190,818       175,686  
  Investment Tax Credits
    1,911       2,150  
  Pension and Other Postretirement Benefits
    28,461       29,036  
  Environmental Remediation Costs
    55,181       52,078  
  Asset Retirement Obligations
    23,932       24,604  
  Derivatives - Energy Related Liabilities
    10,277       4,190  
  Derivatives - Other
    3,089       2,484  
  Regulatory Liabilities
    52,336       55,779  
  Other
    14,886       15,707  
                 
        Total Deferred Credits
               
          and Other Noncurrent Liabilities
    380,891       361,714  
                 
Commitments and Contingencies  (Note 12)
               
                 
              Total Capitalization and Liabilities
  $ 1,633,311     $ 1,529,441  
                 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
         
                 


 
SJI - 8

 



Notes to Unaudited Condensed Consolidated Financial Statements

1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

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

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

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

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

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

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

REVENUE BASED TAXES — SJI collects certain revenue-based energy taxes from customers. Such taxes include New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. TEFA and PUA are included in both utility revenue and cost of sales and totaled $0.9 million in both of the three month periods ended  September 30, 2008 and 2007, and $5.9 million and $6.3 million in the nine months ended  September 30, 2008 and 2007, respectively.

CAPITALIZED INTEREST — SJG capitalizes interest on construction at the rate of return on rate base utilized by the New Jersey Board of Public Utilities (BPU) to set rates in its last base rate proceeding. Marina capitalizes interest on construction projects in progress based on the actual cost of borrowed funds. SJG’s amounts are included in Utility Plant and Marina’s amounts are included in Nonutility Property and Equipment on the condensed consolidated balance sheets. Interest Charges are presented net of capitalized interest on the condensed consolidated statements of income. The amount of interest capitalized by SJI for the three and nine months ended September 30, 2008 and 2007 was not significant.

DERIVATIVE INSTRUMENTS — The Company manages its risks of purchases and sales, as well as natural gas in storage, using a variety of derivative instruments that include forward contracts, swap agreements, options contracts and futures contracts.  These contracts are measured at fair value and recorded in Derivatives — Energy Related Assets or Derivatives — Energy Related Liabilities on the condensed consolidated balance sheets. The consolidated net unrealized pre-tax gain of $71.9 million and $17.8 million were recorded in earnings during the three months ended September 30, 2008 and 2007, respectively.  For the nine months ended September 30, 2008 and 2007, the net unrealized pre-tax gain of $2.1 million and $8.8 million, respectively were recorded in earnings.  These unrealized gains and losses are included with realized gains and losses in Operating Revenues – Nonutility.

 
SJI - 9

 
 



As part of its gas purchasing strategy, SJG uses financial contracts through SJRG to hedge against forward price risk. The costs or benefits of these short-term contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause, subject to BPU approval. As of September 30, 2008 and December 31, 2007, SJG had $13.9 million and $2.1 million of costs, respectively, included in its BGSS related to open financial contracts.

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

The differential to be paid or received as a result of these swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense. As of September 30, 2008 and December 31, 2007, the net unrealized loss on these swaps was $3.1 million and $2.5 million, respectively. The market value represents the amount SJI would have to pay the counterparty to terminate these contracts as of those dates. For selected interest rate derivatives, the market value upon termination can be recovered in rates and has therefore been included in Other Regulatory Assets in the condensed consolidated balance sheets in accordance with FAS 71 “Accounting for the Effects of Certain Types of Regulation.” The remaining interest rate derivatives have been designated as cash flow hedges.

GAS EXPLORATION AND DEVELOPMENT - The Company capitalizes all costs associated with gas property acquisition, exploration and development activities under the full cost method of accounting. Capitalized costs include costs related to unproved properties, which are not amortized until proved reserves are found or it is determined that the unproved properties are impaired. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. As of September 30, 2008, $5.6 million related to the acquisition of interests in proved and unproved properties in Pennsylvania is included with Nonutility Property and Equipment on the condensed consolidated balance sheets.

TREASURY STOCK – SJI uses the par value method of accounting for treasury stock. As of September 30, 2008, SJI held 145,776 shares of treasury stock. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.

NEW ACCOUNTING PRONOUNCEMENTS — In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” to provide clarification of the application of FAS 157 in a market that is not active and to provide an example to illustrate key considerations in determining the fair value of a financial asset in such a non-active market. This statement was effective in fiscal years beginning after November 15, 2007. However for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, FAS 157 is effective in fiscal years beginning after November 15, 2008.  The adoption of the initial phase of this statement did not have a material effect on the Company’s condensed consolidated financial statements. Management does not anticipate that the adoption of the remainder of this statement will have a material effect on the Company’s condensed consolidated financial statements.

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

 
SJI - 10

 
 


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

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

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

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

In September 2008, the FASB issued FASB Staff Position (FSP) No. 133-1 and FIN 45-4 “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.”  The FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. The provisions of the FSP that amend Statement 133 and Interpretation 45 are effective for reporting periods (annual or interim) ending after November 15, 2008. Management is currently evaluating the impact that the adoption of this position will have on the Company’s condensed consolidated financial statements.

CORRECTION IN THE PRESENTATION OF THE STATEMENT OF CASH FLOWS - The following items represent corrections made to the nine months ended September 30, 2007 on the statements of condensed consolidated cash flows:

 
·
Cash flows related to merchandise loans to customers for the purpose of attracting conversions to natural gas heating systems should have been classified under the caption Cash Flows from Investing Activities on the statements of condensed consolidated cash flows. Accordingly, cash outflows for loans originated of $2.7 million and cash inflows from the principal collection on these loans of $3.0 million during the nine months ended September 30, 2007 are now included within Cash Flows from Investing Activities. The overall net impact resulted in an insignificant amount of Cash Flows from Operating Activities for the nine months ended September 30, 2007 now being included within Cash Flows from Investing Activities.

 
SJI - 11

 
 


 
·
Cash flows related to unused loan proceeds that are held in restricted escrow accounts were incorrectly presented on a net basis with the cash flows related to the restricted margin account that is used to support the Company’s risk management activities within Cash Flows from Investing Activities on the statements of condensed consolidated cash flows. Accordingly, purchases of restricted investments with unused loan proceeds of $0.1 million during the nine months ended September 30, 2007 are now included in Purchase of Restricted Investments with Escrowed Loan Proceeds and proceeds from the sale of these restricted investments of $4.2 million during the nine months ended September 30, 2007 are now included in Proceeds from Sale of Restricted Investments from Escrowed Loan Proceeds.  The cash flows related to the restricted margin account remain in Net Proceeds from Sale of Restricted Investments in Margin Account. This change had no overall impact on total Cash Flows from Investing Activities on the statements of condensed consolidated cash flows. 

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

2.           STOCK-BASED COMPENSATION PLAN:

Under the Amended and Restated 1997 Stock-Based Compensation Plan, no more than 2,000,000 shares in the aggregate may be issued to SJI's officers (Officers), non-employee directors (Directors) and other key employees. The plan will terminate on January 26, 2015, unless terminated earlier by the Board of Directors. No options were granted or outstanding during the nine months ended September 30, 2008 and 2007. No stock appreciation rights have been issued under the plan. During the nine months ended September 30, 2008 and 2007, SJI granted 45,241 and 44,106 restricted shares to Officers and other key employees, respectively.   These restricted shares vest over a three-year period and are subject to SJI achieving certain market based performance targets as compared to a peer group average, which can cause the actual amount of shares that ultimately vest to range from between 0% to 150% of the original share units granted. During the nine months ended September 30, 2008, SJI granted 8,667 restricted shares to Directors. Shares issued to Directors vest over a three-year service period but contain no performance conditions. As a result, 100% of the shares granted generally vest.

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

The following table summarizes the nonvested restricted stock awards outstanding at September 30, 2008 and the assumptions used to estimate the fair value of the awards:

 
Grant
 
Shares
 
Fair Value
 
Expected
 
Risk-Free
 
Date
 
Outstanding
 
Per Share
 
Volatility
 
Interest Rate
                     
 Officers & Key Employees -
Jan. 2006
 
35,310
 
$
27.950
 
16.9%
 
4.5%
 
Jan. 2007
 
38,624
 
$
29.210
 
18.5%
 
4.9%
 
Jan. 2008
 
44,479
 
$
34.030
 
21.7%
 
2.9%
                     
 Directors -
Dec. 2005
 
6,340
 
$
29.970
 
-
 
-
 
Dec. 2006
 
9,261
 
$
34.020
 
-
 
-
 
Jan. 2008
 
8,667
 
$
36.355
       

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

 
SJI - 12

 
 


The following table summarizes the total compensation cost for the three and nine months ended September 30, 2008 and 2007 (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Officers & Key Employees
 
$
286
   
$
249
   
$
858
   
$
747
 
Directors
   
67
     
52
     
201
     
156
 
Total Cost
   
353
     
301
     
1,059
     
903
 
                                 
Capitalized
   
(37
)
   
(28
)
   
(112
)
   
(81
)
Net Expense
 
$
316
   
$
273
   
$
947
   
$
822
 

As of September 30, 2008, there was $2.0 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 1.9 years.

The following table summarizes information regarding restricted stock award activity during the nine months ended September 30, 2008 excluding accrued dividend equivalents:

   
Officers & Other
Key Employees
 
Directors
 
Weighted Average
Grant Date
Fair Value
             
Nonvested Shares Outstanding, January 1, 2008
   
76,657
 
15,601
 
$
29.245
Granted
   
45,241
 
8,667
   
34.404
Forfeited
   
(3,485
)
-
   
29.801
Nonvested Shares Outstanding, September 30, 2008
   
118,413
 
24,268
 
$
31.181
                 
 
During the nine months ended September 30, 2008 and 2007, SJI awarded 51,838 shares, which had vested at December 31, 2007, at a market value of $1.9 million and 69,781 shares, which had vested at December 31, 2006, at a market value of $2.3 million, respectively. The Company has a policy of issuing new shares to satisfy its obligations under these plans; therefore, there are no cash payment requirements resulting from the normal operation of this plan. However, a change in control could result in such shares becoming nonforefeitable or immediately payable in cash.  At the discretion of the Officers, Directors and other key employees, the receipt of vested shares can be deferred until future periods.  These deferred shares are included in Treasury Stock on the condensed consolidated balance sheets.

3.           DISCONTINUED OPERATIONS:

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

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

 
SJI - 13

 
 


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

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2008
   
2007
   
2008
   
2007
 
Loss before Income Taxes:
                     
Sand Mining
$
(22
)
 
$
(37
)
 
$
(73
)
 
$
(316
)
Fuel Oil
 
(95
)
   
(13
)
   
(83
)
   
(32
)
Income Tax Benefits
 
41
     
17
     
55
     
113
 
Loss from Discontinued Operations — Net
$
(76
)
 
$
(33
)
 
$
(101
)
 
$
(235
)
Earnings Per Common Share from
                             
Discontinued Operations — Net:
                             
Basic
$
(0.002
)
 
$
(0.001
)
 
$
(0.004
)
 
$
(0.008
)
Diluted
$
(0.003
)
 
$
(0.001
)
 
$
(0.004
)
 
$
(0.008
)

 4.           COMMON STOCK:

The following shares were issued and outstanding at September 30:

   
2008
 
Beginning Balance, January 1
   
29,607,802
 
New Issues During Period:
       
Dividend Reinvestment Plan
   
60,390
 
Stock-Based Compensation Plan
   
60,505
 
Ending Balance, September 30
   
29,728,697
 

The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $1.9 million, was recorded in Premium on Common Stock.
 
EARNINGS PER COMMON SHARE — Basic EPS is based on the weighted-average number of common shares outstanding. EPS is presented in accordance with FASB Statement No. 128, “Earnings Per Share,” which establishes standards for computing and presenting basic and diluted EPS.    The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 136,718 and 108,703 shares for the three months ended September 30, 2008 and 2007, respectively, and 129,124 and 112,199 shares for the nine months ended September 30, 2008 and 2007, respectively These shares relate to SJI’s restricted stock as discussed in Note 2.

DIVIDEND REINVESTMENT PLAN (DRP) — Through April 2008, shares of common stock offered through the DRP have been new shares issued directly by SJI. Beginning in April 2008, shares of common stock offered by the DRP have been purchased in open market transactions. 

5.            RESTRICTED INVESTMENTS:

In accordance with the terms of the Marina and certain SJG loan agreements, unused proceeds are required to be escrowed pending approved construction expenditures. As of September 30, 2008 and December 31, 2007, the escrowed proceeds, including interest earned, totaled $6.5 million.

SJRG maintains a margin account with a national investment firm to support its risk management activities. The balance required to be held in this margin account increases as the net value of the outstanding energy related financial contracts with this investment firm decreases.  As of September 30, 2008, the balance in this account was $11.2 million. As of December 31, 2007, the Company was holding $4.1 million in a margin account received from this investment firm as the value of the related financial contracts had increased. The balance as of December 31, 2007 is reflected in Margin Account Liability on the condensed consolidated balance sheets.

 
SJI - 14

 
 

6.           SEGMENTS OF BUSINESS:

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

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
 2008
   
2007
   
2008
   
2007
   
Operating Revenues:
                         
Gas Utility Operations
 
$
64,563
   
$
84,421
   
$
396,038
   
$
458,280
   
Wholesale Gas Operations
   
79,828
     
18,176
     
76,225
     
55,059
   
Retail Gas and Other Operations
   
37,670
     
29,393
     
138,635
     
128,126
   
Retail Electric Operations
   
15,313
     
13,502
     
48,876
     
39,079
   
On-Site Energy Production
   
14,123
     
11,419
     
37,092
     
30,601
   
Appliance Service Operations
   
4,891
     
4,228
     
14,100
     
11,924
   
Corporate & Services
   
4,139
     
3,203
     
13,135
     
9,989
   
Subtotal
   
220,527
     
164,342
     
724,101
     
733,058
   
Intersegment Sales
   
(10,114
)
   
(8,114
)
   
(29,801
)
   
(36,744
)
 
Total Operating Revenues
 
$
210,413
   
$
156,228
   
$
694,300
   
$
696,314
   
                                   
Operating Income:
                                 
Gas Utility Operations
 
$
1,184
   
$
2,190
   
$
58,613
   
$
59,637
   
Wholesale Gas Operations
   
72,122
     
14,319
     
34,474
     
27,624
   
Retail Gas and Other Operations
   
322
     
164
     
2,311
     
108
   
Retail Electric Operations
   
619
     
412
     
1,656
     
1,789
   
On-Site Energy Production
   
4,094
     
2,925
     
9,030
     
7,049
   
Appliance Service Operations
   
752
     
602
     
1,780
     
531
   
Corporate and Services
   
234
     
255
     
1,088
     
498
   
Total Operating Income
 
$
79,327
   
$
20,867
   
$
108,952
   
$
97,236
   
                                   
Depreciation and Amortization:
                                 
Gas Utility Operations
 
$
7,804
   
$
7,305
   
$
23,283
   
$
21,751
   
Wholesale Gas Operations
   
28
     
2
     
59
     
5
   
Retail Gas and Other Operations
   
4
     
4
     
13
     
9
   
Appliance Services Operations
   
73
     
74
     
227
     
206
   
On-Site Energy Production
   
784
     
724
     
2,289
     
2,225
   
Corporate and Services
   
111
     
31
     
312
     
185
   
Total Depreciation and Amortization
 
$
8,804
   
$
8,140
   
$
26,183
   
$
24,381
   
                                   
Interest Charges:
                                 
Gas Utility Operations
 
$
4,586
   
$
5,371
   
$
14,179
   
$
15,403
   
Wholesale Gas Operations
   
201
     
563
     
407
     
1,758
   
Retail Gas and Other Operations
   
3
     
19
     
111
     
155
   
On-Site Energy Production
   
905
     
913
     
2,515
     
2,707
   
Corporate and Services
   
317
     
1,036
     
942
     
2,906
   
               Subtotal
   
6,012
     
7,902
     
18,154
     
22,929
   
Intersegment Borrowings
   
(267
)
   
(936
)
   
(908
)
   
(2,806
)
 
Total Interest Charges
 
$
5,745
   
$
6,966
   
$
17,246
   
$
20,123
   
                                   
Property Additions:
                                 
Gas Utility Operations
 
$
13,900
   
$
12,040
   
$
37,171
   
$
36,333
   
Wholesale Gas Operations
   
1,359
     
330
     
4,697
     
330
   
Retail Gas and Other Operations
   
0
     
18
     
0
     
49
   
Appliance Service Operations
   
5
     
29
     
25
     
173
   
On-Site Energy Production
   
1,340
     
1,334
     
2,581
     
4,734
   
Corporate and Services
   
(664
)
   
230
     
44
     
883
   
Total Property Additions
 
$
15,940
   
$
13,981
   
$
44,518
   
$
42,502
   


 
SJI - 15

 
 

 

   
September 30,
 2008
   
December 31,
2007
 
             
Identifiable Assets:
           
Gas Utility Operations
 
$
1,251,540
   
$
1,227,162
 
Wholesale Gas Operations
   
203,955
     
142,848
 
Retail Gas and Other Operations
   
32,913
     
42,735
 
Retail Electric Operations
   
9,177
     
7,082
 
On-Site Energy Production
   
129,707
     
124,982
 
Appliance Service Operations
   
17,276
     
16,060
 
Discontinued Operations
   
2,164
     
2,604
 
Corporate and Services
   
86,126
     
58,274
 
Subtotal
   
1,732,858
     
1,621,747
 
Intersegment Assets
   
(99,547
)
   
(92,306
)
Total Identifiable Assets
 
$
1,633,311
   
$
1,529,441
 

7.           RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU.  In August 2008 the BPU approved the statewide funding of the New Jersey Clean Energy Program (NJCEP) of $1.2 billion for the years 2009 through 2012.  Of this amount, SJG will be responsible for the collection and remittance of approximately $41.5 million over the four year period to the State.  This mechanism recovers costs associated with SJG’s energy efficiency and renewable energy programs.  NJCEP adjustments affect revenue and cash flows but do not directly affect earnings as related cost are deferred and recovered through rates on an on-going basis.

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

8.           REGULATORY ASSETS & REGULATORY LIABILITIES:

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

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

   
September 30,
2008
   
December 31,
2007
 
Environmental Remediation Costs:
           
Expended - Net 
 
$
43,930
   
$
25,960
 
Liability for Future Expenditures
   
71,161
     
73,880
 
Income Taxes-Flowthrough Depreciation
   
2,974
     
3,707
 
Deferred Asset Retirement Obligation Costs
   
21,942
     
21,572
 
Deferred Pension and Other Postretirement Benefit Costs
   
32,422
     
32,686
 
Interest Rate Swaps
   
1,413
     
-
 
Deferred Gas Costs and Revenues - Net
   
10,913
     
-
 
Temperature Adjustment Clause Receivable
   
399
     
6,516
 
Conservation Incentive Program Receivable
   
23,543
     
18,173
 
Societal Benefit Costs Receivable
   
601
     
2,952
 
Premium for Early Retirement of Debt
   
1,248
     
1,370
 
Other Regulatory Assets
   
2,197
     
1,872
 
                 
            Total Regulatory Assets
 
$
212,743
   
$
188,688
 


 
SJI - 16

 
 


Regulatory Liabilities consisted of the following items (in thousands):
 
   
September 30,
2008
   
December 31,
2007
 
Excess Plant Removal Costs
 
$
48,814
   
$
48,705
 
Liability for NJCEP
   
1,672
     
2,797
 
Deferred Gas Costs and Revenues - Net
   
-
     
2,586
 
Other
   
1,850
     
1,691
 
                 
Total Regulatory Liabilities
 
$
52,336
   
$
55,779
 
 
DEFERRED GAS COSTS AND REVENUES — NET — Over/under collections of gas costs are monitored through SJG’s Basic Gas Supply Service Clause mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge SJG’s natural gas purchases are also included in the BGSS, subject to BPU approval. Deferred gas costs and revenues-net shifted from a $2.6 million liability at December 31, 2007 to a $10.9 million asset at September 30, 2008. A change in the fair value of SJG’s energy related derivatives accounted for $11.8 million of the fluctuation.

9.           PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended September 30, 2008 and 2007, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):

 
Pension Benefits
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Service Cost
 
$
800
   
$
738
   
$
2,399
   
$
2,593
 
Interest Cost
   
2,080
     
1,737
     
6,240
     
6,049
 
Expected Return on Plan Assets
   
(2,605
)
   
(2,201
)
   
(7,814
)
   
(7,817
)
Amortizations:
                               
Prior Service Cost
   
73
     
64
     
219
     
229
 
Actuarial Loss
   
402
     
448
     
1,206
     
1,482
 
Net Periodic Benefit Cost
   
750
     
786
     
2,250
     
2,536
 
Capitalized Benefit Costs
   
(263
)
   
(266
)
   
(788
)
   
(900
)
Total Net Periodic Benefit Expense
 
$
487
   
$
520
   
$
1,462
   
$
1,636
 
                                 
 
Other Postretirement Benefits
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Service Cost
 
$
242
   
$
225
   
$
726
   
$
756
 
Interest Cost
   
739
     
618
     
2,217
     
2,077
 
Expected Return on Plan Assets
   
(549
)
   
(482
)
   
(1,646
)
   
(1,620
)
Amortizations:
                               
Prior Service Credits
   
(89
)
   
(82
)
   
(266
)
   
(275
)
Actuarial Loss
   
186
     
139
     
558
     
469
 
Net Periodic Benefit Cost
   
529
     
418
     
1,589
     
1,407
 
Capitalized Benefit Costs
   
(188
)
   
(145
)
   
(563
)
   
(525
)
Total Net Periodic Benefit Expense
 
$
341
   
$
273
   
$
1,026
   
$
882
 

Capitalized benefit costs reflected in the table above relate to SJG’s construction program.

During February 2008, SJI contributed $5.9 million to its pension plans.  No contribution was made during the nine months ended September 30, 2007.  SJI does not expect to make additional contributions to its employee pension plans in 2008.

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

 
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10.          RETAINED EARNINGS:

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004 that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.2 million. SJG’s total common equity balance was $392.6 million at September 30, 2008.

Various loan agreements also contain potential restrictions regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of September 30, 2008, these loan restrictions did not affect the amount that may be distributed from either SJG’s or SJI’s retained earnings.

11.
UNUSED LINES OF CREDIT:

Bank credit available to SJI totaled $403.0 million at September 30, 2008, of which $225.7 million, inclusive of $66.6 million of letters of credit, was used. Those bank facilities consist of a $100.0 million revolving credit facility, a $10.0 million line of credit and $53.0 million of uncommitted bank lines available to SJG; and a $200.0 million revolving credit facility and $40.0 million of uncommitted bank lines available to SJI. The revolving credit facilities expire in August 2011. All of the facilities contain one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis. SJI and SJG were in compliance with this covenant as of September 30, 2008. Borrowings under these credit facilities are at market rates. The weighted average borrowing cost, which changes daily, was 3.62% and 5.64% at September 30, 2008 and 2007, respectively.

In June 2008, SJG used $25.0 million of the revolving credit facility to repurchase its outstanding auction-rate Series A 2006 Bonds at par. Those bonds were remarketed to the public in August 2008 as variable rate demand bonds with liquidity support provided by a letter of credit from a commercial bank as discussed in Note 12. The related borrowings under the revolver were repaid at that time.  Material terms of the original bonds, such as the 2036 maturity date, floating rate interest that resets weekly, and a first mortgage collateral position, remain unchanged.
 
12.           COMMITMENTS AND CONTINGENCIES:

GUARANTEES — The Company has recorded a liability of $2.0 million in Other Noncurrent Liabilities on the condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007 for the fair value of the following guarantees:

·      In April 2007, SJI guaranteed certain obligations of LVE Energy Partners, LLC (LVE) an unconsolidated joint venture in which Marina has a 50% equity interest.  LVE entered into a 25-year contract with a resort developer to design, build, own and operate a district energy system and central energy center for a planned resort in Las Vegas, Nevada.  LVE began construction of the facility in 2007 and expected to provide full energy services in 2010 when the resort was originally scheduled to be completed.  However, the developer of the resort recently announced that it was delaying construction of the project due to the difficult environment in the capital markets and weak economic conditions.  The developer has indicated that they are considering different strategies to move the project forward, including opening the project in phases and obtaining a partner, but that it was unlikely construction would resume during 2009.

As of September 30, 2008, the Company had approximately $0.4 million included in Investment in Affiliates on the condensed consolidated balance sheets related to this project and an unsecured Note Receivable – Affiliate of approximately $2.3 million due from LVE. The district energy system and central energy center are being financed by LVE with debt that is non-recourse to SJI and includes a guaranty by the developer of certain fixed payments to be made under the Energy Sales Agreement until the project begins commercial operations. LVE is currently in discussions with the banks that are financing the energy facilities regarding a plan to address the developer’s construction delay. Those discussions include a revised timetable and funding schedule for the completion of construction of the energy facilities, and the potential contribution of additional equity. SJI is obligated to invest at least $30.0 million of equity during the construction period as discussed below and may invest up to an additional $9.0 million.  SJI's risk of loss is limited to its equity contribution and the unsecured Note Receivable.

 
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SJI has issued a performance guaranty for up to $180.0 million to the resort developer to ensure that certain construction milestones relating to the development of the thermal facility are met. Concurrently, SJI is the beneficiary of a surety bond purchased by the project’s general contractor that provides SJI with assurance that construction of the thermal facility will meet those same milestones. Those milestones are currently being revised due to delays announced by the project developer. In addition, SJI has guaranteed the obligations of LVE under certain insurance policies during the construction period.  The maximum amount that SJI could be obligated for, in the event that LVE does not have sufficient resources to make deductible payments on future claims under these insurance policies, is approximately $6.0 million.  SJI has also guaranteed certain performance obligations of LVE under the operating agreements between LVE and the resort, up to $20.0 million each year for the term of the agreement, commencing with the first year of operations.  SJI and the partner in this joint venture have entered into reimbursement agreements that secure reimbursement for SJI of a proportionate share of any payments made by SJI on these guarantees.  

·      In August 2007, SJI guaranteed certain obligations of BC Landfill Energy, LLC (BCLE), an unconsolidated joint venture in which Marina has a 50% equity interest. BCLE has entered into a 20-year agreement with a county government to lease and operate a facility that will produce electricity from landfill methane gas. The facility went online in the fourth quarter of 2007. Although unlikely, the maximum amount that SJI could be obligated for, in the event that BCLE does not meet minimum specified levels of operating performance and no mitigating action is taken, or is unable to meet certain financial obligations as they become due, is approximately $4.0 million each year.  SJI and the partner in this joint venture have entered into reimbursement agreements that secure reimbursement for SJI of a proportionate share of any payments made by SJI on these guarantees.  
 
CAPITAL CONTRIBUTION OBLIGATION — In December 2007, Marina and its joint venture partner agreed to each contribute approximately $30.0 million of equity to LVE as part of its construction period financing. LVE will initially use bank and bond financing to fund project construction and then expects to use contributed equity to complete the project. Marina’s obligation is secured by an irrevocable letter of credit from a bank. In the event of a default by LVE on its financing arrangements, the partners may be required to make the equity contributions prior to the end of the construction period.   

STANDBY LETTERS OF CREDIT — As of September 30, 2008, SJI provided $66.6 million of standby letters of credit through SJI’s revolving credit facility. Letters of credit in the amount of $62.3 million support variable-rate demand bonds issued through the New Jersey Economic Development Authority (NJEDA) to finance Marina’s initial thermal plant project. The additional outstanding letters of credit total $4.3 million, and were posted to enable SJE to market retail electricity and for various construction activities. The Company also provided two additional letters of credit under separate facilities outside of the revolving credit facility. Those letters of credit consist of a $25.3 million letter of credit provided by SJG to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG’s natural gas distribution system as discussed in Note 11; and a $30.7 million letter of credit provided by Marina to support a capital contribution obligation as discussed above. These letters of credit expire in August 2009 and November 2010, respectively.

ENVIRONMENTAL REMEDIATION COSTS — SJI incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also accrued costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage. There have been no changes to the status of the Company’s environmental remediation efforts since December 31, 2007 as described in Note 14 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2007.   However, the lower end of the range of expected remediation costs, which is recorded as a liability on the condensed consolidated balance sheets, has decreased $2.7 million since December 31, 2007.  This decrease is the result of expenditures of $20.9 million during 2008 and revised forecasts of expected remediation costs for all sites as additional information has become available.

 
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13.            FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

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

For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category as of September 30, 2008 is as follows (in thousands):

   
Total