SJI-9.30.12-10Q

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, 2012
OR
o
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o
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      o
Non-accelerated filer     o (Do not check if a smaller reporting company)
 
Smaller reporting company      o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
As of November 1, 2012 there were 31,262,570 shares of the registrant’s common stock outstanding.




TABLE OF CONTENTS
 
 
PageNo.
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 


Table of Contents

Item 1. Unaudited Condensed Consolidated Financial Statements
 
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
 
 
Three Months Ended
September 30,
 
2012
 
2011
Operating Revenues:
 
 
 
Utility
$
53,999

 
$
58,208

Nonutility
57,978

 
79,413

Total Operating Revenues
111,977

 
137,621

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
20,801

 
27,242

 - Nonutility
49,748

 
79,413

Operations
25,817

 
24,002

Maintenance
3,570

 
3,414

Depreciation
10,602

 
9,023

Energy and Other Taxes
1,494

 
1,673

Total Operating Expenses
112,032

 
144,767

Operating Loss
(55
)
 
(7,146
)
 
 
 
 
Other Income and Expense
4,359

 
2,586

Interest Charges
(5,981
)
 
(6,242
)
Loss Before Income Taxes
(1,677
)
 
(10,802
)
Income Taxes
2,576

 
6,034

Equity in Earnings (Loss) of Affiliated Companies
1,265

 
(435
)
Income (Loss) from Continuing Operations
2,164

 
(5,203
)
(Loss) Income from Discontinued Operations - (Net of tax benefit or expense)
(151
)
 
65

Net Income (Loss)
$
2,013

 
$
(5,138
)
 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.070

 
$
(0.173
)
Discontinued Operations
(0.005
)
 
0.002

Basic Earnings Per Common Share
$
0.065

 
$
(0.171
)
 
 
 
 
Average Shares of Common Stock Outstanding - Basic
30,861

 
30,029

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.070

 
$
(0.173
)
Discontinued Operations
(0.005
)
 
0.002

Diluted Earnings Per Common Share
$
0.065

 
$
(0.171
)
 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
30,945

 
30,029

 
 
 
 
Dividends Declared per Common Share
$
0.403

 
$
0.365

 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


1

Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
 
 
Nine Months Ended September 30,
 
2012
 
2011
Operating Revenues:
 
 
 
Utility
$
292,257

 
$
297,567

Nonutility
216,465

 
332,453

Total Operating Revenues
508,722

 
630,020

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
127,352

 
137,924

 - Nonutility
169,584

 
294,309

Operations
80,015

 
74,187

Maintenance
10,133

 
9,638

Depreciation
30,691

 
26,528

Energy and Other Taxes
7,237

 
9,094

Total Operating Expenses
425,012

 
551,680

Operating Income
83,710

 
78,340

 
 
 
 
Other Income and Expense
9,890

 
12,963

Interest Charges
(16,669
)
 
(18,457
)
Income Before Income Taxes
76,931

 
72,846

Income Taxes
(12,236
)
 
(19,480
)
Equity in Earnings (Loss) of Affiliated Companies
2,512

 
(493
)
Income from Continuing Operations
67,207

 
52,873

Loss from Discontinued Operations - (Net of tax benefit)
(785
)
 
(484
)
Net Income
$
66,422

 
$
52,389

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
2.203

 
$
1.765

Discontinued Operations
(0.025
)
 
(0.016
)
Basic Earnings Per Common Share
$
2.178

 
$
1.749

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
30,502

 
29,961

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
2.197

 
$
1.760

Discontinued Operations
(0.026
)
 
(0.016
)
Diluted Earnings Per Common Share
$
2.171

 
$
1.744

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
30,591

 
30,045

 
 
 
 
Dividends Declared per Common Share
$
1.209

 
$
1.095

 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


2

Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
September 30,
 
2012
 
2011
Net Income (Loss)
$
2,013

 
$
(5,138
)
 
 
 
 
Other Comprehensive Income (Loss), Net of Tax:*
 

 
 

 
 
 
 
Unrealized Gain (Loss) on Available-for-Sale Securities
205

 
(478
)
Unrealized Gain (Loss) on Derivatives - Other
67

 
(814
)
Other Comprehensive Income of Affiliated Companies
364

 
666

 
 
 
 
Other Comprehensive Income (Loss) - Net of Tax*
636

 
(626
)
 
 
 
 
Comprehensive Income (Loss)
$
2,649

 
$
(5,764
)
 

 
Nine Months Ended September 30,
 
2012
 
2011
Net Income
$
66,422

 
$
52,389

 
 
 
 
Other Comprehensive Income (Loss), Net of Tax:*
 
 
 
 
 
 
 
Unrealized Gain (Loss) on Available-for-Sale Securities
420

 
(581
)
Unrealized Loss on Derivatives - Other
(158
)
 
(757
)
Other Comprehensive Loss of Affiliated Companies
(1,598
)
 
(167
)
 
 
 
 
Other Comprehensive Loss - Net of Tax*
(1,336
)
 
(1,505
)
 
 
 
 
Comprehensive Income
$
65,086

 
$
50,884


* Determined using a combined statutory tax rate of 41%.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3

Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
 
Nine Months Ended September 30,
 
2012
 
2011
Net Cash Provided by Operating Activities
$
62,290

 
$
135,569

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures
(147,759
)
 
(113,993
)
Proceeds from Sale of Property, Plant and Equipment
29

 
3,500

Net Proceeds from Sale of Restricted Investments in Margin Account
9,532

 
743

Investment in Long-Term Receivables
(4,178
)
 
(3,780
)
Proceeds from Long-Term Receivables
5,217

 
4,297

Purchase of Company Owned Life Insurance
(4,547
)
 
(4,352
)
Investment in Affiliate
(35,899
)
 
(23,034
)
Return of Investment in Affiliate

 
1,902

Advances on Notes Receivable - Affiliate
(66,755
)
 
(28,827
)
Repayment of Notes Receivable - Affiliate
11,523

 
39,977

Other
(6,388
)
 
(5,847
)
 
 
 
 
Net Cash Used in Investing Activities
(239,225
)
 
(129,414
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net (Repayments of) Borrowings from Short-Term Credit Facilities
(6,000
)
 
12,150

Proceeds from Issuance of Long-Term Debt
200,000

 

Principal Repayments of Long-Term Debt
(35,000
)
 
(25,000
)
Payments for Issuance of Long-Term Debt
(1,820
)
 
(32
)
Premium for Early Retirement of Debt
(700
)
 

Dividends on Common Stock
(24,452
)
 
(21,866
)
Proceeds from Sale of Common Stock
41,543

 
5,359

Proceeds from Finance Obligation

 
23,482

 
 
 
 
Net Cash Provided by (Used in) Financing Activities
173,571

 
(5,907
)
 
 
 
 
Net (Decrease) Increase in Cash and Cash Equivalents
(3,364
)
 
248

Cash and Cash Equivalents at Beginning of Period
7,538

 
2,363

 
 
 
 
Cash and Cash Equivalents at End of Period
$
4,174

 
$
2,611


The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4

Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
 
September 30,
2012
 
December 31,
2011
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
1,625,431

 
$
1,515,274

Accumulated Depreciation
(373,064
)
 
(357,245
)
Nonutility Property and Equipment, at cost
244,834

 
221,051

Accumulated Depreciation
(34,251
)
 
(26,687
)
 
 
 
 
Property, Plant and Equipment - Net
1,462,950

 
1,352,393

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
7,359

 
6,677

Restricted
9,126

 
18,658

Investment in Affiliates
73,493

 
31,815

 
 
 
 
Total Investments
89,978

 
57,150

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
4,174

 
7,538

Accounts Receivable
137,837

 
135,253

Unbilled Revenues
12,555

 
42,961

Provision for Uncollectibles
(6,995
)
 
(5,337
)
Notes Receivable - Affiliate
38,368

 
2,747

Natural Gas in Storage, average cost
58,965

 
68,823

Materials and Supplies, average cost
2,729

 
2,794

Deferred Income Taxes - Net

 
12,779

Prepaid Taxes
34,099

 
22,303

Derivatives - Energy Related Assets
26,335

 
37,461

Other Prepayments and Current Assets
15,768

 
13,287

 
 
 
 
Total Current Assets
323,835

 
340,609

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
324,161

 
315,221

Derivatives - Energy Related Assets
11,287

 
8,135

Unamortized Debt Issuance Costs
9,107

 
7,009

Notes Receivable-Affiliate
118,272

 
111,946

Contract Receivables
13,553

 
13,280

Other
52,136

 
41,767

 
 
 
 
Total Regulatory and Other Noncurrent Assets
528,516

 
497,358

 
 
 
 
Total Assets
$
2,405,279

 
$
2,247,510

 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5

Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
 
September 30,
2012
 
December 31,
2011
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
38,856

 
$
37,765

Premium on Common Stock
315,760

 
273,303

Treasury Stock (at par)
(181
)
 
(193
)
Accumulated Other Comprehensive Loss
(29,774
)
 
(28,438
)
Retained Earnings
371,135

 
341,677

 
 
 
 
Total Equity
695,796

 
624,114

 
 
 
 
Long-Term Debt
566,400

 
424,213

 
 
 
 
Total Capitalization
1,262,196

 
1,048,327

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
315,400

 
321,400

Current Portion of Long-Term Debt
25,000

 
2,187

Accounts Payable
111,071

 
153,666

Customer Deposits and Credit Balances
25,248

 
24,914

Environmental Remediation Costs
20,224

 
24,721

Taxes Accrued
2,094

 
3,168

Derivatives - Energy Related Liabilities
17,558

 
38,738

Deferred Income Taxes - Net
11,400

 

Deferred Contract Revenues

 
996

Dividends Payable
12,511

 

Interest Accrued
5,241

 
6,408

Pension Benefits
1,240

 
1,275

Other Current Liabilities
5,858

 
10,498

 
 
 
 
Total Current Liabilities
552,845

 
587,971

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities:
 

 
 

Deferred Income Taxes - Net
290,056

 
295,434

Investment Tax Credits
690

 
905

Pension and Other Postretirement Benefits
91,765

 
109,021

Environmental Remediation Costs
75,495

 
69,439

Asset Retirement Obligations
30,322

 
29,430

Derivatives - Energy Related Liabilities
5,952

 
7,367

Derivatives - Other
14,454

 
14,046

Regulatory Liabilities
46,156

 
48,311

Finance Obligation
21,893

 
22,549

Other
13,455

 
14,710

 
 
 
 
Total Deferred Credits and Other Noncurrent Liabilities
590,238

 
611,212

 
 
 
 
Commitments and Contingencies  (Note 11)


 


 
 
 
 
Total Capitalization and Liabilities
$
2,405,279

 
$
2,247,510

 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

6

Table of Contents

 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, Appalachian 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 under warranty via a subcontractor arrangement.

South Jersey Exploration, LLC (SJEX) owns oil, gas and mineral rights in the Marcellus Shale region of Pennsylvania.

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. We eliminate all significant intercompany accounts and transactions. In management’s opinion, the condensed consolidated financial statements reflect all normal and recurring adjustments needed to fairly present SJI’s financial position,operating results and cash flows 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 (SEC), 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 2011 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 $0.7 million and $0.9 million for the three months ended September 30, 2012 and 2011, respectively, and $4.0 million and $5.9 million for the nine months ended September 30, 2012 and 2011, respectively. TEFA, which accounts for the majority of the revenue based taxes, is subject to a planned phase-out, which decreased rates by 25% effective January 1, 2012.
 
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. During the nine months ended September 30, 2012, the Company recorded $1.1 million of impairment charges within Other Income and Expense on the condensed consolidated statement of income due to a reduction in the expected cash flows to be received from certain shallow wells in the Marcellus region. No impairment charges were recorded during the nine months ended September 30, 2011. As of September 30, 2012 and December 31, 2011, $9.0 million and $9.6 million, respectively, related to interests in proved and unproved properties in Pennsylvania, net of amortization, is included with Nonutility Property and Equipment and Other Noncurrent Assets on the condensed consolidated balance sheets.
 
TREASURY STOCK – SJI uses the par value method of accounting for treasury stock. As of September 30, 2012 and December 31, 2011, SJI held 144,864 and 154,718 shares of treasury stock, respectively. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.

7

Table of Contents



INCOME TAXES — Deferred income taxes are provided for all significant temporary differences between the book and taxable bases of assets and liabilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 - “Income Taxes”.  A valuation allowance is established when it is determined that it is more likely than not that a deferred tax asset will not be realized. Investment tax credits related to renewable energy facilities of the non-regulated entities are recognized on the flow through method, which may result in variations in the customary relationship between income taxes and pre-tax income for interim periods.

NEW ACCOUNTING PRONOUNCEMENTS — Other than as described below, no new accounting pronouncement issued or effective during 2011 and 2012 had, or is expected to have, a material impact on the condensed consolidated financial statements.

In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU amends ASC Topic 820 to include a consistent definition of the term “fair value” and set forth common requirements for measuring fair value and disclosing information about fair value measurements in financial statements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance modified the disclosures around fair value, but did not have an impact on the Company's financial statement results.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  This ASU allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with a total for other comprehensive income, and a total amount for comprehensive income.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  In January 2012, the FASB issued ASU 2011-12, Deferral of the Effective Date for the Presentation of Reclassification Adjustments Out of Accumulated Other Comprehensive Income, which defers the provisions related to the presentation of reclassification adjustments. The other portions of the ASU remain unchanged and are effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance did not have an impact on the Company's financial statement results.

In January 2012, the FASB issued ASU 2011-11, Enhanced Disclosure Requirements Concerning Offsetting of Financial Assets and Financial Liabilities. This ASU amends ASC 210-20 to add disclosure requirements in respect of the offsetting of financial assets and financial liabilities. The new guidance is effective for fiscal years beginning on or after January 1, 2013. Management does not anticipate that the adoption of this guidance will have an impact on the Company's financial statement results.

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, 2012 and 2011.  No stock appreciation rights have been issued under the plan. During the nine months ended September 30, 2012 and 2011, SJI granted 40,955 and 40,711 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 and earnings-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. Grants containing market-based performance targets have been issued in each of the last three years and use SJI's total shareholder return (TSR) relative to a peer group to measure performance. Beginning with 2012, grants containing earnings-based targets have also been issued. These new grants are based on SJI's earnings per share (EPS) growth rate relative to a peer group to measure performance. During the nine months ended September 30, 2012 and 2011, SJI granted 9,904 and 12,220 restricted shares, respectively, to Directors.  Shares issued to Directors in 2010 and 2011 vest over a three-year service period and contain no performance conditions. Shares issued to Directors in 2012 vest over twelve months and 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, 2011 for the related accounting policy.


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The following table summarizes the nonvested restricted stock awards outstanding at September 30, 2012 and the assumptions used to estimate the fair value of the awards:

 
Grant Date
 
Shares Outstanding
 
Fair Value Per Share
 
Expected Volatility
 
Risk-Free Interest Rate
Officers & Key Employees -
Jan. 2010 - TSR
 
52,404

 
$
39.020

 
29.0
%
 
1.65
%
 
Jan. 2011 - TSR
 
40,227

 
$
50.940

 
27.5
%
 
1.01
%
 
Jan. 2012 - TSR
 
20,389

 
$
51.230

 
22.5
%
 
0.43
%
 
Jan. 2012 - EPS
 
20,389

 
$
56.930

 
N/A

 
N/A

 

 


 
 
 
 
 
 
Directors -
Jan. 2010
 
11,690

 
$
37.825

 

 

 
Jan. 2011
 
7,332

 
$
52.940

 

 

 
Jan. 2012
 
8,666

 
$
56.580

 

 


Expected volatility is based on the actual 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, 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 fair value of these awards are equal to the market value of the shares on the date of grant.

The following table summarizes the total stock-based compensation cost for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2012
2011
 
2012
 
2011
Officers & Key Employees
$
524

$
467

 
$
1,572

 
$
1,399

Directors
110

110

 
464

 
567

Total Cost
634

577

 
2,036

 
1,966

 
 
 
 
 
 
 
Capitalized
(58
)
(55
)
 
(173
)
 
(165
)
Net Expense
$
576

$
522

 
$
1,863

 
$
1,801


As of September 30, 2012, there was $3.2 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 1.8 years.

The following table summarizes information regarding restricted stock award activity during the nine months ended September 30, 2012, excluding accrued dividend equivalents:

 
Officers &Other Key Employees
 
Directors
 
Weighted
Average
Fair Value
Nonvested Shares Outstanding, January 1, 2012
92,907

 
21,914

 
$
44.112

Granted
40,955

 
9,904

 
$
54.567

Canceled/Forfeited
(453
)
 

 
$
49.430

Vested

 
(4,130
)
 
$
47.919

Nonvested Shares Outstanding, September 30, 2012
133,409

 
27,688

 
$
47.300



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During the nine months ended September 30, 2012 and 2011, SJI awarded 33,322 shares to its Officers and other key employees, which had vested at December 31, 2011, at a market value of $1.9 million, and 69,271 shares, which had vested at December 31, 2010, at a market value of $3.7 million, respectively. Also, during the nine months ended September 30, 2012 and 2011, SJI awarded 9,904 and 12,220 shares to its Directors at a market value of $0.6 million for each period. 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 these plans. However, a change in control could result in such shares becoming nonforfeitable 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 AND AFFILATIONS:

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

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

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

 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
(Loss) Income before Income Taxes:
 
 
 
 
 
 
 
Sand Mining
$
(34
)
 
$
126

 
$
(935
)
 
$
(225
)
Fuel Oil
(198
)
 
(25
)
 
(273
)
 
(519
)
Income Tax Benefits
81

 
(36
)
 
423

 
260

(Loss) Income from Discontinued Operations — Net
$
(151
)
 
$
65

 
$
(785
)
 
$
(484
)
Earnings Per Common Share from
 
 
 
 
 
 
 

Discontinued Operations — Net:
 
 
 
 
 
 
 

Basic
$
(0.005
)
 
$
0.002

 
$
(0.025
)
 
$
(0.016
)
Diluted
$
(0.005
)
 
$
0.002

 
$
(0.026
)
 
$
(0.016
)

AFFILIATIONS — The following affiliated entities are accounted for under the equity method:

Marina and a joint venture partner formed the following entities in which Marina has a 50% equity interest:

LVE Energy Partners, LLC (LVE), which has entered into a contract to design, build, own and operate a district energy system and central energy center for a planned resort in Las Vegas, Nevada.

Energenic – US, LLC (Energenic), which develops and operates on-site, self-contained, energy-related projects.

During the first nine months of 2012 and 2011, the Company made investments in, and provided net advances to, unconsolidated affiliates of $91.1 million and $10.0 million, respectively. The purpose of these investments and advances was to acquire two district energy systems in Hartford, Connecticut, and to develop landfill gas-fired electric production facilities, solar and thermal energy projects, and to cover certain project related costs of LVE (See Note 11).  As of September 30, 2012 and December 31, 2011, the outstanding balance on these Notes Receivable – Affiliate was $156.6 million and $114.7 million, respectively. Approximately $101.0 million of these notes are secured by property, plant and equipment of the affiliates, accrue interest at 7.5% and are to be repaid through 2025. The remaining $55.6 million of these notes are unsecured, and are either non-interest bearing or accrue interest at variable rates and are to be repaid when the affiliate secures permanent financing.


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SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of September 30, 2012, the Company had a net asset of approximately $71.6 million included in Investment in Affiliates and Other Noncurrent Liabilities on the condensed consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliate as discussed above. SJI’s maximum exposure to loss from these entities as of September 30, 2012 is limited to its combined equity contributions and the Notes Receivable-Affiliate in the amount of $231.2 million.

SJI and a joint venture partner formed Potato Creek, LLC (Potato Creek) in which SJI has a 30% equity interest.  Potato Creek owns and manages the oil, gas and mineral rights of certain real estate in Pennsylvania.

In April 2012, Energenic acquired The Energy Network, LLC, a holding company for the Hartford Steam Company, TEN Companies and CNE Power I, LLC, for approximately $50.5 million. In conjunction with the acquisition, Marina made a capital contribution to Energenic of $7.6 million and provided $35.4 million of advances which are expected to be repaid by Energenic when permanent financing is obtained.

4.
COMMON STOCK:

The following shares were issued and outstanding at September 30:

 
2012
Beginning Balance, January 1
30,212,453

New Issues During Period:
 

Dividend Reinvestment Plan
827,115

Stock-Based Compensation Plan
43,226

Ending Balance, September 30
31,082,794


The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $42.5 million was recorded in Premium on Common Stock.

EARNINGS PER COMMON SHARE (EPS) — Basic EPS is based on the weighted-average number of common shares outstanding.  The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 83,897 for the three months ended September 30, 2012, and 89,060 and 84,072 shares for the nine months ended September 30, 2012 and 2011, respectively. For the three months ended September 30, 2011, incremental shares of 76,257 were not included in the denominator for the diluted EPS calculation because they would have an antidilutive effect on EPS. These shares relate to SJI’s restricted stock as discussed in Note 2.


DIVIDEND REINVESTMENT PLAN (DRP) —The Company offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. From April 2008 through April 2011, shares of common stock offered by the DRP have been purchased in open market transactions.  Beginning in May 2011, shares of common stock offered by the DRP have been issued directly by SJI from its authorized but unissued shares of common stock. The Company raised $41.5 million and $5.4 million of equity capital through the DRP during the nine months ended September 30, 2012 and 2011, respectively.

5.
FINANCIAL INSTRUMENTS:

RESTRICTED INVESTMENTS — In accordance with the terms of certain Marina and SJG loan agreements, unused proceeds are required to be escrowed pending approval of construction expenditures. As of both September 30, 2012 and December 31, 2011, the escrowed proceeds, including interest earned, totaled $1.3 million.


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Table of Contents

The Company maintains margin accounts with selected counterparties to support its risk management activities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy related contracts with the respective counterparties decrease. As of September 30, 2012 and December 31, 2011, the balances in these accounts totaled $7.8 million and $17.3 million, respectively. The carrying amounts of the Restricted Investments approximate their fair values at September 30, 2012 and December 31, 2011, which would be included in Level 1 of the fair value hierarchy (See Note 13 - Fair Value of Financial Assets and Financial Liabilities).

LONG-TERM RECEIVABLES — SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources.  The terms of these loans call for customers to make monthly payments over a period of up to five years with no interest.  The carrying amounts of such loans were $12.8 million and $11.7 million as of September 30, 2012 and December 31, 2011, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Contract Receivables on the condensed consolidated balance sheets. The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amount of $1.2 million as of both September 30, 2012 and December 31, 2011.  The annual amortization to interest is not material to the Company’s condensed consolidated financial statements.  The carrying amounts of these receivables approximate their fair value at September 30, 2012 and December 31, 2011, which would be included in Level 2 of the fair value hierarchy (See Note 13 - Fair Value of Financial Assets and Financial Liabilities).

CREDIT RISK - As of September 30, 2012, approximately $10.1 million, or 26.8%, of the current and noncurrent Derivatives – Energy Related Assets are with a single retail counterparty. This counterparty has contracts with a large number of diverse customers which minimizes the concentration of this risk. A portion of these contracts may be assigned to SJI in the event of a default by the counterparty.

FINANCE OBLIGATION - During 2010, ACB Energy Partners LLC (ACB), a wholly-owned subsidiary of Energenic, of which Marina has a 50% equity interest, completed construction of a combined heat and power generating facility to serve, under an energy services agreement, a thermal plant owned by Marina. Construction period financing was provided by Marina. Due to its continuing involvement in the facility, Marina is considered the owner of the facility for accounting purposes. As a result, the Company included costs to construct the facility within Nonutility Property, Plant and Equipment on the condensed consolidated balance sheets of $23.6 million and $23.5 million as of September 30, 2012 and December 31, 2011, respectively. In addition, the Company includes repayments from ACB to Marina on the construction loan within the Finance Obligation on the condensed consolidated balance sheets. Marina does not have a fixed payment obligation to ACB; as a result, the Finance Obligation is classified as a noncurrent liability on the condensed consolidated balance sheets. The costs to construct the facility and the repayments of the construction loan are amortized over the term of the energy services agreement. The impact on the condensed consolidated statements of income is not significant. As a result, the Company recorded $21.9 million and $22.5 million, net of amortization, within Finance Obligation on the condensed consolidated balance sheets at September 30, 2012 and December 31, 2011, respectively.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE - The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. The carrying amounts of SJI's financial instruments that are not carried at fair value, including those financial instruments disclosed in this footnote, approximate their fair values at September 30, 2012 and December 31, 2011, except as noted below.
For Long-Term Debt, in estimating the fair value, we use the present value of remaining cash flows at the balance sheet date. We based the estimates on interest rates available to SJI at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy, see Note 13 - Fair Value of Financial Assets and Financial Liabilities). The estimated fair values of SJI's long-term debt, including current maturities, as of September 30, 2012 and December 31, 2011, were $706.6 million and $533.4 million, respectively.  The carrying amounts of SJI's long-term debt, including current maturities, as of September 30, 2012 and December 31, 2011, was $591.4 million and $426.4 million, respectively.


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Table of Contents

6.
SEGMENTS OF BUSINESS:

SJI operates in several different reportable operating segments which reflect the financial information regularly evaluated by the chief operating decision maker. Gas Utility Operations (SJG) consists primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Energy Operations include SJRG’s and SJEX'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 under warranty via a subcontractor arrangement as well as on a time and materials basis, and the installation of residential and small commercial HVAC systems.  The Retail Energy Operations caption includes Retail Gas and Other, Retail Electric, On-Site Energy Production and Appliance Service Operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.  Intersegment sales and transfers are treated as if the sales or transfers were to third parties at current market prices.

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

 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Operating Revenues:
 
 
 
 
 
 
 
Gas Utility Operations
$
54,251

 
$
58,482

 
$
292,864

 
$
303,992

Wholesale Energy Operations
(1,601
)
 
(5,274
)
 
15,570

 
49,472

Retail Energy Operations:
 
 
 
 
 
 
 
Retail Gas and Other Operations
18,841

 
20,582

 
50,633

 
80,866

Retail Electric Operations
28,918

 
51,305

 
117,470

 
165,458

On-Site Energy Production
12,621

 
11,049

 
29,878

 
30,700

Appliance Service Operations
3,048

 
3,720

 
9,908

 
12,308

Subtotal Retail Energy Operations
63,428

 
86,656

 
207,889

 
289,332

Corporate & Services
6,973

 
5,788

 
20,018

 
17,822

Subtotal
123,051

 
145,652

 
536,341

 
660,618

Intersegment Sales
(11,074
)
 
(8,031
)
 
(27,619
)
 
(30,598
)
Total Operating Revenues
$
111,977

 
$
137,621

 
$
508,722

 
$
630,020


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Table of Contents


 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Operating (Loss) Income:
 

 
 

 
 
 
 
Gas Utility Operations
$
2,950

 
$
2,860

 
$
69,270

 
$
68,418

Wholesale Energy Operations
(4,380
)
 
(9,379
)
 
3,449

 
1,716

Retail Energy Operations:
 
 
 
 
 
 
 
Retail Gas and Other Operations
(515
)
 
(150
)
 
(1,062
)
 
564

Retail Electric Operations
1,300

 
(888
)
 
11,354

 
5,953

On-Site Energy Production
440

 
578

 
786

 
2,945

Appliance Service Operations
(189
)
 
(321
)
 
(408
)
 
(1,143
)
Subtotal Retail Energy Operations
1,036

 
(781
)
 
10,670

 
8,319

Corporate and Services
339

 
154

 
321

 
(113
)
Total Operating (Loss) Income
$
(55
)
 
$
(7,146
)
 
$
83,710

 
$
78,340


 
 
 
 
 
 
 
Depreciation and Amortization:
 

 
 

 
 
 
 
Gas Utility Operations
$
11,209

 
$
10,463

 
$
33,301

 
$
31,141

Wholesale Energy Operations
56

 
64

 
173

 
198

Retail Energy Operations:
 
 
 
 
 
 
 
Retail Gas and Other Operations
18

 
8

 
49

 
25

On-Site Energy Production
2,469

 
1,185

 
7,195

 
3,288

Appliance Service Operations
74

 
86

 
236

 
235

Subtotal Retail Energy Operations
2,561

 
1,279

 
7,480

 
3,548

Corporate and Services
170

 
159

 
505

 
498

Total Depreciation and Amortization
$
13,996

 
$
11,965

 
$
41,459

 
$
35,385


 
 
 
 
 
 
 
Interest Charges:
 

 
 

 
 
 
 
Gas Utility Operations
$
3,872

 
$
4,539

 
$
11,832

 
$
14,463

Wholesale Energy Operations
42

 
4

 
200

 
26

Retail Energy Operations:
 
 
 
 
 
 
 
Retail Gas and Other Operations
49

 
46

 
100

 
157

On-Site Energy Production
1,464

 
1,799

 
3,698

 
4,325

Subtotal Retail Energy Operations
1,513

 
1,845

 
3,798

 
4,482

Corporate and Services
1,349

 
777

 
2,907

 
1,961

Subtotal
6,776

 
7,165

 
18,737

 
20,932

Intersegment Borrowings
(795
)
 
(923
)
 
(2,068
)
 
(2,475
)
Total Interest Charges
$
5,981

 
$
6,242

 
$
16,669

 
$
18,457


 
 
 
 
 
 
 
Income Taxes:
 

 
 

 
 
 
 
Gas Utility Operations
$
258

 
$
(699
)
 
$
23,122

 
$
22,412

Wholesale Energy Operations
(1,673
)
 
(3,547
)
 
1,280

 
1,473

Retail Energy Operations:
 
 
 
 
 
 
 
Retail Gas and Other Operations
(214
)
 
(59
)
 
(120
)
 
479

Retail Electric Operations
531

 
(363
)
 
4,638

 
2,432

On-Site Energy Production
(1,499
)
 
(1,621
)
 
(16,729
)
 
(9,278
)
Appliance Service Operations
(70
)
 
163

 
(124
)
 
1,796

Subtotal Retail Energy Operations
(1,252
)
 
(1,880
)
 
(12,335
)
 
(4,571
)
Corporate and Services
91

 
92

 
169

 
166

Total Income Tax (Benefit) Expense
$
(2,576
)
 
$
(6,034
)
 
$
12,236

 
$
19,480


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Table of Contents


 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Property Additions:
 
 
 
 
 
 
 
Gas Utility Operations
$
37,263

 
$
38,792

 
$
118,139

 
$
97,868

Wholesale Energy Operations
1

 
53

 
13

 
83

Retail Energy Operations:
 
 
 
 
 
 
 
Retail Gas and Other Operations
74

 
3

 
177

 
18

On-Site Energy Production
11,517

 
5,510

 
22,519

 
20,807

Appliance Service Operations
1

 
111

 
3

 
244

Subtotal Retail Energy Operations
11,592

 
5,624

 
22,699

 
21,069

Corporate and Services
1,503

 
24

 
3,162

 
406

Total Property Additions
$
50,359

 
$
44,493

 
$
144,013

 
$
119,426


 
September 30, 2012
 
December 31, 2011
Identifiable Assets:
 
 
 
Gas Utility Operations
$
1,699,399

 
$
1,615,723

Wholesale Energy Operations
141,427

 
159,424

Retail Energy Operations:
 
 
 
Retail Gas and Other Operations
15,710

 
14,659

Retail Electric Operations
21,259

 
31,225

On-Site Energy Production
259,311

 
275,053

Appliance Service Operations
8,131

 
11,335

Subtotal Retail Energy Operations
304,411

 
332,272

Discontinued Operations
98

 
224

Corporate and Services
271,360

 
156,252

Intersegment Assets
(11,416
)
 
(16,385
)
Total Identifiable Assets
$
2,405,279

 
$
2,247,510



15

Table of Contents

7.
RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). In May 2012, SJG filed a petition requesting the approval of a new Energy Efficiency Program (“EEP II”). The petition requests the approval to continue its Energy Efficiency Tracker (“EET”) to recover all costs associated with the EEP II through a $3.1 million increase in annual revenues. These programs provide customers with increased incentives to reduce their natural gas consumption. This petition is currently pending.

In September 2012, the BPU approved the 2010 and 2011 Annual EET true-up filings resulting in a $4.7 million increase in annual revenues, effective October 1, 2012.

In June 2012, SJG filed a petition requesting a continuation of the Energy Efficiency Program (“EEP I”) to bridge the gap between the expiration of the EEP I program on April 30, 2012 and the implementation of the proposed new EEP II program. This petition was approved by the BPU in August 2012. Also in June, SJG filed its annual EET rate adjustment petition requesting a $5.8 million increase in annual revenues to recover the costs associated with its EEP I program. This petition is still pending.

Also in June 2012, SJG filed its annual Basic Gas Supply Service (“BGSS”) and Conservation Incentive Program (“CIP”) petition with the BPU. This petition requested a $27.0 million reduction in annual revenues for the BGSS and a $30.4 million increase in annual revenues for the CIP. Provisional rates were approved for both clauses by the BPU in September 2012, with rates commencing on October 1, 2012.

In July 2012, SJG filed a petition to implement a five-year, $250.0 million Accelerated Infrastructure Replacement Program (“AIRP”). SJG proposed spending an incremental $50.0 million per year on the accelerated replacement of its cast iron and bare steel main and service infrastructure and is seeking a return on program investments as it had under prior Capital Investment Recovery Tracker ("CIRT") programs. This petition is still pending.

In October 2012, SJG filed a petition requesting a $13.2 million increase in annual CIRT revenues which would result from rolling portions of CIRT I, II and CIRT III investments into base rates effective January 1, 2013. This petition is currently pending.

There have been no other significant regulatory actions or changes to SJG's rate structure since December 31, 2011. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K as of December 31, 2011.

8.
REGULATORY ASSETS & REGULATORY LIABILITIES:

There have been no significant changes to the nature of the Company’s regulatory assets and liabilities since December 31, 2011 which are described in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2011.


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Table of Contents

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

 
September 30, 2012
 
December 31, 2011
Environmental Remediation Costs:
 
 
 
Expended - Net
$
40,773

 
$
45,815

Liability for Future Expenditures
91,512

 
89,984

Deferred Asset Retirement Obligation Costs
25,477

 
25,162

Deferred Pension and Other Postretirement Benefit Costs
88,340

 
88,624

Deferred Gas Costs - Net
4,638

 
22,441

Conservation Incentive Program Receivable
33,924

 
13,580

Societal Benefit Costs Receivable
11,827

 
8,618

Premium for Early Retirement of Debt
416

 
537

Deferred Interest Rate Contracts
8,365

 
8,146

Energy Efficiency Tracker
12,974

 
8,464

Other Regulatory Assets
5,915

 
3,850

 
 
 
 
Total Regulatory Assets
$
324,161

 
$
315,221


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

 
September 30, 2012
 
December 31, 2011
Excess Plant Removal Costs
$
46,150

 
$
47,230

Other Regulatory Liabilities
6

 
1,081

 
 
 
 
Total Regulatory Liabilities
$
46,156

 
$
48,311


CONSERVATION INCENTIVE PROGRAM (CIP) RECEIVABLE – The increase in this receivable is primarily the result of unusually warm weather experienced in the region during the first nine months of 2012. The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. 

DEFERRED GAS COSTS – NET – Over/under collections of gas costs are monitored through SJG’s BGSS clause.  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 natural gas purchases are also included in the BGSS, subject to BPU approval.  The BGSS decreased from a $22.4 million regulatory asset at December 31, 2011 to a $4.6 million regulatory asset at September 30, 2012, primarily due to gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first nine months of 2012, as a result of natural gas prices remaining at very low levels.




17

Table of Contents

9.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended September 30, 2012 and 2011, 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,
 
2012

2011
 
2012
 
2011
Service Cost
$
1,133

 
$
979

 
$
3,400

 
$
2,938

Interest Cost
2,406

 
2,381

 
7,217

 
7,143

Expected Return on Plan Assets
(2,585
)
 
(2,342
)
 
(7,756
)
 
(7,026
)
Amortizations:
 
 
 

 
 
 
 
Prior Service Cost
63

 
67

 
188

 
200

Actuarial Loss
1,907

 
1,360

 
5,722

 
4,080

Net Periodic Benefit Cost
2,924

 
2,445

 
8,771

 
7,335

Early Retirement Incentive Program Costs (ERIP)

 

 

 
102

Capitalized Benefit Costs
(1,306
)
 
(906
)
 
(3,513
)
 
(2,718
)
Total Net Periodic Benefit Expense
$
1,618

 
$
1,539

 
$
5,258

 
$
4,719


 
Other Postretirement Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2012

2011
 
2012
 
2011
Service Cost
$
259

 
$
249

 
$
777

 
$
747

Interest Cost
750

 
800

 
2,251

 
2,400

Expected Return on Plan Assets
(526
)
 
(562
)
 
(1,579
)
 
(1,686
)
Amortizations:
 
 
 

 
 
 
 
Prior Service Credits
(71
)
 
(89
)
 
(213
)
 
(266
)
Actuarial Loss
431

 
414

 
1,293

 
1,241

Net Periodic Benefit Cost
843

 
812

 
2,529

 
2,436

Capitalized Benefit Costs
(374
)
 
(302
)
 
(1,005
)
 
(907
)
Total Net Periodic Benefit Expense
$
469

 
$
510

 
$
1,524

 
$
1,529


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

The ERIP costs reflected in the table above relate to an early retirement plan offered during 2011 to one of our business segments.

SJI contributed $25.0 million to the pension plans in January 2012. No contributions were made to the pension plans during the nine months ended September 30, 2011. Payments related to the unfunded supplemental executive retirement plan (SERP) plan are expected to approximate $1.3 million in 2012. SJG also has a regulatory obligation to contribute approximately $3.6 million annually to the other postretirement benefit plans’ trusts, less direct costs incurred.

See Note 12 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2011, for additional information related to SJI’s pension and other postretirement benefits.



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10.
UNUSED LINES OF CREDIT:
 
Credit facilities and available liquidity as of September 30, 2012 were as follows (in thousands):

Company

Total Facility

Usage

Available Liquidity

Expiration Date
SJG:

 

 

 

 
Commercial Paper Program/Revolving Credit Facility

$
200,000


$
137,900


$
62,100


May 2015
Uncommitted Bank Lines (B)

10,000




10,000


August 2013












Total SJG

210,000


137,900


72,100


 












SJI:

 

 

 

 









Revolving Credit Facility

$
300,000


$
159,500


$
140,500


April 2015 (A)
Term Line of Credit (C)

50,000


50,000




November 2013












Total SJI

350,000


209,500


140,500


 












Total
 
$
560,000

 
$
347,400

 
$
212,600

 
 

(A) Includes letters of credit outstanding in the amount of $32.0 million.

(B) SJG reduced the uncommitted bank lines by $10.0 million during 2012.
(C) In June 2012, SJI increased its term line of credit by $20.0 million, which matures in November 2013.
The SJG facilities are restricted as to use and availability specifically to SJG; however, if necessary, the SJI facilities can also be used to support SJG’s liquidity needs. Borrowings under these credit facilities are at market rates. The weighted average interest rate on these borrowings, which changes daily, was 0.97% and 1.08% at September 30, 2012 and 2011, respectively. Average borrowings outstanding under these credit facilities, not including letters of credit, during the nine months ended September 30, 2012 and 2011 were $366.7 million and $209.2 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the nine months ended September 30, 2012 and 2011 were $462.2 million and $271.4 million, respectively.

The SJI and SJG facilities are provided by a syndicate of banks and contain one financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreements) to not more than 0.65 to 1, measured at the end of each fiscal quarter. SJI and SJG were in compliance with this covenant as of September 30, 2012.

During the third quarter of 2011, SJG began a commercial paper program under which SJG may issue short-term, unsecured promissory notes to qualified investors up to a maximum aggregate amount outstanding at any time of $200.0 million.  The notes  have fixed maturities which vary by note, but may not exceed 270 days from the date of issue. Proceeds from the notes are used for general corporate purposes.  SJG uses the commercial paper program in tandem with the $200.0 million revolving credit facility and does not expect the principal amount of borrowings outstanding under the commercial paper program and the credit facility at any time to exceed an aggregate of $200.0 million.


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11.
COMMITMENTS AND CONTINGENCIES:

GUARANTEES — The Company has recorded a liability of $1.9 million which is included in Other Noncurrent Liabilities with a corresponding increase in Investment in Affiliates on the condensed consolidated balance sheets as of September 30, 2012 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 service in 2010 when the resort was originally scheduled to be completed.  LVE suspended construction of the district energy system and central energy center in January 2009 after the resort developer’s August 2008 announcement that it was delaying the completion of construction of the resort due to the difficult environment in the capital markets and weak economic conditions.  The resort developer had indicated that it was considering different strategies to move its project forward, including opening its project in phases and obtaining a partner, but that it was unlikely construction would resume during 2009.  In August 2012, the resort developer, repeating previous disclosures, indicated again that it does not expect to resume construction on the project for three to five years.  The resort developer stated that it remains committed to having a significant presence on the Las Vegas Strip as part of a long-term growth strategy and continues to view this site as a major strategic asset.

The district energy system and central energy center are being financed by LVE with debt that is non-recourse to SJI. The outstanding balance of LVE’s bank debt is approximately $192.2 million as of September 30, 2012.  As a result of the construction delay, the district energy system and central energy center were not completed by the end of 2010 as originally expected. Consequently, the full amount of LVE’s debt became due and payable in December 2010. LVE intends to seek additional financing to complete the facility once construction of the resort resumes, however, as of December 31, 2010, LVE was in default under the financing agreements with the banks.  The Energy Sales Agreement between LVE and the resort developer includes a payment obligation by the resort developer to pay certain fees and expenses to LVE. A portion of this payment obligation is guaranteed to LVE’s lenders by the parent of the resort developer.

In March 2011, LVE reached agreements with (a) the resort developer, that specified the payments to be made by the developer to LVE during the suspension period and provided the developer and its corporate parent with an option to purchase the assets of LVE, and (b) the banks that are financing the energy facilities to address the existing default under the financing agreements. The terms of the March 2011 agreement require the resort developer to pay certain fees and expenses to LVE on a monthly basis beginning in March 2011 until construction of the resort resumes or until the resort developer has exercised its option to purchase the energy facilities from LVE. The monthly payments that are being paid to LVE by the resort developer are expected to be sufficient to reimburse LVE for costs to maintain the energy facilities and to cover debt service costs over time. The resort developer has provided LVE with a $6.0 million letter of credit to support its monthly payment obligation.

The banks that are financing the energy facilities have agreed not to exercise their rights under the financing agreements resulting from the event of default discussed above through December 2013, provided that no additional events of default occur. SJI and its joint venture partner have provided a total of $10.0 million in letters of credit to the banks to support LVE’s obligations, which can be drawn upon by the banks at the end of the existing agreement in December 2013 or upon the occurrence of an event of default by LVE prior to December 2013.

As of September 30, 2012, the Company had a net liability of approximately $1.6 million included in Other Noncurrent Liabilities on the condensed consolidated balance sheets related to this project, in addition to unsecured Notes Receivable – Affiliate of approximately $55.6 million due from LVE. As of September 30, 2012, SJI’s capital at risk is limited to its equity contributions, letters of credit and the unsecured notes receivable totaling approximately $72.2 million. During 2012, SJI provided support to LVE of approximately $1.8 million to cover interest and other project related costs.

As a result of the construction delay, management has evaluated the investment in LVE and concluded that the fair value of this investment continues to be in excess of the carrying value as of September 30, 2012.

SJI has guaranteed certain performance obligations of LVE under the operating agreements between LVE and the resort developer, up to $20.0 million each year for the term of the agreement, commencing with the first year of operations.  SJI and its 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 this guarantee.



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SJI has guaranteed certain obligations of BC Landfill Energy, LLC (BCLE) and WC Landfill Energy, LLC (WCLE), unconsolidated joint ventures in which Marina has a 50% equity interest through Energenic. BCLE and WCLE have entered into agreements ranging from 15-20 years with the respective county governments to lease and operate facilities that will produce electricity from landfill methane gas.  Although unlikely, the maximum amount that SJI could be obligated for, in the event that BCLE and WCLE do not meet minimum specified levels of operating performance and no mitigating action is taken, or are unable to meet certain financial obligations as they become due, is approximately $4.2 million each year.  SJI and its partner in these joint ventures have entered into reimbursement agreements that secure reimbursement for SJI of a proportionate share of any payments made by SJI on these guarantees.  SJI holds variable interests in BCLE and WCLE but is not the primary beneficiary.

In February 2011, ACR Energy Partners, LLC (ACR), a wholly-owned subsidiary of Energenic, of which Marina has a 50% equity interest, entered into a 20 year contract with a developer to build, own and operate a central energy center and energy distribution system for a new hotel, casino and entertainment complex in Atlantic City, New Jersey. The complex commenced operations in April 2012 and as a result, ACR is providing full energy services to the complex. During the nine months ended September 30, 2012, Marina and its joint venture partner each made capital contributions to ACR, through Energenic, of $22.0 million. Marina and its joint venture partner have also agreed to provide a $5.0 million letter of credit to support certain operating performance obligations of ACR under the operating agreements between ACR and the developer. SJI and its 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 to or on behalf of ACR. Remaining capital contributions are not expected to be significant.

In May 2012, UMM Energy Partners, LLC (UMM), a wholly-owned subsidiary of Energenic, of which Marina has a 50% equity interest, entered into a 30 year contract with a public university to build, own and operate a combined heating, cooling and power system for its main campus in New Jersey. The system is expected to be completed during the second half of 2013. Marina and its joint venture partner are each obligated to make capital contributions to UMM, through Energenic, of approximately $10.0 million. As of September 30, 2012, Marina has advanced approximately $8.8 million to UMM, through Energenic, for initial construction costs.  Of this amount, $5.0 million is included in Investment in Affiliates and $3.8 million is included in Notes Receivable - Affiliate on the condensed consolidated balance sheets. In addition, SJI has guaranteed certain obligations of UMM under the operating and lease agreements between UMM and the university, for the terms of the agreements, commencing with the first year of operations. SJI has guaranteed up to $2.2 million for the first year. This amount is adjusted each year based upon the Consumer Price Index. SJI has also guaranteed certain construction obligations of UMM during the construction period, the majority of which are supported by a surety bond. SJI and its 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.

As of September 30, 2012, SJI had issued $5.3 million of guarantees on behalf of an unconsolidated subsidiary. These guarantees generally expire within the next two years and were issued to enable our subsidiary to market retail natural gas.


COLLECTIVE BARGAINING AGREEMENTS — Unionized personnel represent approximately 47.0% of our workforce at September 30, 2012. The Company has collective bargaining agreements with two unions that represent these employees: the International Brotherhood of Electrical Workers (IBEW) Local 1293 and the International Association of Machinists and Aerospace Workers (IAM) Local 76.  SJG and SJESP employees represented by the IBEW operate under a collective bargaining agreement that runs through February 2013, with the option to extend until February 2014 at the union’s election. The remaining unionized employees represented by the IAM operate under a collective bargaining agreement that expires in August 2014.

STANDBY LETTERS OF CREDIT — As of September 30, 2012, SJI provided $32.0 million of standby letters of credit through SJI’s revolving credit facility to enable SJE to market retail electricity and for various construction activities. The Company has also provided $87.6 million of additional letters of credit under separate facilities outside of the revolving credit facility to support variable-rate demand bonds issued through the New Jersey Economic Development Authority (NJEDA) to finance the expansion of SJG’s natural gas distribution system and to finance Marina's initial thermal plant project.  


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PENDING LITIGATION — The Company is subject to claims arising in the ordinary course of business and other legal proceedings. The Company has been named in, among other actions, certain product liability claims related to our former sand mining subsidiary. We accrue liabilities related to these claims when we can reasonably estimate the amount or range of amounts of probable settlement costs or other charges for these claims. The Company has accrued approximately $3.0 million and $2.9 million related to all claims in the aggregate as of September 30, 2012 and December 31, 2011, respectively. Management does not believe that it is reasonably possible that there will be a material change in the Company's estimated liability in the near term and does not currently anticipate the disposition of any known claims that would have a material effect on the Company's financial position, results of operations or cash flows.

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 recorded 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, 2011 as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2011.

12.
DERIVATIVE INSTRUMENTS:

Certain SJI subsidiaries are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. The Company uses a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines.  These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts. As of September 30, 2012, the Company had outstanding derivative contracts intended to limit the exposure to market risk on 23.4 MMdts (1 MMdts = one million decatherms) of expected future purchases of natural gas, 24.1 MMdts of expected future sales of natural gas, 1.0 MMmwh (1 MMmwh = one million megawatt hours) of expected future purchases of electricity and 1.0 MMmwh of expected future sales of electricity.  These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives — Energy Related Assets or Derivatives — Energy Related Liabilities on the condensed consolidated balance sheets. The net unrealized pre-tax gains and losses for these energy related commodity contracts are included with realized gains and losses in Operating Revenues – Nonutility.

The Company has also entered into interest rate derivatives to hedge exposure to increasing interest rates and the impact of those rates on cash flows of variable-rate debt. Some of these derivatives have been designated as hedging instruments under GAAP. Beginning in July 2012, hedge accounting was discontinued for these derivatives. As a result, unrealized gains and losses on these derivatives, that were previously included in Accumulated Other Comprehensive Loss on the condensed consolidated balance sheets, will be reclassified into earnings over the remaining life of the derivative. These derivatives are expected to mature in 2026.

There have been no other significant changes to the Company’s active interest rate swaps since December 31, 2011 which are described in Note 16 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2011.


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Table of Contents

The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
September 30, 2012
 
December 31, 2011
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives – Energy Related – Current
 
$
26,335

 
$
17,558

 
$
37,461

 
$
38,738

Derivatives – Energy Related – Non-Current
 
11,287

 
5,952

 
8,135

 
7,367

Interest rate contracts:
 
 
 
 
 
 

 
 

Derivatives - Other
 

 
14,454

 

 
10,684

Total derivatives not designated as hedging instruments under GAAP
 
37,622

 
37,964

 
45,596

 
56,789

 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments under GAAP
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 

 
 

Derivatives - Other
 

 

 

 
3,362

Total derivatives designated as hedging instruments under GAAP
 

 

 

 
3,362

 
 
 
 
 
 
 
 
 
Total Derivatives
 
$
37,622

 
$
37,964

 
$
45,596

 
$
60,151


The effect of derivative instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2012 and 2011 are as follows (in thousands):

 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships
 
2012
 
2011
 
2012
 
2011
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Gains (losses) recognized in OCI on effective portion
 
$

 
$
(1,765
)
 
$
(752
)
 
$
(2,407
)
Losses reclassified from accumulated OCI into income (a)
 
$
(112
)
 
$
(385
)
 
$
(482
)
 
$
(1,122
)
Gains (losses) recognized in income on ineffective portion (a)
 

 

 

 


(a) Included in Interest Charges

 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
Derivatives Not Designated as Hedging Instruments under GAAP
 
2012
 
2011
 
2012
 
2011
(Losses) gains on energy related commodity contracts (a)
 
$
(3,614
)
 
$
(8,543
)
 
$
6,665

 
$
(2,411
)
Losses on interest rate contracts (b)
 
53

 
(309
)
 
273

 
(298
)
 
 
 
 
 
 
 
 
 
Total
 
$
(3,561
)
 
$
(8,852
)
 
$
6,938

 
$
(2,709
)

(a)  Included in Operating Revenues - Non Utility
(b)  Included in Interest Charges


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Net realized losses associated with SJG’s energy-related financial commodity contracts of $3.0 million and $2.4 million for the three months ended September 30, 2012 and 2011, respectively, and $13.7 million and $9.5 million for the nine months ended September 30, 2012 and 2011, respectively, are not included in the above table. These contracts are part of SJG’s regulated risk management activities that serve to mitigate BGSS costs passed on to its customers. As these transactions are entered into pursuant to, and recoverable through, regulatory riders, any changes in the value of SJG’s energy related financial commodity contracts are deferred in Regulatory Assets or Liabilities and there is no impact to earnings.

Certain of the Company’s derivative instruments contain provisions that require immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions in the event of a material adverse change in the credit standing of the Company. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on September 30, 2012, is $7.4 million.   If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2012, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $3.2 million after offsetting asset positions with the same counterparties under master netting arrangements.

13.
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP 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 is as follows (in thousands):

As of September 30, 2012
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
7,359

 
$
682

 
$
6,677

 
$

Derivatives – Energy Related Assets (C)
37,622

 
13,592

 
16,458

 
7,572