SJI-9.30.13-10Q

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, 2013
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, 2013 there were 32,207,008 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,
 
2013
 
2012
Operating Revenues:
 
 
 
Utility
$
59,302

 
$
53,999

Nonutility
69,506

 
57,978

Total Operating Revenues
128,808

 
111,977

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
24,345

 
20,801

 - Nonutility
64,815

 
49,748

Operations
27,216

 
25,817

Maintenance
3,354

 
3,570

Depreciation
12,826

 
10,602

Energy and Other Taxes
1,458

 
1,494

Total Operating Expenses
134,014

 
112,032

Operating Loss
(5,206
)
 
(55
)
 
 
 
 
Other Income and Expense
2,200

 
4,359

Interest Charges
(4,393
)
 
(5,981
)
Loss Before Income Taxes
(7,399
)
 
(1,677
)
Income Tax Benefit
5,533

 
2,576

Equity in Earnings of Affiliated Companies
645

 
1,265

(Loss) Income from Continuing Operations
(1,221
)
 
2,164

Loss from Discontinued Operations - (Net of tax benefit)
(200
)
 
(151
)
Net (Loss) Income
$
(1,421
)
 
$
2,013

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.04
)
 
$
0.07

Discontinued Operations

 

Basic Earnings Per Common Share
$
(0.04
)
 
$
0.07

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
31,984

 
30,861

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.04
)
 
$
0.07

Discontinued Operations

 

Diluted Earnings Per Common Share
$
(0.04
)
 
$
0.07

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
31,984

 
30,945

 
 
 
 
Dividends Declared per Common Share
$
0.44

 
$
0.40


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,
 
2013
 
2012
Operating Revenues:
 
 
 
Utility
$
298,993

 
$
292,257

Nonutility
208,037

 
216,465

Total Operating Revenues
507,030

 
508,722

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
127,111

 
127,352

 - Nonutility
202,176

 
169,584

Operations
87,862

 
80,015

Maintenance
10,141

 
10,133

Depreciation
36,605

 
30,691

Energy and Other Taxes
6,955

 
7,237

Total Operating Expenses
470,850

 
425,012

Operating Income
36,180

 
83,710

 
 
 
 
Other Income and Expense
8,734

 
9,890

Interest Charges
(12,521
)
 
(16,669
)
Income Before Income Taxes
32,393

 
76,931

Income Tax Benefit (Expense)
9,393

 
(12,236
)
Equity in Earnings of Affiliated Companies
1,246

 
2,512

Income from Continuing Operations
43,032

 
67,207

Loss from Discontinued Operations - (Net of tax benefit)
(699
)
 
(785
)
Net Income
$
42,333

 
$
66,422

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
1.35

 
$
2.20

Discontinued Operations
(0.02
)
 
(0.02
)
Basic Earnings Per Common Share
$
1.33

 
$
2.18

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
31,898

 
30,502

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
1.35

 
$
2.20

Discontinued Operations
(0.02
)
 
(0.03
)
Diluted Earnings Per Common Share
$
1.33

 
$
2.17

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
31,959

 
30,591

 
 
 
 
Dividends Declared per Common Share
$
1.33

 
$
1.21


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,
 
2013
 
2012
Net (Loss) Income
$
(1,421
)
 
$
2,013

 
 
 
 
Other Comprehensive Income, Net of Tax:*
 

 
 

 
 
 
 
Unrealized Gain on Available-for-Sale Securities
221

 
205

Unrealized Gain on Derivatives - Other
66

 
67

Other Comprehensive (Loss) Income of Affiliated Companies
(25
)
 
364

 
 
 
 
Other Comprehensive Income - Net of Tax*
262

 
636

 
 
 
 
Comprehensive (Loss) Income
$
(1,159
)
 
$
2,649

 
 
 
 
 
Nine Months Ended
September 30,
 
2013
 
2012
Net Income
$
42,333

 
$
66,422

 
 
 
 
Other Comprehensive Income (Loss), Net of Tax:*
 
 
 
 
 
 
 
Unrealized (Loss) Gain on Available-for-Sale Securities
(76
)
 
420

Unrealized Gain (Loss) on Derivatives - Other
198

 
(158
)
Other Comprehensive Income (Loss) of Affiliated Companies
5,011

 
(1,598
)
 
 
 
 
Other Comprehensive Income (Loss) - Net of Tax*
5,133

 
(1,336
)
 
 
 
 
Comprehensive Income
$
47,466

 
$
65,086


* 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,
 
2013
 
2012
Net Cash Provided by Operating Activities
$
123,425

 
$
62,290

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures
(192,497
)
 
(147,759
)
Proceeds from Sale of Property, Plant and Equipment
6

 
29

Net (Purchase of) Proceeds from Sale of Restricted Investments in Margin Account
(5,802
)
 
9,532

Purchase of Restricted Investments with Escrowed Loan Proceeds
(47
)
 

Investment in Long-Term Receivables
(5,012
)
 
(4,178
)
Proceeds from Long-Term Receivables
5,376

 
5,217

Purchase of Company Owned Life Insurance
(5,072
)
 
(4,547
)
Investment in Affiliate
(2,973
)
 
(35,899
)
Advances on Notes Receivable - Affiliate
(11,849
)
 
(66,755
)
Repayment of Notes Receivable - Affiliate
94,946

 
11,523

Other

 
(6,388
)
 
 
 
 
Net Cash Used in Investing Activities
(122,924
)
 
(239,225
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net Borrowings from (Repayments of) Short-Term Credit Facilities
38,600

 
(6,000
)
Proceeds from Issuance of Long-Term Debt

 
200,000

Principal Repayments of Long-Term Debt
(25,000
)
 
(35,000
)
Payments for Issuance of Long-Term Debt
(30
)
 
(1,820
)
Premium for Early Retirement of Debt

 
(700
)
Dividends on Common Stock
(28,246
)
 
(24,452
)
Proceeds from Sale of Common Stock
13,931

 
41,543

 
 
 
 
Net Cash (Used in) Provided by Financing Activities
(745
)
 
173,571

 
 
 
 
Net Decrease in Cash and Cash Equivalents
(244
)
 
(3,364
)
Cash and Cash Equivalents at Beginning of Period
4,638

 
7,538

 
 
 
 
Cash and Cash Equivalents at End of Period
$
4,394

 
$
4,174


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,
2013
 
December 31,
2012
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
1,776,502

 
$
1,658,790

Accumulated Depreciation
(388,511
)
 
(373,199
)
Nonutility Property and Equipment, at cost
407,110

 
328,638

Accumulated Depreciation
(47,609
)
 
(36,208
)
 
 
 
 
Property, Plant and Equipment - Net
1,747,492

 
1,578,021

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
8,255

 
7,538

Restricted
23,753

 
17,903

Investment in Affiliates
78,248

 
75,825

 
 
 
 
Total Investments
110,256

 
101,266

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
4,394

 
4,638

Accounts Receivable
192,197

 
195,293

Unbilled Revenues
12,445

 
40,938

Provision for Uncollectibles
(7,112
)
 
(5,924
)
Notes Receivable - Affiliate
9,645

 
39,495

Natural Gas in Storage, average cost
65,437

 
55,517

Materials and Supplies, average cost
2,758

 
2,618

Deferred Income Taxes - Net
21,220

 

Prepaid Taxes
15,597

 
26,187

Derivatives - Energy Related Assets
28,807

 
24,242

Other Prepayments and Current Assets
19,629

 
11,833

 
 
 
 
Total Current Assets
365,017

 
394,837

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
326,727

 
352,656

Derivatives - Energy Related Assets
11,737

 
12,297

Unamortized Debt Issuance Costs
7,632

 
8,226

Notes Receivable-Affiliate
67,613

 
117,188

Contract Receivables
13,880

 
13,985

Other
57,641

 
52,964

 
 
 
 
Total Regulatory and Other Noncurrent Assets
485,230

 
557,316

 
 
 
 
Total Assets
$
2,707,995

 
$
2,631,440

 
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,
2013
 
December 31,
2012
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
39,985

 
$
39,567

Premium on Common Stock
361,578

 
345,807

Treasury Stock (at par)
(170
)
 
(182
)
Accumulated Other Comprehensive Loss
(25,972
)
 
(31,105
)
Retained Earnings
382,056

 
382,127

 
 
 
 
Total Equity
757,477

 
736,214

 
 
 
 
Long-Term Debt
580,400

 
601,400

 
 
 
 
Total Capitalization
1,337,877

 
1,337,614

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
377,500

 
338,900

Current Portion of Long-Term Debt
21,000

 
25,000

Accounts Payable
200,466

 
193,331

Customer Deposits and Credit Balances
20,992

 
17,757

Environmental Remediation Costs
27,064

 
21,026

Taxes Accrued
2,814

 
2,156

Derivatives - Energy Related Liabilities
33,254

 
23,828

Deferred Income Taxes - Net

 
10,812

Dividends Payable
14,155

 

Interest Accrued
5,361

 
6,635

Pension Benefits
1,236

 
1,272

Other Current Liabilities
5,834

 
11,127

 
 
 
 
Total Current Liabilities
709,676

 
651,844

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities:
 

 
 

Deferred Income Taxes - Net
313,716

 
289,489

Investment Tax Credits
424

 
618

Pension and Other Postretirement Benefits
99,712

 
105,168

Environmental Remediation Costs
85,254

 
91,072

Asset Retirement Obligations
40,150

 
39,385

Derivatives - Energy Related Liabilities
22,696

 
5,403

Derivatives - Other
8,106

 
13,462

Regulatory Liabilities
52,219

 
56,517

Finance Obligation
20,893

 
21,646

Other
17,272

 
19,222

 
 
 
 
Total Deferred Credits and Other Noncurrent Liabilities
660,442

 
641,982

 
 
 
 
Commitments and Contingencies  (Note 11)


 


 
 
 
 
Total Capitalization and Liabilities
$
2,707,995

 
$
2,631,440

 
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 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.

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

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

South Jersey Energy Service Plus, LLC (SJESP) services residential and small commercial HVAC systems, provides plumbing services and services appliances under warranty via a subcontractor arrangement as well as on a time and materials basis, and the installation of small commercial HVAC systems.

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 2012 Annual Report on Form 10-K for a more complete discussion of the Company’s accounting policies and certain other information.

Certain reclassifications have been made to the prior period segment disclosures to conform to the current period presentation. In all periods presented, net receivables between the Discontinued Operations segment and the Corporate and Services segment have been reclassified in the Identifiable Assets Segment disclosure in Note 6.

REVENUE AND THROUGHPUT-BASED TAXES — SJG collects certain revenue-based energy taxes from its customers. Such taxes include New Jersey State Sales Tax and Public Utilities Assessment (PUA). SJG also collects a throughput-based energy tax from customers in the form of a Transitional Energy Facility Assessment (TEFA). 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 $0.5 million and $0.7 million for the three months ended September 30, 2013 and 2012, respectively, and $3.4 million and $4.0 million for the nine months ended September 30, 2013 and 2012, respectively. The TEFA is subject to a planned phase-out which decreased the assessment in increments of 25% in 2012 and 2013 and is eliminated after December 31, 2013.
 
IMPAIRMENT OF LONG-LIVED ASSETS - We review the carrying amount of long-lived assets for possible impairment whenever events or changes in circumstances indicate that such amounts may not be recoverable. The Company recorded a $1.1 million impairment charge during the nine months ended September 30, 2012 related to certain shallow wells in the Marcellus region as discussed under “Gas Exploration and Development”.  For the nine months ended September 30, 2013, no impairments were identified.


7

Table of Contents

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. No impairment was recorded during the nine months ended September 30, 2013. 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. As of September 30, 2013 and December 31, 2012, $8.9 million and $9.0 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, 2013 and December 31, 2012, SJI held 135,831 and 145,414 shares of treasury stock, respectively. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.

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 Marina 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 2013 and 2012 had, or is expected to have, a material impact on the condensed consolidated financial statements.

In January 2012, the FASB issued Accounting Standards Update (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. In February 2013, the FASB issued ASU 2013-01 Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which amends and clarifies the scope of the balance sheet offsetting disclosures required through ASU 2011-11. The new guidance is effective for fiscal years beginning on or after January 1, 2013. The adoption of this guidance modified the disclosures around derivative instruments, but did not have an impact on the Company's financial statement results.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU expands the disclosure requirements in ASC 220 and requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective lines in net income. The ASU requires an entity to present information about significant items reclassified out of accumulated other comprehensive income by component either on the face of the statement where net income is presented, or as a separate disclosure in the notes to the financial statements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this guidance modified the disclosures around accumulated other comprehensive income, but did not have an impact on the Company's financial statement results.

In July 2013, the FASB issued ASU 2013-11, Balance Sheet Presentation of an Unrecognized Income Tax Benefit for a Net Operating Loss or Tax Credit Carryforward. This ASU provides that a liability related to an unrecognized tax benefit should be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Management does not anticipate that the adoption of this guidance will have an impact on the Company's financial statement results.


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Table of Contents

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, 2013 and 2012.  No stock appreciation rights have been issued under the plan. During the nine months ended September 30, 2013 and 2012, SJI granted 56,464 and 40,955 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, 2013 and 2012, SJI granted 12,285 and 9,904 restricted shares, respectively, to Directors.  Shares issued to Directors in 2011 vest over a three-year service period and contain no performance conditions. Shares issued to Directors in 2012 and 2013 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, 2012 for the related accounting policy.

The following table summarizes the nonvested restricted stock awards outstanding at September 30, 2013 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. 2011 - TSR
 
39,971

 
$
50.94

 
27.5
%
 
1.01
%
 
Jan. 2012 - TSR
 
19,930

 
$
51.23

 
22.5
%
 
0.43
%
 
Jan. 2012 - EPS
 
19,930

 
$
56.93

 
N/A

 
N/A

 
Jan. 2013 - TSR
 
27,426

 
$
44.38

 
21.1
%
 
0.40
%
 
Jan. 2013 - EPS
 
27,426

 
$
51.18

 
N/A

 
N/A

 

 


 
 
 
 
 
 
Directors -
Jan. 2011
 
7,332

 
$
52.94

 

 

 
Jan. 2013
 
12,285

 
$
51.74

 

 


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 requisite 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, 2013 and 2012 (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
2012
 
2013
 
2012
Officers & Key Employees
$
565

$
524

 
$
1,696

 
$
1,572

Directors
191

110

 
574

 
464

Total Cost
756

634

 
2,270

 
2,036

 
 
 
 
 
 
 
Capitalized
(59
)
(58
)
 
(178
)
 
(173
)
Net Expense
$
697

$
576

 
$
2,092

 
$
1,863



9

Table of Contents

As of September 30, 2013, there was $3.2 million of total unrecognized compensation cost related to nonvested stock-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, 2013, excluding accrued dividend equivalents:

 
Officers &Other Key Employees
 
Directors
 
Weighted
Average
Fair Value
Nonvested Shares Outstanding, January 1, 2013
81,005

 
27,688

 
$
51.29

  Granted
56,464

 
12,285

 
$
48.49

  Cancelled/Forfeited
(2,786
)
 

 
$
50.15

  Vested

 
(20,356
)
 
$
45.81

Nonvested Shares Outstanding, September 30, 2013
134,683

 
19,617

 
$
50.58


During the nine months ended September 30, 2013 and 2012, SJI awarded 66,077 shares to its Officers and other key employees, which had vested at December 31, 2012, at a market value of $3.3 million, and 33,322 shares, which had vested at December 31, 2011, at a market value of $1.9 million, respectively. Also, during the nine months ended September 30, 2013 and 2012, SJI awarded 12,285 and 9,904 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,
 
2013
 
2012
 
2013
 
2012
Loss Before Income Taxes:
 
 
 
 
 
 
 
Sand Mining
$
(287
)
 
$
(34
)
 
$
(379
)
 
$
(935
)
Fuel Oil
(22
)
 
(198
)
 
(697
)
 
(273
)
Income Tax Benefits
109

 
81

 
377

 
423

Loss from Discontinued Operations — Net
$
(200
)
 
$
(151
)
 
$
(699
)
 
$
(785
)
Earnings Per Common Share from
 
 
 
 
 
 
 

Discontinued Operations — Net:
 
 
 
 
 
 
 

Basic
$

 
$

 
$
(0.02
)
 
$
(0.02
)
Diluted
$

 
$

 
$
(0.02
)
 
$
(0.03
)


10

Table of Contents

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

Energenic – US, LLC (Energenic) - Marina and a joint venture partner formed Energenic, in which Marina has a 50% equity interest. Energenic develops and operates on-site, self-contained, energy-related projects.

In April 2012, Energenic acquired The Energy Network, LLC, a holding company for the Hartford Steam Company, TEN Companies and CNE Power I, LLC. In conjunction with this acquisition, Marina provided $35.4 million of advances to Energenic, which was repaid by Energenic during the second quarter of 2013 as permanent financing was obtained.

Potato Creek, LLC (Potato Creek) - SJI and a joint venture partner formed 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.

LVE Energy Partners, LLC (LVE) - In March 2013, substantially all of the assets of Marina's joint venture, LVE, an entity in which Marina has a 50% equity interest, were sold. As a result of the transaction, Marina received cash proceeds of $57.6 million. See Note 11.

During the first nine months of 2013 and 2012, the Company made investments in, and provided net advances to, unconsolidated affiliates of $12.9 million and $91.1 million, respectively. These amounts do not include the cash proceeds from LVE and the repayment of the advances to Energenic as discussed above. The purpose of these investments and advances was to cover certain project related costs of affiliates.   As of September 30, 2013 and December 31, 2012, the outstanding balance on these Notes Receivable – Affiliate was $77.3 million and $156.7 million, respectively. Approximately $69.2 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 $8.1 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.

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, 2013, the Company had a net asset of approximately $77.9 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, 2013 is limited to its combined equity contributions and the Notes Receivable-Affiliate in the amount of $157.3 million.

4.
COMMON STOCK:

The following shares were issued and outstanding at September 30:

 
2013
Beginning Balance, January 1
31,653,262

New Issues During the Period:
 

Dividend Reinvestment Plan
256,210

Stock-Based Compensation Plan
78,363

Ending Balance, September 30
31,987,835


The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $15.8 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 61,315 and 89,060 for the nine months ended September 30, 2013 and 2012, respectively. For the three months ended September 30, 2013, incremental shares of 67,196 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.


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Table of Contents

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. 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 $13.9 million and $41.5 million of equity capital through the DRP during the nine months ended September 30, 2013 and 2012, 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 September 30, 2013 and December 31, 2012, the escrowed proceeds, including interest earned, totaled $1.4 million and $1.3 million, respectively.

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, 2013 and December 31, 2012, the balances in these accounts totaled $22.4 million and $16.6 million, respectively. The carrying amounts of the Restricted Investments approximate their fair values at September 30, 2013 and December 31, 2012, 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 $14.0 million and $13.6 million as of September 30, 2013 and December 31, 2012, 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 $1.3 million as of both September 30, 2013 and December 31, 2012.  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, 2013 and December 31, 2012, 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, 2013, approximately $13.5 million, or 33.3%, of the current and noncurrent Derivatives – Energy Related Assets are with two counterparties. One of these counterparties 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. As substantially all of the costs of constructing the facility were funded by the financing provided by Marina, Marina was considered the owner of the facility for accounting purposes during the construction period. When an entity is considered the accounting owner during the construction period, a sale of the asset effectively occurs when construction of the asset is completed. However, due to its continuing involvement in the facility through its equity interest in Energenic, Marina continues to be considered the owner of the facility for accounting purposes under ASC Topic 360 Property, Plant and Equipment. As a result, the transaction is being accounted for as a financing arrangement under ASC Topic 840 Leases and therefore the Company has included costs to construct the facility within Nonutility Property, Plant and Equipment on the condensed consolidated balance sheets of $23.6 million as of both September 30, 2013 and December 31, 2012. In addition, the Company included 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 $20.9 million and $21.6 million, net of amortization, within Finance Obligation on the condensed consolidated balance sheets at September 30, 2013 and December 31, 2012, respectively.


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Table of Contents

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 approximate their fair values at September 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, were $624.7 million and $682.3 million, respectively.  The carrying amounts of SJI's long-term debt, including current maturities, as of September 30, 2013 and December 31, 2012, was $601.4 million and $626.4 million, respectively.

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 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,
 
2013
 
2012
 
2013
 
2012
Operating Revenues:
 
 
 
 
 
 
 
Gas Utility Operations
$
59,674

 
$
54,251

 
$
300,308

 
$
292,864

Wholesale Energy Operations
128

 
(1,601
)
 
(4,354
)
 
15,570

Retail Energy Operations:
 
 
 
 
 
 
 
Retail Gas and Other Operations
19,588

 
18,841

 
78,286

 
50,633

Retail Electric Operations
36,063

 
28,918

 
98,211

 
117,470

On-Site Energy Production
14,254

 
12,621

 
33,313

 
29,878

Appliance Service Operations
2,974

 
3,048

 
9,415

 
9,908

Subtotal Retail Energy Operations
72,879

 
63,428

 
219,225

 
207,889

Corporate & Services
7,126

 
6,973

 
22,968

 
20,018

Subtotal
139,807

 
123,051

 
538,147

 
536,341

Intersegment Sales
(10,999
)
 
(11,074
)
 
(31,117
)
 
(27,619
)
Total Operating Revenues
$
128,808

 
$
111,977

 
$
507,030

 
$
508,722


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Table of Contents


 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
2013
 
2012
 
 
2013
 
2012
Operating (Loss) Income:
 

 
 

 
 
 
 
 
Gas Utility Operations
$
3,285

 
$
2,950

 
 
$
69,149

 
$
69,270

Wholesale Energy Operations
(8,969
)
 
(4,380
)
 
 
(33,326
)
 
3,449

Retail Energy Operations:
 
 
 
 
 
 
 
 
Retail Gas and Other Operations
(125
)
 
(515
)
 
 
(257
)
 
(1,062
)
Retail Electric Operations
(146
)
 
1,300

 
 
(19
)
 
11,354

On-Site Energy Production
111

 
440

 
 
(794
)
 
786

Appliance Service Operations
532

 
(189
)
 
 
1,317

 
(408
)
Subtotal Retail Energy Operations
372

 
1,036

 
 
247

 
10,670

Corporate and Services
106

 
339

 
 
110

 
321

Total Operating (Loss) Income
$
(5,206
)
 
$
(55
)
 
 
$
36,180

 
$
83,710


 
 
 
 
 
 
 
 
Depreciation and Amortization:
 

 
 

 
 
 
 
 
Gas Utility Operations
$
12,476

 
$
11,209

 
 
$
36,429

 
$
33,301

Wholesale Energy Operations
51

 
56

 
 
157

 
173

Retail Energy Operations:
 
 
 
 
 
 
 
 
Retail Gas and Other Operations
21

 
18

 
 
64

 
49

On-Site Energy Production
4,008

 
2,469

 
 
10,978

 
7,195

Appliance Service Operations
47

 
74

 
 
193

 
236

Subtotal Retail Energy Operations
4,076

 
2,561

 
 
11,235

 
7,480

Corporate and Services
207

 
170

 
 
653

 
505

Total Depreciation and Amortization
$
16,810

 
$
13,996

 
 
$
48,474

 
$
41,459


 
 
 
 
 
 
 
 
Interest Charges:
 

 
 

 
 
 
 
 
Gas Utility Operations
$
2,629

 
$
3,872

 
 
$
8,379

 
$
11,832

Wholesale Energy Operations
148

 
42

 
 
233

 
200

Retail Energy Operations:
 
 
 
 
 
 
 
 
Retail Gas and Other Operations
73

 
49

 
 
216

 
100

On-Site Energy Production
1,274

 
1,464

 
 
2,984

 
3,698

Subtotal Retail Energy Operations
1,347

 
1,513

 
 
3,200

 
3,798

Corporate and Services
1,488

 
1,349

 
 
4,208

 
2,907

Subtotal
5,612

 
6,776

 
 
16,020

 
18,737

Intersegment Borrowings
(1,219
)
 
(795
)
 
 
(3,499
)
 
(2,068
)
Total Interest Charges
$
4,393

 
$
5,981

 
 
$
12,521

 
$
16,669


 
 
 
 
 
 
 
 
Income Taxes:
 

 
 

 
 
 
 
 
Gas Utility Operations
$
471

 
$
258

 
 
$
23,511

 
$
23,122

Wholesale Energy Operations
(3,616
)
 
(1,673
)
 
 
(13,307
)
 
1,280

Retail Energy Operations:
 
 
 
 
 
 
 
 
Retail Gas and Other Operations
(72
)
 
(214
)
 
 
148

 
(120
)
Retail Electric Operations
(59
)
 
531

 
 
(8
)
 
4,638

On-Site Energy Production
(2,547
)
 
(1,499
)
 
 
(20,577
)
 
(16,729
)
Appliance Service Operations
232

 
(70
)
 
 
574

 
(124
)
Subtotal Retail Energy Operations
(2,446
)
 
(1,252
)
 
 
(19,863
)
 
(12,335
)
Corporate and Services
58

 
91

 
 
266

 
169

Total Income Tax (Benefit) Expense
$
(5,533
)
 
$
(2,576
)
 
 
$
(9,393
)
 
$
12,236


14

Table of Contents


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Property Additions:
 
 
 
 
 
 
 
Gas Utility Operations
$
46,426

 
$
37,263

 
$
128,232

 
$
118,139

Wholesale Energy Operations
8

 
1

 
42

 
13

Retail Energy Operations:
 
 
 
 

 
 
Retail Gas and Other Operations
7

 
74

 
44

 
177

On-Site Energy Production
55,737

 
11,517

 
73,263

 
22,519

Appliance Service Operations

 
1

 

 
3

Subtotal Retail Energy Operations
55,744

 
11,592

 
73,307

 
22,699

Corporate and Services
706

 
1,503

 
2,570

 
3,162

Total Property Additions
$
102,884

 
$
50,359

 
$
204,151

 
$
144,013


 
September 30, 2013
 
December 31, 2012
Identifiable Assets (See Note 1):
 
 
 
Gas Utility Operations
$
1,857,187

 
$
1,786,459

Wholesale Energy Operations
223,220

 
204,358

Retail Energy Operations:
 
 
 
Retail Gas and Other Operations
32,451

 
39,481

Retail Electric Operations
23,468

 
21,919

On-Site Energy Production
531,202

 
543,416

Appliance Service Operations
2,473

 
3,244

Subtotal Retail Energy Operations
589,594

 
608,060

Discontinued Operations
1,777

 
78

Corporate and Services
323,886

 
337,010

Intersegment Assets
(287,669
)
 
(304,525
)
Total Identifiable Assets
$
2,707,995

 
$
2,631,440



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 January 2013, SJG credited the accounts of SJG's periodic Basic Gas Supply Service (BGSS) customers with refunds totaling $9.4 million due to gas costs that were lower than projected.

In January 2013, the BPU approved an extension of SJG's Energy Efficiency Program (“EEP”) to June 30, 2013 and approved additional investments of up to $2.5 million. In June 2013, the BPU approved a further extension of SJG's EEP through June 2015 and authorized incremental investments totaling $24.0 million. The costs and returns associated with the EEP program investments will continue to be recovered through SJG's Energy Efficiency Tracker (“EET”).

In June 2013, SJG filed its annual EET petition requesting additional revenues to recover the costs of, and its allowed return on, prior investments associated with the EEP programs. This petition is currently pending.

In July 2012, SJG filed a petition with the BPU 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 was seeking a return on program investments as it had under prior Capital Investment Recovery Tracker ("CIRT") programs. SJG's CIRT III program expired on December 31, 2012. In February 2013, the parties executed a Stipulation agreeing to $35.3 million per year of incremental capital spending for four years, totaling $141.2 million under the AIRP. The BPU approved the Stipulation in February 2013.

In March 2013, SJG filed a joint petition with another utility requesting modifications to, and the continuation of, the Conservation Incentive Plan (“CIP”) program. This petition is currently pending.

In May 2013, SJG made its annual BGSS and CIP filing requesting a $17.9 million decrease in annual revenues. Provisional rates were approved by the BPU in September 2013 and effective October 1, 2013.
In June 2013, SJG filed a petition requesting deferral of incremental operating and maintenance expenses incurred due to Superstorm Sandy. These costs totaled $0.7 million and are expected to be recovered in SJG's next base rate case. This petition is currently pending.

In October 2012, SJG filed a petition requesting a $13.2 million increase in annual revenues by rolling $110.6 million of CIRT I, II and III investments into base rates. In May 2013, SJG filed a supplemental petition requesting to roll an additional $6.9 million of CIRT III investments into base rates, for a total annual revenue increase of $15.5 million related to $117.5 million of CIRT investments made since our last base rate case in 2010. The BPU approved the petition in September 2013 with rates effective October 1, 2013.

In September 2013, SJG filed a petition requesting a Storm Hardening and Reliability Program (SHARP), pursuant to which SJG is proposing to invest approximately $280.0 million over seven years to replace low pressure distribution mains and services with high pressure distribution mains and services in coastal areas that are susceptible to flooding during major storm events. This petition is currently pending.

There have been no other significant regulatory actions or changes to SJG's rate structure since December 31, 2012. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K as of December 31, 2012.


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Table of Contents

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, 2012 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, 2012.

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

 
September 30, 2013
 
December 31, 2012
Environmental Remediation Costs:
 
 
 
Expended - Net
$
30,189

 
$
37,892

Liability for Future Expenditures
108,236

 
107,410

Deferred Asset Retirement Obligation Costs
30,607

 
30,199

Deferred Pension and Other Postretirement Benefit Costs
95,897

 
95,897

Conservation Incentive Program Receivable
12,573

 
31,686

Societal Benefit Costs Receivable
12,816

 
12,801

Premium for Early Retirement of Debt
976

 
1,075

Deferred Interest Rate Contracts
4,569

 
7,761

Energy Efficiency Tracker
12,263

 
12,306

Pipeline Supplier Service Charges
7,522

 
8,771

Other Regulatory Assets
11,079

 
6,858

 
 
 
 
Total Regulatory Assets
$
326,727

 
$
352,656


CONSERVATION INCENTIVE PROGRAM (CIP) RECEIVABLE – The decrease in this receivable is primarily the result of colder weather experienced in the region during the first half of 2013. The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. 

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

 
September 30, 2013
 
December 31, 2012
Excess Plant Removal Costs
$
41,128

 
$
45,593

Deferred Revenues - Net
8,352

 
10,924

Other Regulatory Liabilities
2,739

 

 
 
 
 
Total Regulatory Liabilities
$
52,219

 
$
56,517

 
DEFERRED REVENUES – NET – Over/under collections of gas costs are monitored through SJG’s BGSS 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 natural gas purchases are also included in the BGSS, subject to BPU approval.  


17

Table of Contents

9.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended September 30, 2013 and 2012, 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,

2013

2012
 
2013
 
2012
Service Cost
$
1,356

 
$
1,133

 
$
4,066

 
$
3,400

Interest Cost
2,360

 
2,406

 
7,079

 
7,217

Expected Return on Plan Assets
(2,979
)
 
(2,585
)
 
(8,936
)
 
(7,756
)
Amortizations:
 
 
 

 
 
 
 
Prior Service Cost
63

 
63

 
188

 
188

Actuarial Loss
2,251

 
1,907

 
6,754

 
5,722

Net Periodic Benefit Cost
3,051

 
2,924

 
9,151

 
8,771

Capitalized Benefit Costs
(1,218
)
 
(1,306
)
 
(3,653
)
 
(3,513
)
Total Net Periodic Benefit Expense
$
1,833

 
$
1,618

 
$
5,498

 
$
5,258


 
Other Postretirement Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013

2012
 
2013
 
2012
Service Cost
$
285

 
$
259

 
$
855

 
$
777

Interest Cost
682

 
750

 
2,047

 
2,251

Expected Return on Plan Assets
(595
)
 
(526
)
 
(1,784
)
 
(1,579
)
Amortizations:
 
 
 

 
 
 
 
Prior Service Credits
(71
)
 
(71
)
 
(213
)
 
(213
)
Actuarial Loss
435

 
431

 
1,304

 
1,293

Net Periodic Benefit Cost
736

 
843

 
2,209

 
2,529

Capitalized Benefit Costs
(286
)
 
(374
)
 
(856
)
 
(1,005
)
Total Net Periodic Benefit Expense
$
450

 
$
469

 
$
1,353

 
$
1,524


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

SJI contributed $12.7 million and $25.0 million to the pension plans in January 2013 and 2012, respectively. No additional contributions are expected to be made to the pension plans during 2013. Payments related to the unfunded supplemental executive retirement plan (SERP) are expected to approximate $1.3 million in 2013. 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, 2012, 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, 2013 were as follows (in thousands):

Company

Total Facility

Usage

Available Liquidity

Expiration Date
SJG:

 

 

 

 
Commercial Paper Program/Revolving Credit Facility

$
200,000


$
110,000


$
90,000


May 2018
Uncommitted Bank Lines

10,000




10,000


August 2014












Total SJG

210,000


110,000


100,000


 












SJI:

 

 

 

 









Revolving Credit Facility

$
400,000


$
245,300


$
154,700


February 2018 (A)
Term Line of Credit

50,000


50,000




November 2015 (B)












Total SJI

450,000


295,300


154,700


 












Total
 
$
660,000

 
$
405,300

 
$
254,700

 
 

(A) Includes letters of credit outstanding in the amount of $27.8 million.
(B) See Note 16 - Subsequent Events.

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 0.98% and 0.97% at September 30, 2013 and 2012, respectively. Average borrowings outstanding under these credit facilities, not including letters of credit, during the nine months ended September 30, 2013 and 2012 were $297.2 million and $366.7 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the nine months ended September 30, 2013 and 2012 were $389.4 million and $462.2 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, 2013.

SJG manages 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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Table of Contents

11.
COMMITMENTS AND CONTINGENCIES:

GUARANTEES — The Company has recorded a liability of $0.3 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, 2013 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 announcement that it was delaying the completion of construction of the resort.

In March 2013, the resort developer purchased substantially all of the assets of LVE. As a result, the guarantees provided by SJI of certain performance obligations of LVE under the operating agreements between LVE and the resort developer were canceled.

During the nine months ended September 30, 2013, the Company received $57.6 million of repayments of advances from LVE. As of September 30, 2013, the Company had remaining unsecured Notes Receivable - Affiliate of approximately $8.1 million due from LVE on the condensed consolidated balance sheets related to this project. During 2013, SJI provided support to LVE of approximately $2.7 million to cover interest and other project related costs.

As a result of the sale of substantially all of the assets, 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, 2013.

SJI and its joint venture partner have guaranteed the repayment of interest rate derivative contracts held by LVE which mature in November 2013. As of September 30, 2013 the amount required to satisfy these contracts is approximately $1.0 million. LVE is expected to have sufficient resources to satisfy these interest rate derivative contracts upon the liquidation of its remaining assets. 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.

SJI has guaranteed certain obligations of WC Landfill Energy, LLC (WCLE) and BC Landfill Energy, LLC (BCLE), unconsolidated joint ventures in which Marina has a 50% equity interest through Energenic. WCLE and BCLE have entered into agreements through 2018 and 2027, respectively, 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 WCLE and BCLE 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 WCLE and BCLE 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. Marina and its joint venture partner have 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.

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 commenced commercial operations in September 2013. 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 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.


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Table of Contents

As of September 30, 2013, 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 44.0% of our workforce at September 30, 2013. 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 employees represented by the IBEW operate under a collective bargaining agreement that runs through February 28, 2017. SJESP employees represented by the IBEW operate under a collective bargaining agreement that runs through February 28, 2014. The remaining unionized employees are represented by the IAM and operate under collective bargaining agreements that expire in August 2014.

STANDBY LETTERS OF CREDIT — As of September 30, 2013, SJI provided $27.8 million of standby letters of credit through SJI’s revolving credit facility to enable SJE to market retail electricity and for various construction and operating 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.  

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 $2.9 million and $3.1 million related to all claims in the aggregate as of September 30, 2013 and December 31, 2012, 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, 2012 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, 2012.


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Table of Contents

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, 2013, the Company has outstanding derivative contracts intended to limit the exposure to market risk on 17.9 MMdts (1 MMdts = one million decatherms) of expected future purchases of natural gas, 20.2 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. In addition to these derivative contracts, the Company has basis and index related purchase and sales contracts totaling 36.2 MMdts.  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. These interest rate derivatives, some of which have been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Other on the condensed consolidated balance sheets. 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, 2012 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, 2012.

The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
September 30, 2013
 
December 31, 2012
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives – Energy Related – Current
 
$
28,807

 
$
33,254

 
$
24,242

 
$
23,828

Derivatives – Energy Related – Non-Current
 
11,737

 
22,696

 
12,297

 
5,403

Interest rate contracts:
 
 
 
 
 
 

 
 

Derivatives - Other - Non-Current
 

 
8,106

 

 
13,462

Total derivatives not designated as hedging instruments under GAAP
 
40,544

 
64,056

 
36,539

 
42,693

 
 
 
 
 
 
 
 
 
Total Derivatives
 
$
40,544

 
$
64,056

 
$
36,539

 
$
42,693



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Table of Contents

The Company enters into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. The Company presents derivatives at gross fair values on the condensed consolidated balance sheets. As of September 30, 2013 and December 31, 2012, information related to these offsetting arrangements were as follows (in thousands):
As of September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Gross amounts of recognized assets/liabilities
 
Gross amount offset in the balance sheet
 
Net amounts of assets/liabilities in balance sheet
 
Gross amounts not offset in the balance sheet
 
Net amount
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
Derivatives - Energy Related Assets
 
$
40,544

 
$

 
$
40,544

 
$
(10,625
)
(A)
$

 
$
29,919

Derivatives - Energy Related Liabilities
 
$
(55,950
)
 
$

 
$
(55,950
)
 
$
10,625

(B)
$
13,952

 
$
(31,373
)
Derivatives - Other
 
$
(8,106
)
 
$

 
$
(8,106
)
 
$

 
$

 
$
(8,106
)

As of December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Gross amounts of recognized assets/liabilities
 
Gross amount offset in the balance sheet
 
Net amounts of assets/liabilities in balance sheet
 
Gross amounts not offset in the balance sheet
 
Net amount
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
Derivatives - Energy Related Assets
 
$
36,539

 
$

 
$
36,539

 
$
(12,975
)
(A)
$

 
$
23,564

Derivatives - Energy Related Liabilities
 
$
(29,231
)
 
$

 
$
(29,231
)
 
$
12,975

(B)
$
6,347

 
$
(9,909
)
Derivatives - Other
 
$
(13,462
)
 
$

 
$
(13,462
)
 
$

 
$

 
$
(13,462
)

(A) The balances at September 30, 2013 and December 31, 2012 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at September 30, 2013 and December 31, 2012 were related to derivative assets which can be net settled against derivative liabilities.

The effect of derivative instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Derivatives in Cash Flow Hedging Relationships
 
2013
 
2012
 
2013
 
2012
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Losses recognized in AOCL on effective portion
 
$

 
$

 
$

 
$