10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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 May 2, 2016 there were 71,425,506 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 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
March 31,
 
2016
 
2015
Operating Revenues:
 
 
 
Utility
$
183,669

 
$
266,530

Nonutility
149,366

 
116,422

Total Operating Revenues
333,035

 
382,952

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
65,206

 
144,974

 - Nonutility
87,769

 
96,733

Operations
38,797

 
41,861

Maintenance
4,384

 
3,998

Depreciation
20,701

 
16,819

Energy and Other Taxes
1,925

 
2,196

Total Operating Expenses
218,782

 
306,581

Operating Income
114,253

 
76,371

 
 
 
 
Other Income and Expense
2,203

 
2,241

Interest Charges
(9,160
)
 
(8,601
)
Income Before Income Taxes
107,296

 
70,011

Income Taxes
(39,267
)
 
(16,613
)
Equity in Earnings of Affiliated Companies
158

 
455

Income from Continuing Operations
68,187

 
53,853

Loss from Discontinued Operations - (Net of tax benefit)
(118
)
 
(276
)
Net Income
$
68,069

 
$
53,577

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.96

 
$
0.79

Discontinued Operations

 

Basic Earnings Per Common Share
$
0.96

 
$
0.79

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
71,127

 
68,397

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.95

 
$
0.79

Discontinued Operations

 

Diluted Earnings Per Common Share
$
0.95

 
$
0.79

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
71,416

 
68,618

 
 
 
 
Dividends Declared Per Common Share
$
0.26

 
$
0.25


The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. All share and per share amounts were adjusted for all periods presented for the 2-for-1 stock split, effected in the form of a stock dividend, effective on May 8, 2015. See Note 1.
 
 
 
 


1

Table of Contents


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
March 31,
 
2016
 
2015
Net Income
$
68,069

 
$
53,577

 
 
 
 
Other Comprehensive Income, Net of Tax:*
 

 
 

 
 
 
 
Unrealized Gain on Available-for-Sale Securities
49

 
88

Unrealized Gain on Derivatives - Other
51

 
8

Other Comprehensive Loss of Affiliated Companies

 
(95
)
 
 
 
 
Other Comprehensive Income - Net of Tax*
100

 
1

 
 
 
 
Comprehensive Income
$
68,169

 
$
53,578

 
 
 
 

* Determined using a combined average statutory tax rate of 40%.

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 CASH FLOWS (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
March 31,
 
2016
 
2015
Net Cash Provided by Operating Activities
$
98,080

 
$
34,936

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures
(67,416
)
 
(54,307
)
Purchase of Available for Sale Securities

 
(6,059
)
Proceeds from Restricted Investments
1,738

 

Net Proceeds from Sale of Restricted Investments in Margin Account
8,906

 
4,829

Investment in Long-Term Receivables
(3,142
)
 
(4,658
)
Proceeds from Long-Term Receivables
2,527

 
1,808

Notes Receivable
(50
)
 

Purchase of Company-Owned Life Insurance
(357
)
 
(356
)
Investment in Affiliate
(3,079
)
 
(717
)
Advances on Notes Receivable - Affiliate

 
(1,265
)
Repayment of Notes Receivable - Affiliate
1,626

 
275

 
 
 
 
Net Cash Used in Investing Activities
(59,247
)
 
(60,450
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net (Repayments of) Borrowings from Short-Term Credit Facilities
(92,200
)
 
26,700

Proceeds from Issuance of Long-Term Debt
61,000

 

Principal Repayments of Long-Term Debt
(12,905
)
 

Proceeds from Sale of Common Stock
5,645

 
1,857

 
 
 
 
Net Cash (Used in) Provided by Financing Activities
(38,460
)
 
28,557

 
 
 
 
Net Increase in Cash and Cash Equivalents
373

 
3,043

Cash and Cash Equivalents at Beginning of Period
3,877

 
4,171

 
 
 
 
Cash and Cash Equivalents at End of Period
$
4,250

 
$
7,214


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 BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
March 31,
2016
 
December 31,
2015
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
2,261,409

 
$
2,211,239

Accumulated Depreciation
(450,001
)
 
(440,473
)
Nonutility Property and Equipment, at cost
784,495

 
785,646

Accumulated Depreciation
(117,737
)
 
(108,307
)
 
 
 
 
Property, Plant and Equipment - Net
2,478,166

 
2,448,105

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
14,960

 
14,810

Restricted
37,893

 
48,758

Investment in Affiliates
20,254

 
16,983

 
 
 
 
Total Investments
73,107

 
80,551

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
4,250

 
3,877

Accounts Receivable
179,662

 
178,359

Unbilled Revenues
47,502

 
40,044

Provision for Uncollectibles
(10,024
)
 
(10,252
)
Notes Receivable
11,819

 
11,800

Notes Receivable - Affiliate
1,508

 
3,134

Natural Gas in Storage, average cost
38,571

 
54,211

Materials and Supplies, average cost
6,762

 
5,088

Prepaid Taxes
11,382

 
21,753

Derivatives - Energy Related Assets
57,815

 
83,093

Other Prepayments and Current Assets
46,863

 
40,167

 
 
 
 
Total Current Assets
396,110

 
431,274

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
356,962

 
323,434

Derivatives - Energy Related Assets
19,489

 
16,238

Notes Receivable - Affiliate
13,275

 
13,275

Contract Receivables
29,039

 
28,609

Notes Receivable
31,888

 
35,439

Goodwill
8,139

 
8,880

Identifiable Intangible Assets
21,850

 
21,553

Other
65,959

 
64,575

 
 
 
 
Total Regulatory and Other Noncurrent Assets
546,601

 
512,003

 
 
 
 
Total Assets
$
3,493,984

 
$
3,471,933

 
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)
 
March 31,
2016
 
December 31,
2015
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
89,048

 
$
88,707

Premium on Common Stock
505,601

 
499,460

Treasury Stock (at par)
(262
)
 
(296
)
Accumulated Other Comprehensive Loss
(24,399
)
 
(24,499
)
Retained Earnings
523,454

 
474,167

 
 
 
 
Total Equity
1,093,442

 
1,037,539

 
 
 
 
Long-Term Debt (See Note 1)
1,046,968

 
997,427

 
 
 
 
Total Capitalization
2,140,410

 
2,034,966

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
339,500

 
431,700

Current Portion of Long-Term Debt
28,604

 
29,454

Accounts Payable
151,006

 
186,400

Customer Deposits and Credit Balances
19,340

 
20,146

Environmental Remediation Costs
55,065

 
50,559

Taxes Accrued
3,737

 
2,336

Derivatives - Energy Related Liabilities
66,370

 
90,708

Dividends Payable
18,790

 

Interest Accrued
6,108

 
7,316

Pension Benefits
2,261

 
2,261

Other Current Liabilities
7,222

 
11,596

 
 
 
 
Total Current Liabilities
698,003

 
832,476

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities:
 

 
 

Deferred Income Taxes - Net
333,572

 
295,945

Pension and Other Postretirement Benefits
77,720

 
76,068

Environmental Remediation Costs
85,263

 
76,064

Asset Retirement Obligations
58,054

 
57,943

Derivatives - Energy Related Liabilities
10,148

 
21,697

Derivatives - Other
13,118

 
10,943

Regulatory Liabilities
55,373

 
42,841

Other
22,323

 
22,990

 
 
 
 
Total Deferred Credits and Other Noncurrent Liabilities
655,571

 
604,491

 
 
 
 
Commitments and Contingencies  (Note 11)


 


 
 
 
 
Total Capitalization and Liabilities
$
3,493,984

 
$
3,471,933

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

5

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 wholly-owned 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, industrial and residential customers.

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

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

Marina Energy, LLC (Marina) develops and operates on-site energy-related projects. The following entities are wholly-owned subsidiaries of Marina as of December 31, 2015 (see Note 3):

ACB Energy Partners, LLC (ACB) owns and operates a natural gas fueled combined heating, cooling and power facility located in Atlantic City, New Jersey.

AC Landfill Energy. LLC (ACLE), BC Landfill Energy, LLC (BCLE), SC Landfill Energy, LLC (SCLE) and SX Landfill Energy, LLC (SXLE) own and operate landfill gas-fired electric production facilities in Atlantic, Burlington, Salem and Sussex Counties located in New Jersey.

MCS Energy Partners, LLC (MCS), NBS Energy Partners, LLC (NBS) and SBS Energy Partners, LLC (SBS) own and operate solar-generation sites located in New Jersey.

South Jersey Energy Service Plus, LLC (SJESP) services residential and small commercial HVAC systems, installs 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.

SJI Midstream, LLC was formed in 2014 to invest in infrastructure and other midstream projects, including a current project to build a 100-mile natural gas pipeline in Pennsylvania and New Jersey.

BASIS OF PRESENTATION — The condensed consolidated financial statements include the accounts of SJI, its wholly-owned subsidiaries and subsidiaries in which SJI has a controlling interest. SJI eliminates 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 2015 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's condensed consolidated balance sheets, as well as the prior period long-term debt carrying value and prior period's segment disclosures in Notes 5 and 6, respectively, to conform to the current period presentation. The unamortized debt issuance costs previously included in "Regulatory and Other Noncurrent Assets" on the condensed consolidated balance sheets were reclassified to Long-Term Debt to conform to ASU 2015-03, which is described below under "New Accounting Pronouncements." This reclassification caused the prior period long-term debt carrying value in Note 5 to be adjusted, along with the prior period unamortized debt issuance costs recorded as Identifiable Assets in the Gas Utility Operations, On-Site Energy Production and Corporate and Services segments in Note 6 to be removed.


6

Table of Contents

On February 26, 2015, the Board of Directors approved an amendment to SJI's Certificate of Incorporation to increase the authorized number of shares of common stock from 60,000,000 shares to 120,000,000 shares. The principal purpose of the increase was to permit a two-for-one split of all the issued shares of SJI's common stock, effected pursuant to a stock dividend of one share of common stock for each outstanding share of common stock, payable May 8, 2015 to shareholders of record at the close of business on April 17, 2015. All references to number of shares and per share information in the condensed consolidated financial statements and related notes have been adjusted for all periods presented to reflect this stock split.

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). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. The PUA is included in both utility revenue and energy and other taxes and totaled $0.4 million and $0.6 million for the three months ended March 31, 2016 and 2015, respectively.
 
IMPAIRMENT OF LONG-LIVED ASSETS - SJI reviews the carrying amount of long-lived assets for possible impairment whenever events or changes in circumstances indicate that such amounts may not be recoverable. For the three months ended March 31, 2016 and 2015, no impairments were identified.

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 charges were recorded during the three months ended March 31, 2016 or 2015. As of both March 31, 2016 and December 31, 2015, $8.9 million 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 March 31, 2016 and December 31, 2015, SJI held 209,298 and 236,571 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.

GOODWILL - Goodwill was acquired as part of the acquisition of Energenic projects discussed in Note 3 and is a part of the on-site energy production segment. Goodwill represents the excess of the consideration paid over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. No such events have occurred during the three months ended March 31, 2016. The Company recorded $8.1 million and $8.9 million of Goodwill on the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively.

The following table summarizes the changes in Goodwill for the three months ended March 31, 2016 (in thousands):

 
2016
Beginning Balance, January 1
$
8,880

Fair Value Adjustments During Measurement Periods (See Note 3)
(741
)
Ending Balance, March 31
$
8,139



7

Table of Contents

NEW ACCOUNTING PRONOUNCEMENTS — Other than as described below, no new accounting pronouncement issued or effective during 2016 or 2015 had, or is expected to have, a material impact on the condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and in most industry-specific topics. The new guidance identifies how and when entities should recognize revenue. The new rules establish a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The new guidance requires management of a company to evaluate whether there is substantial doubt about the company's ability to continue as a going concern. This ASU is effective for the annual reporting period ending after December 15, 2016, and for interim and annual reporting periods thereafter, with early adoption permitted. The Company does not expect this standard to have an impact on its consolidated financial statements upon adoption.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis, which changes the analysis to be performed in determining whether certain types of legal entities should be consolidated. Specifically, the standard amends the evaluation of whether (a) fees paid to a decision maker or a service provider represent a variable interest, (b) a limited partnership or similar entity has the characteristics of a Variable Interest Entity ("VIE") and (c) a reporting entity is the primary beneficiary of a VIE. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Adoption of this guidance did not have an impact on the Company's financial statement results.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Adoption of this guidance did not have an impact on the Company's results of operations; however, balance sheet presentations were modified to conform to this guidance.

Also in April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). This ASU provides guidance to customers (a) in determining whether a cloud computing arrangement includes a software license, and (b) on how the arrangement should be accounted for, depending on whether or not it includes a software license. The amended guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Adoption of this guidance did not have an impact on the Company's financial statement results.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU states that inventory for which cost is determined using a method other than last-in, first-out (LIFO) or the retail method should be subsequently measured at the lower of cost or net realizable value (NRV), rather than at the lower of cost or market. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This ASU states that, given the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements within ASU 2015-03 (discussed above), the SEC staff would not object to an entity deferring and presenting such costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of credit arrangement. The adoption of this standard did not have an impact on the Company's financial statement results.


8

Table of Contents

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which enhances the reporting model for financial instruments and includes amendments to address aspects of recognition, measurement, presentation and disclosure. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for only certain portions of the new guidance. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In March 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The accounting for leases by the lessor remains relatively the same. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this guidance clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In March 2016, the FASB issued ASU 2016-07, Investments- Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This standard amends ASU 2014-09 (discussed above), to improve the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. This standard will have the same effective date and transition requirements as ASU 2014-09. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects of accounting for share-based payment arrangements. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This standard amends ASU 2014-09 (discussed above), to clarify identifying performance obligations and the licensing implementation guidance. This standard will have the same effective date and transition requirements as ASU 2014-09. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

2.
STOCK-BASED COMPENSATION PLAN:

On April 30, 2015, the shareholders of SJI approved the adoption of the Company's 2015 Omnibus Equity Compensation Plan (Plan), replacing the Amended and Restated 1997 Stock-Based Compensation Plan that had terminated on January 26, 2015. Under the Plan, shares may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees. No options were granted or outstanding during the three months ended March 31, 2016 and 2015.  No stock appreciation rights have been issued under the plans. During the three months ended March 31, 2016 and 2015, SJI granted 192,760 and 151,354 restricted shares, respectively, to Officers and other key employees under the plans.  Performance-based restricted shares vest over a three-year period and are subject to SJI achieving certain market and earnings-based performance targets, which can cause the actual amount of shares that ultimately vest to range from 0% to 200% of the original share units granted.

9

Table of Contents


Beginning in 2015, SJI grants time-based shares of restricted stock, one-third of which vests annually over a three-year period and is limited to 100% payout. Vesting of time-based grants is contingent upon SJI achieving a return on equity (ROE) of at least 7% during the initial year of the grant and meeting the service requirement. Provided that the 7% ROE requirement is met in the initial year, payout is solely contingent upon the service requirement being met in years two and three of the grant. During the three months ended March 31, 2016 and 2015, Officers and other key employees were granted 57,828 and 45,406 shares of time-based restricted stock, which are included in the shares noted above.

Grants containing market-based performance targets use SJI's total shareholder return (TSR) relative to a peer group to measure performance. As TSR-based grants are contingent upon market and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant on a straight-line basis over the requisite three-year period of each award. In addition, SJI identifies specific forfeitures of share-based awards, and compensation expense is adjusted accordingly over the requisite service period. Compensation expense is not adjusted based on the actual achievement of performance goals. The fair value of TSR-based restricted stock awards on the date of grant is estimated using a Monte Carlo simulation model.

Through 2014, grants containing earnings-based targets were based on SJI's earnings per share (EPS) growth rate relative to a peer group to measure performance. In 2015, earning-based performance targets included pre-defined EPS and return on equity (ROE) goals to measure performance. Beginning in 2016, performance targets include pre-defined Economic Earnings compound annual growth rate (EE) for SJI. As EPS-based, ROE-based and EE-based grants are contingent upon performance and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant over the requisite three-year period of each award. The fair value is measured as the market price at the date of grant. The initial accruals of compensation expense are based on the estimated number of shares expected to vest, assuming the requisite service is rendered and probable outcome of the performance condition is achieved. That estimate is revised if subsequent information indicates that the actual number of shares is likely to differ from previous estimates. Compensation expense is ultimately adjusted based on the actual achievement of service and performance targets.

During the three months ended March 31, 2016 and 2015, SJI granted 32,882 and 25,398 restricted shares, respectively, to Directors.  Shares issued to Directors vest over twelve months and contain no performance conditions. As a result, 100% of the shares granted generally vest.

The following table summarizes the nonvested restricted stock awards outstanding at March 31, 2016 and the assumptions used to estimate the fair value of the awards:

 
Grants
 
Shares Outstanding
 
Fair Value Per Share
 
Expected Volatility
 
Risk-Free Interest Rate
Officers & Key Employees -
2014 - TSR
 
51,042

 
$
21.31

 
20.0
%
 
0.80
%
 
2014 - EPS
 
51,042

 
$
27.22

 
N/A

 
N/A

 
2015 - TSR
 
34,406

 
$
26.31

 
16.0
%
 
1.10
%
 
2015 - EPS, ROE, Time
 
75,300

 
$
29.47

 
N/A

 
N/A

 
2016 - TSR
 
67,466

 
$
22.01

 
18.1
%
 
1.31
%
 
2016 - EE, Time
 
125,294

 
$
23.52

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
Directors -
2016
 
32,882

 
$
23.52

 
N/A

 
N/A

 

 


 


 


 



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.


10

Table of Contents

The following table summarizes the total stock-based compensation cost for the three months ended March 31, 2016 and 2015 (in thousands):

 
Three Months Ended
March 31,
 
2016
2015
Officers & Key Employees
$
817

$
799

Directors
193

186

Total Cost
1,010

985

 
 
 
Capitalized
(106
)
(91
)
Net Expense
$
904

$
894


As of March 31, 2016, there was $6.5 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the plans. That cost is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes information regarding restricted stock award activity during the three months ended March 31, 2016, excluding accrued dividend equivalents:

 
Officers &Other Key Employees
 
Directors
 
Weighted
Average
Fair Value
Nonvested Shares Outstanding, January 1, 2016
226,191

 
26,338

 
$
26.89

  Granted
192,760

 
32,882

 
$
23.07

  Cancelled/Forfeited
(1,154
)
 

 
$
26.24

  Vested
(13,247
)
 
(26,338
)
 
$
29.30

Nonvested Shares Outstanding, March 31, 2016
404,550

 
32,882

 
$
24.70


Performance targets during the three-year vesting period were not attained for the 2012 or 2013 Officer and other key employee grants that vested at December 31, 2014 and 2015, respectively. As a result, no shares were awarded in 2015 or 2016 associated with those grants. However, the initial performance hurdle for the 2015 time-based grant was met. As a result, 13,247 shares were awarded to Officers and other key employees during the three months ended March 31, 2016 at a market value of $0.3 million. During the three months ended March 31, 2016 and 2015, SJI granted 32,882 and 25,398 shares to its Directors at a market value of $0.8 million and $0.7 million, respectively. The Company has a policy of issuing new shares to satisfy its obligations under the Plan; therefore, there are no cash payment requirements resulting from the normal operation of the Plan. 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.


11

Table of Contents

3.
AFFILIATIONS AND DISCONTINUED OPERATIONS:

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.

On December 31, 2015, Energenic, Marina and its joint venture partner entered into two Equity Distribution and Purchase Agreements (the "Transaction"), pursuant to which Marina became the sole owner of eight of the Energenic projects ("Marina Projects") and its joint venture partner became the sole owner of seven other Energenic projects ("Partner Projects"). The Transaction has been accounted for as a distribution of member interests by Energenic to its owners and a business combination through the exchange of member interests in various projects between Marina and its joint venture partner. In connection with the exchange, the joint venture partner provided a $19.5 million note payable to Marina. The note and other existing obligations of the joint venture partner to Marina are included in Notes Receivable on the condensed consolidated balance sheets, with approximately $1.8 million being included as a current asset as of March 31, 2016, as it is due within one year. This note is collateralized by security interests in various energy project assets owned by the joint venture partner, as well as personal guarantees from its principals.

As part of the transaction, each party is relieved of any guarantees related to the Projects in which it no longer has an ownership interest.

The projects that are now wholly-owned by Marina are ACB, ACLE, BCLE, SCLE, SXLE, MCS, NBS and SBS.

Through December 31, 2015, Marina’s investment in Energenic was accounted for under the equity method of accounting. As such, Marina’s share of the equity value of the projects was included within Investment in Affiliates on the condensed consolidated balance sheets and Marina’s share of the loss or earnings from the projects for the three months ended March 31, 2015 was included within Equity in Earnings of Affiliated Companies on the condensed consolidated statements of income. As of December 31, 2015, the assets and liabilities of the projects that are now wholly-owned by Marina are consolidated into the condensed consolidated balance sheets. Beginning in 2016, the respective results from operations and cash flows of the projects that are now wholly-owned by Marina are consolidated into the condensed consolidated statements of income and cash flows. The results of the acquired projects are included in the On-Site Energy Production segment.

The following table summarizes the preliminary purchase price allocation and reflects 100% of the fair values of the assets acquired and the liabilities assumed by the Company in connection with the Transaction. The Company is still awaiting final valuation reports supporting the allocation of the purchase price to certain identifiable intangibles. Total consideration for the step acquisition of the remaining interest in the Marina Projects was $46.0 million, which represents the fair value of the Company’s interest in the Partner Projects exchanged ($31.5 million) as well as the existing value of the Marina Projects immediately prior to the exchange ($14.5 million) (in thousands):

 
 
Current assets (excluding inventory)
$
7,804

Inventory
3,154

Note Receivable Received
19,504

Fixed Assets
41,190

Intangible Assets:
 
     Identifiable Intangibles
22,220

     Goodwill
8,139

Non-Current Assets
1,873

Current Liabilities
(8,196
)
Note Payable - Affiliate
(16,986
)
Long-Term Debt, including current portion
(21,642
)
Capital Lease Payable
(10,458
)
Other Non-Current Liabilities
(572
)
          Fair Value of Consolidated Assets and Liabilities of Acquired Projects
$
46,030


12

Table of Contents


The recorded amounts for assets and liabilities represent the Company's best estimate as of March 31, 2016. The measurement period adjustments recorded during the three months ended March 31, 2016 did not have a significant impact on the Company's condensed consolidated balance sheet. The pro forma impact of this transaction on the operations of the Company is not significant.

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.

PennEast Pipeline Company, LLC (PennEast) - Midstream has a 20% investment in PennEast, which is planning to construct an approximately 100-mile natural gas pipeline that will extend from Northeastern Pennsylvania into New Jersey, with a target completion of 2018.

During the first three months of 2016 and 2015, the Company made net investments in unconsolidated affiliates of $1.5 million and $1.7 million, respectively.  As of March 31, 2016 and December 31, 2015, the outstanding balance of Notes Receivable – Affiliate was $14.8 million and $16.4 million, respectively. As of March 31, 2016, approximately $13.7 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 $1.1 million of these notes are unsecured and accrue interest at variable rates.
    
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 March 31, 2016, the Company had a net asset of approximately $20.3 million included in Investment in Affiliates 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 March 31, 2016, is limited to its combined equity contributions and the Notes Receivable-Affiliate in the aggregate amount of $35.1 million.

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

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

Summarized operating results of the discontinued operations for the three months ended March 31, 2016 and 2015, were (in thousands, except per share amounts):
 
Three Months Ended
March 31,
 
2016
 
2015
Loss before Income Taxes:
 
 
 
Sand Mining
$
(146
)
 
$
(347
)
Fuel Oil
(35
)
 
(66
)
Income Tax Benefits
63

 
137

Loss from Discontinued Operations — Net
$
(118
)
 
$
(276
)
Earnings Per Common Share from
 
 
 

Discontinued Operations — Net:
 
 
 

Basic and Diluted
$

 
$



13

Table of Contents

4.
COMMON STOCK:

The following shares were issued and outstanding:

 
2016
Beginning Balance, January 1
70,965,622

New Issues During the Period:
 

Dividend Reinvestment Plan
229,522

Stock-Based Compensation Plan
43,023

Ending Balance, March 31
71,238,167


The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $6.1 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 288,502 and 220,762 for the three months ended March 31, 2016 and 2015, respectively. 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. 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 $5.6 million and $1.9 million of equity capital through the DRP during the three months ended March 31, 2016 and 2015, respectively.

5.
FINANCIAL INSTRUMENTS:

RESTRICTED INVESTMENTS — Marina is required to maintain escrow accounts related to ongoing capital projects as well as unused loan proceeds pending approval of construction expenditures. As of March 31, 2016 and December 31, 2015, the escrowed funds, including interest earned, totaled $3.2 million and $3.4 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 March 31, 2016 and December 31, 2015, the balances in these accounts totaled $34.7 million and $43.7 million, respectively.

As of December 31, 2015, in accordance with an outstanding loan agreement which ACB had with a third party, ACB was required to maintain control accounts which included a debt service reserve of $1.7 million. In January 2016, the remaining debt on the loan agreement was paid (see Note 14); as such, there was no reserve as of March 31, 2016.

The carrying amounts of the Restricted Investments approximate their fair values at March 31, 2016 and December 31, 2015, which would be included in Level 1 of the fair value hierarchy (see Note 13).

INVESTMENT IN AFFILIATES - During 2011, subsidiaries of Energenic, in which Marina has a 50% equity interest, entered into 20-year contracts 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, Energenic subsidiaries began providing full energy services to the complex. 

In June 2014, the parent company of the hotel, casino and entertainment complex filed petitions in U.S. Bankruptcy Court to facilitate a sale of substantially all of its assets. The complex ceased normal business operations in September 2014. Energenic subsidiaries continued to provide limited energy services to the complex during the shutdown period under a temporary agreement with the trustee. The hotel, casino and entertainment complex was sold in April 2015. As of December 31, 2015, the Energenic subsidiaries were providing limited services to the complex under a short-term agreement with the new owner. However, the Energenic subsidiaries had not been able to secure a permanent or long-term energy services agreement with the new owner.
    

14

Table of Contents

In 2015 management of the Company and Energenic evaluated the carrying value of the investment in this project and a related note receivable. Based on the inability of the Energenic subsidiaries to secure a permanent or long-term energy services agreement, the Company recorded a $7.7 million (net of tax) non-cash charge to earnings during the second quarter of 2015 due to the reduction in the carrying value of the investment in this project recorded by Energenic. This charge was included in Equity in Loss of Affiliated Companies during the second quarter of 2015 on the condensed consolidated statements of income. Estimating the fair value of an investment is highly judgmental and involves the use of significant estimates and assumptions. Actual results may differ significantly from those used to develop this estimate.
The central energy center and energy distribution system owned by the Energenic subsidiaries was financed in part by the issuance of bonds during 2011. These bonds were collateralized primarily by certain assets of the central energy center and revenue from the energy services agreement with the hotel, casino and entertainment complex. During 2015, due to the cessation of normal business operations of the complex and the inability of the Energenic subsidiaries to meet its obligations under the bonds, the trustee for the bondholders filed suit to foreclose on certain assets of the central energy center. In November 2015 during settlement discussions, the bondholders alleged, among other things, that they were entitled to recover from Energenic itself, any amounts owed under the bonds that were not covered by the collateral, including principal, interest and attorney’s fees. The bondholders’ assertion was based on inconsistent language in the bond documents. In January 2016, Energenic and certain subsidiaries reached a multi-party settlement with the bondholders. This agreement resolves all outstanding litigation and transfers ownership of the bondholders’ collateral to the owners of the entertainment complex. The Company’s share of this settlement was $7.5 million, which was accrued by Energenic as of December 31, 2015 and paid in 2016. Management of Energenic is currently in active settlement discussions and believes that this amount is recoverable from its insurance carrier and external legal advisors.
As of March 31, 2016, the Company, through its investment in Energenic, had a remaining net asset of approximately $1.4 million included in Investment in Affiliates on the condensed consolidated balance sheets related to cogeneration assets for this project. In addition, the Company had approximately $13.7 million included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from Energenic, which is secured by those cogeneration assets. This note is subject to a reimbursement agreement that secures reimbursement for the Company, from its joint venture partner, of a proportionate share of any amounts that are not repaid.

Management will continue to monitor the situation surrounding the complex and will evaluate the carrying value of the investment and the note receivable as future events occur.

NOTE RECEIVABLE - In June 2015, SJG advanced $10.0 million to a not-for-profit organization formed to spur economic development in Atlantic City, New Jersey, of which $0.1 million was repaid. The note bears interest at 1.0% for an initial term of six months, with the borrower’s option to extend the term for two additional terms of three months each. In December 2015 and February 2016, the borrower exercised each option, respectively. SJG holds a first lien security interest on land in Atlantic City as collateral against this note.  The carrying amount of this receivable approximates its fair value at March 31, 2016 and December 31, 2015, which would be included in Level 2 of the fair value hierarchy (see Note 13).

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 to ten years with no interest.  The carrying amounts of such loans were $12.2 million and $12.9 million as of March 31, 2016 and December 31, 2015, 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 and $1.3 million as of March 31, 2016 and December 31, 2015, respectively.  The annualized 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 March 31, 2016 and December 31, 2015, which would be included in Level 2 of the fair value hierarchy (see Note 13).

CREDIT RISK - As of March 31, 2016, approximately $12.3 million, or 15.9%, of the current and noncurrent Derivatives – Energy Related Assets are transacted with one 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 default by the counterparty.

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 March 31, 2016 and December 31, 2015, except as noted below.

15

Table of Contents

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). The estimated fair values of SJI's long-term debt, including current maturities, as of March 31, 2016 and December 31, 2015, were $1,143.0 million and $1,079.0 million, respectively.  The carrying amounts of SJI's long-term debt, including current maturities, as of March 31, 2016 and December 31, 2015, were $1,075.6 million and $1,026.9 million, respectively. The carrying amounts as of March 31, 2016 and December 31, 2015 are net of unamortized debt issuance costs of $8.4 million and $9.0 million, respectively (see Note 1).

OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's other financial instruments approximate their fair values at March 31, 2016 and December 31, 2015.
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. These segments are as follows:

Gas utility operations (SJG) consist primarily of natural gas distribution to residential, commercial and industrial customers.
Wholesale energy operations include the activities of SJRG and SJEX.
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, industrial and residential customers.
On-site energy production consists of Marina's thermal energy facility and other energy-related projects. Also included in this segment are the activities of ACB, ACLE, BCLE, SCLE, SXLE, MCS, NBS and SBS. These entities became wholly-owned subsidiaries of Marina on December 31, 2015 (see Note 3).
Appliance service operations includes SJESP’s servicing of appliances under warranty via a subcontractor arrangement as well as on a time and materials basis. 
The activities of Midstream are a part of the Corporate and Services segment.
 
SJI groups its nonutility operations into two categories: Energy Group and Energy Services. Energy Group includes wholesale energy, retail gas and other, and retail electric operations. Energy Services includes 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.


16

Table of Contents

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

 
Three Months Ended
March 31,
 
2016
 
2015
Operating Revenues:
 
 
 
Gas Utility Operations
$
187,766

 
$
267,658

Energy Group:
 
 
 
     Wholesale Energy Operations
65,074

 
35,345

Retail Gas and Other Operations
29,733

 
38,078

Retail Electric Operations
39,491

 
29,777

     Subtotal Energy Group
134,298

 
103,200

Energy Services:
 
 
 
On-Site Energy Production
16,321

 
13,572

Appliance Service Operations
1,888

 
2,357

Subtotal Energy Services
18,209

 
15,929

Corporate and Services
8,876

 
9,086

Subtotal
349,149

 
395,873

Intersegment Sales
(16,114
)
 
(12,921
)
Total Operating Revenues
$
333,035

 
$
382,952


17

Table of Contents


 
Three Months Ended
March 31,
 
2016
 
2015
Operating Income:
 

 
 

Gas Utility Operations
$
75,773

 
$
73,189

Energy Group:
 
 
 
     Wholesale Energy Operations
38,244

 
330

Retail Gas and Other Operations
(759
)
 
3,087

Retail Electric Operations
585

 
(182
)
     Subtotal Energy Group
38,070

 
3,235

Energy Services:
 
 
 
On-Site Energy Production
(89
)
 
(482
)
Appliance Service Operations
44

 
(52
)
  Subtotal Energy Services
(45
)
 
(534
)
Corporate and Services
455

 
481

Total Operating Income
$
114,253

 
$
76,371


 
 
 
Depreciation and Amortization:
 

 
 

Gas Utility Operations
$
15,626

 
$
14,167

Energy Group:
 
 
 
     Wholesale Energy Operations
204

 
32

Retail Gas and Other Operations
85

 
20

     Subtotal Energy Group
289

 
52

Energy Services:
 
 
 
On-Site Energy Production
9,919

 
7,051

Appliance Service Operations
84

 
74

  Subtotal Energy Services
10,003

 
7,125

Corporate and Services
223

 
242

Total Depreciation and Amortization
$
26,141

 
$
21,586


 
 
 
Interest Charges:
 

 
 

Gas Utility Operations
$
4,787

 
$
5,190

Energy Group:
 
 
 
     Wholesale Energy Operations
64

 
242

Retail Gas and Other Operations
132

 
73

     Subtotal Energy Group
196

 
315

Energy Services:
 
 
 
On-Site Energy Production
3,462

 
2,315

Corporate and Services
3,452

 
2,988

Subtotal
11,897

 
10,808

Intersegment Borrowings
(2,737
)
 
(2,207
)
Total Interest Charges
$
9,160

 
$
8,601



18

Table of Contents

 
Three Months Ended
March 31,
 
2016
 
2015
Income Taxes:
 

 
 

Gas Utility Operations
$
27,404

 
$
26,172

Energy Group:
 
 
 
     Wholesale Energy Operations
14,737

 
867

Retail Gas and Other Operations
(168
)
 
1,576

Retail Electric Operations
239

 
(74
)
     Subtotal Energy Group
14,808

 
2,369

Energy Services:
 
 
 
On-Site Energy Production
(3,012
)
 
(12,047
)
Appliance Service Operations
26

 
(8
)
  Subtotal Energy Services
(2,986
)
 
(12,055
)
Corporate and Services
41

 
127

Total Income Taxes
$
39,267

 
$
16,613

 
 
 
 
Property Additions:
 
 
 
Gas Utility Operations
$
51,370

 
$
43,326

Energy Group:
 
 
 
     Wholesale Energy Operations
6

 
4

Retail Gas and Other Operations
371

 
729

     Subtotal Energy Group
377

 
733

Energy Services:
 
 
 
On-Site Energy Production
2,651

 
4,381

Appliance Service Operations
101

 
116

  Subtotal Energy Services
2,752

 
4,497

Corporate and Services
163

 
1,064

Total Property Additions
$
54,662

 
$
49,620


 
March 31, 2016
 
December 31, 2015
Identifiable Assets (See Note 1):
 
 
 
Gas Utility Operations
$
2,365,728

 
$
2,281,576

Energy Group:
 
 
 
     Wholesale Energy Operations
174,326

 
231,660

Retail Gas and Other Operations
60,178

 
55,111

Retail Electric Operations
51,239

 
55,528

     Subtotal Energy Group
285,743

 
342,299

Energy Services:
 
 
 
On-Site Energy Production
784,474

 
790,231

Appliance Service Operations
3,849

 
4,885

Subtotal Energy Services
788,323

 
795,116

Discontinued Operations
1,542

 
1,545

Corporate and Services
648,213

 
652,325

Intersegment Assets
(595,565
)
 
(600,928
)
Total Identifiable Assets
$
3,493,984

 
$
3,471,933



19

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 2016, SJG provided a BGSS bill credit of approximately $20.0 million to its residential and small commercial customers. This credit is in addition to an overall rate reduction of 10.3% that was approved by the BPU and took effect in October 2015. SJG’s ability to offer the BGSS bill credit is a direct result of lower wholesale natural gas prices and the overall management of its gas supply portfolio. The BGSS clause serves as a method to pass along increases or decreases in gas costs to customers; therefore, SJG’s income is not affected by BGSS rate adjustments or bill credits.

On February 29, 2016, SJG filed a petition with the BPU for approval to continue its Accelerated Infrastructure Replacement Program (AIRP), which will expire at the end of 2016. In its petition, SJG has requested approval to continue its AIRP for an additional seven years, with program investments totaling approximately $500.0 million, to retire and replace bare steel and cast iron mains, bare steel services, and other aging infrastructure. The petition proposes to recover the costs of, and a return on, future AIRP investments through annual base rate adjustments. The petition also includes a request to reflect in base rates approximately $76.0 million of AIRP investments that will have been made since the conclusion of SJG’s last base rate case in October 2014 through the end 2016.

In February 2016, the BPU approved a $7.9 million revenue decrease to SJG’s Energy Efficiency Tracker (EET), which recovers the cost of, and an allowed return on, investments in Energy Efficiency Programs (EEP). SJG’s original EEPs and its first EEP Extension, approved by the BPU in 2009 and 2013, respectively, ended in July 2013 and August 2015, respectively. The revenue requirements associated with these prior investments decrease over time as they are amortized and recovered. SJG is continuing to make energy efficiency investments under its most recent EEP Extension, which was approved by the BPU in August 2015, and is recovering the costs, and the allowed return on, those investments through the EET.

There have been no other significant regulatory actions or changes to SJG's rate structure since December 31, 2015. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K for the year ended December 31, 2015.

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, 2015, which are described in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2015.

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

 
March 31, 2016
 
December 31, 2015
Environmental Remediation Costs:
 
 
 
Expended - Net
$
47,023

 
$
42,032

Liability for Future Expenditures
136,779

 
123,194

Deferred Asset Retirement Obligation Costs
42,515

 
42,430

Deferred Pension and Other Postretirement Benefit Costs
79,779

 
79,779

Deferred Gas Costs - Net

 
2,701

Conservation Incentive Program Receivable
19,205

 
2,624

Deferred Interest Rate Contracts
9,379

 
7,631

Energy Efficiency Tracker

 
496

Pipeline Supplier Service Charges
3,360

 
3,776

Pipeline Integrity Cost
4,310

 
4,596

AFUDC - Equity Related Deferrals
11,638

 
11,423

Other Regulatory Assets
2,974

 
2,752

 
 
 
 
Total Regulatory Assets
$
356,962

 
$
323,434



20

Table of Contents

ENVIRONMENTAL REMEDIATION COSTS - SJG has two regulatory assets associated with environmental costs related to the cleanup of 12 sites where SJG or its predecessors previously operated gas manufacturing plants. The first asset, "Environmental Remediation Cost: Expended - Net," represents what was actually spent to clean up the sites, less recoveries through the Remediation Adjustment Clause (RAC) and insurance carriers. These costs meet the deferral requirements of GAAP, as the BPU allows SJG to recover such expenditures through the RAC. The other asset, "Environmental Remediation Cost: Liability for Future Expenditures," relates to estimated future expenditures required to complete the remediation of these sites. SJG recorded this estimated amount as a regulatory asset with the corresponding current and noncurrent liabilities on the balance sheets under the captions "Current Liabilities" and "Deferred Credits and Other Noncurrent Liabilities." The BPU allows SJG to recover the deferred costs over seven-year periods after they are spent. The increase from December 31, 2015 is a result of expenditures made during the first three months of 2016 and an increase in the expected future expenditures for remediation activities.

DEFERRED GAS COSTS - NET - See discussion under "Deferred Revenues - Net" below.

CONSERVATION INCENTIVE PROGRAM (CIP) RECEIVABLE – The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. Actual usage per customer was less than the established baseline during the 2015 - 2016 winter season, and more notably, during the first three months of 2016, resulting in an increase in the receivable. This is primarily the result of extremely warm weather experienced in the region.

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

 
March 31, 2016
 
December 31, 2015
Excess Plant Removal Costs
$
32,294

 
$
32,644

Deferred Revenues - Net
11,241

 

Societal Benefit Costs
9,454

 
10,197

Energy Efficiency Tracker
2,384

 

 
 
 
 
Total Regulatory Liabilities
$
55,373

 
$
42,841

 
DEFERRED REVENUES - NET - Over/under collections of gas costs are monitored through SJG's BGSS mechanism. Net under collected gas costs are classified as a regulatory asset and net over collected 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 changed from a $2.7 million regulatory asset at December 31, 2015 to a $11.2 million regulatory liability at March 31, 2016 primarily due to the gas costs recovered from customers exceeding the actual cost of the commodity. SJG typically over collects during the winter season when throughput is high and under collects during the summer season when throughput is low.

ENERGY EFFICIENCY TRACKER (EET) - This regulatory liability primarily represents energy efficiency measures installed in customer homes and businesses. The change from a $0.5 million regulatory asset at December 31, 2015 to a $2.4 million regulatory liability at March 31, 2016 is due to recoveries being greater than the cost of, and allowed return on, investments in the Energy Efficiency Programs. In February 2016, the BPU approved a $7.9 million revenue decrease to SJG’s EET (see Note 7).


21

Table of Contents

9.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three months ended March 31, 2016 and 2015, 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
March 31,
 
2016

2015
Service Cost
$
1,315

 
$
1,443

Interest Cost
3,000

 
2,770

Expected Return on Plan Assets
(3,380
)
 
(3,699
)
Amortizations:
 
 
 

Prior Service Cost
53

 
53

Actuarial Loss
2,309

 
2,656

Net Periodic Benefit Cost
3,297

 
3,223

Capitalized Benefit Cost
(1,187
)
 
(1,239
)
   Deferred Benefit Cost
(161
)
 

Total Net Periodic Benefit Expense
$
1,949

 
$
1,984


 
Other Postretirement Benefits
 
Three Months Ended
March 31,
 
2016

2015
Service Cost
$
230

 
$
327

Interest Cost
653

 
771

Expected Return on Plan Assets
(776
)
 
(748
)
Amortizations:
 
 
 

Prior Service Cost
(86
)
 
152

Actuarial Loss
294

 
384

Net Periodic Benefit Cost
315

 
886

Capitalized Benefit Cost
(101
)
 
(256
)
Total Net Periodic Benefit Expense
$
214

 
$
630


Capitalized benefit costs reflected in the table above relate to SJG’s construction program. Deferred benefit costs relate to SJG's deferral of incremental expense associated with the adoption of new mortality tables effective December 31, 2014 and 2015. Deferred benefit costs are expected to be recovered through rates as part of SJG's next base rate case.

SJI contributed $15.0 million to the pension plans in January 2015. No contributions were made to the pension plans during the three months ended March 31, 2016. SJI does not expect to make any contributions to the pension plans in 2016; however, changes in future investment performance and discount rates may ultimately result in a contribution. Payments related to the unfunded supplemental executive retirement plan (SERP) are expected to approximate $2.3 million in 2016. 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 for the year ended December 31, 2015, for additional information related to SJI’s pension and other postretirement benefits.


22

Table of Contents

10.
LINES OF CREDIT:
 
Credit facilities and available liquidity as of March 31, 2016 were as follows (in thousands):

Company
 
Total Facility
 
Usage
 
Available Liquidity
 
Expiration Date
SJG:
 
 
 
 
 
 
 
 
Commercial Paper Program/Revolving Credit Facility
 
$
200,000

 
$
66,900

(A)
$
133,100

 
May 2018
Uncommitted Bank Lines
 
10,000

 

 
10,000

 
August 2016
 
 
 
 
 
 
 
 
 
Total SJG
 
210,000

 
66,900

 
143,100

 
 
 
 
 
 
 
 
 
 
 
SJI:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
 
400,000

 
278,000

(B)
122,000

 
February 2018
 
 
 
 
 
 
 
 
 
Total SJI
 
400,000

 
278,000

 
122,000

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
610,000

 
$
344,900


$
265,100

 
 

(A) Includes letters of credit outstanding in the amount of $2.1 million.
(B) Includes letters of credit outstanding in the amount of $3.3 million.

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 1.34% and 0.88% at March 31, 2016 and 2015, respectively. Average borrowings outstanding under these credit facilities, not including letters of credit, during the three months ended March 31, 2016 and 2015 were $394.6 million and $274.1 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the three months ended March 31, 2016 and 2015 were $467.7 million and $329.4 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 March 31, 2016.

SJG has 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 its $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.

In March 2016, the Company entered into amendments to three separate letter of credit reimbursement agreements in connection with letters of credit that were set to expire on March 15, 2016. The letters of credit are in the aggregate amount of $62.3 million and support three outstanding series of bonds issued by Marina, in the amounts of $16.4 million, $20.0 million and $25.0 million. Each of the three amendments was entered into in connection with the extension of its respective letter of credit until March 15, 2018, and each amendment provides for the Company to reimburse the issuing bank for any draws under the related letter of credit.


23

Table of Contents

11.
COMMITMENTS AND CONTINGENCIES:

GUARANTEES — As part of the Transaction involving the Energenic projects (see Note 3), the Company is relieved of any guarantees from prior periods related to the projects in which it no longer has an ownership interest.

As of March 31, 2016, SJI had issued $6.2 million of parental 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 45% of our workforce at March 31, 2016. 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 collective bargaining agreements that run through February 2017. The remaining unionized employees are represented by the IAM and operate under collective bargaining agreements that run through August 2017.

STANDBY LETTERS OF CREDIT — As of March 31, 2016, SJI provided $3.3 million of standby letters of credit through its revolving credit facility to enable SJE to market retail electricity and for various construction and operating activities. SJG provided a $2.1 million letter of credit under its revolving credit facility to support the remediation of environmental conditions at certain locations in SJG's service territory. The Company has also provided $87.5 million of additional letters of credit under separate facilities outside of the revolving credit facilities 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 gas supply and capacity management contract disputes and 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 $3.3 million and $3.2 million related to all claims in the aggregate as of March 31, 2016 and December 31, 2015, 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, 2015, as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2015.

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 March 31, 2016, the Company had outstanding derivative contracts intended to limit the exposure to market risk on 71.9 MMdts (1 MMdts = one million decatherms) of expected future purchases of natural gas, 59.2 MMdts of expected future sales of natural gas, 2.6 MMmwh (1 MMmwh = one million megawatt hours) of expected future purchases of electricity and 2.4 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 169.6 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.


24

Table of Contents

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 had been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Other on the condensed consolidated balance sheets. Hedge accounting has been discontinued for these derivatives. As a result, unrealized gains and losses on these derivatives, that were previously included in Accumulated Other Comprehensive Loss (AOCL) on the condensed consolidated balance sheets, are being recorded in earnings over the remaining life of the derivative. These derivatives are expected to mature in 2026.

As of March 31, 2016, SJI’s active interest rate swaps were as follows:

Notional Amount
 
Fixed Interest Rate
 
Start Date
 
Maturity
 
Type
 
Obligor
$
14,500,000

 
3.905%
 
3/17/2006
 
1/15/2026
 
Tax-exempt
 
Marina
$
500,000

 
3.905%
 
3/17/2006
 
1/15/2026
 
Tax-exempt
 
Marina
$
330,000

 
3.905%
 
3/17/2006
 
1/15/2026
 
Tax-exempt
 
Marina
$
12,500,000

 
3.530%
 
12/1/2006
 
2/1/2036
 
Tax-exempt
 
SJG
$
12,500,000

 
3.430%
 
12/1/2006
 
2/1/2036
 
Tax-exempt
 
SJG


The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
March 31, 2016
 
December 31, 2015
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy-related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives – Energy Related – Current
 
$
57,815

 
$
66,370

 
$
83,093

 
$
90,708

Derivatives – Energy Related – Non-Current
 
19,489

 
10,148

 
16,238

 
21,697

Interest rate contracts:
 
 
 
 
 
 

 
 

Derivatives - Other
 

 
13,118

 

 
10,943

Total derivatives not designated as hedging instruments under GAAP
 
$
77,304

 
$
89,636

 
$
99,331

 
$
123,348

 
 
 
 
 
 
 
 
 
Total Derivatives
 
$
77,304

 
$
89,636

 
$
99,331

 
$
123,348


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 March 31, 2016 and December 31, 2015, information related to these offsetting arrangements were as follows (in thousands):
As of March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
77,304

 
$

 
$
77,304

 
$
(15,597
)
(A)
$

 
$
61,707

Derivatives - Energy Related Liabilities
 
$
(76,518
)
 
$

 
$
(76,518
)
 
$
15,597

(B)
$
22,020

 
$
(38,901
)
Derivatives - Other
 
$
(13,118
)
 
$

 
$
(13,118
)
 
$

 
$

 
$
(13,118
)


25

Table of Contents

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
99,331

 
$

 
$
99,331

 
$
(35,491
)
(A)
$

 
$
63,840

Derivatives - Energy Related Liabilities
 
$
(112,405
)
 
$

 
$
(112,405
)
 
$
35,491

(B)
$
23,045

 
$
(53,869
)
Derivatives - Other
 
$
(10,943
)
 
$

 
$
(10,943
)
 
$

 
$

 
$
(10,943
)

(A) The balances at March 31, 2016 and December 31, 2015 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at March 31, 2016 and December 31, 2015 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 months ended March 31, 2016 and 2015 are as follows (in thousands):

 
 
Three Months Ended
March 31,
Derivatives in Cash Flow Hedging Relationships under GAAP
 
2016
 
2015
Interest Rate Contracts:
 
 
 
 
Losses recognized in AOCL on effective portion
 
$

 
$

Losses reclassified from AOCL into income (a)
 
$
(86
)
 
$
(23
)
Gains (losses) recognized in income on ineffective portion (a)
 
$

 
$


(a) Included in Interest Charges

 
 
Three Months Ended
March 31,
Derivatives Not Designated as Hedging Instruments under GAAP
 
2016
 
2015
Gains (losses) on energy-related commodity contracts (a)
 
$
18,655

 
$
(6,707
)
Losses on interest rate contracts (b)
 
(427
)
 
(298
)
 
 
 
 
 
Total
 
$
18,228

 
$
(7,005
)

(a)  Included in Operating Revenues - Nonutility
(b)  Included in Interest Charges

Net realized loss of $2.8 million and $2.6 million associated with SJG's energy-related financial commodity contracts for the three months ended March 31, 2016 and 2015, 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, as applicable, and there is no impact to earnings.


26

Table of Contents

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 March 31, 2016, is $33.6 million.  If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2016, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $31.5 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 March 31, 2016
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
14,960

 
$
2,945

 
$
12,015

 
$

Derivatives – Energy Related Assets (B)
77,304

 
7,145

 
15,986

 
54,173

 
$
92,264

 
$
10,090

 
$
28,001

 
$
54,173

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
76,518

 
$
31,858

 
$
3,728

 
$
40,932

Derivatives – Other (C)
13,118

 

 
13,118

 

 
$
89,636

 
$
31,858

 
$
16,846

 
$
40,932


As of December 31, 2015
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
14,810

 
$
2,925

 
$
11,885

 
$

Derivatives – Energy Related Assets (B)
99,331

 
16,006

 
24,730

 
58,595

 
$
114,141

 
$
18,931

 
$
36,615

 
$
58,595

 
 
 
 
 
 
 
 
 Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
112,405

 
$
42,170

 
$
11,008

 
$
59,227

Derivatives – Other (C)
10,943

 

 
10,943

 

 
$
123,348

 
$
42,170

 
$
21,951

 
$
59,227



27

Table of Contents

(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly. The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy. The remaining securities consist of funds that are not publicly traded. These funds, which consist of stocks and bonds that are traded individually in active markets, are valued using quoted prices for similar assets and are categorized in Level 2 in the fair value hierarchy.

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 as the model inputs generally are not observable.

Significant Unobservable Inputs - Management uses the discounted cash flow model to value Level 3 physical and financial forwards, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in mark-to-market valuations from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Level 3 valuation methods for natural gas derivative contracts include utilizing another location in close proximity adjusted for certain pipeline charges to derive a basis value. The significant unobservable inputs used in the fair value measurement of certain natural gas contracts consist of forward prices developed based on industry-standard methodologies. Significant increases (decreases) in these forward prices for purchases of natural gas would result in a directionally similar impact to the fair value measurement and for sales of natural gas would result in a directionally opposite impact to the fair value measurement. Level 3 valuation methods for electric represent the value of the contract marked to the forward wholesale curve, as provided by daily exchange quotes for delivered electricity. The significant unobservable inputs used in the fair value measurement of electric contracts consist of fixed contracted electric load profiles; therefore, no change in unobservable inputs would occur. Unobservable inputs are updated daily using industry-standard techniques. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.

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

The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands):

Type
Fair Value at March 31, 2016
Valuation Technique
Significant Unobservable Input
Range [Weighted Average]
 
 
Assets
Liabilities
 
 
 
 
Forward Contract - Natural Gas
$27,715
$15,874
Discounted Cash Flow
Forward price (per dt)

$1.03 - $8.92 [$1.93]
(A)
Forward Contract - Electric


$26,458
$25,058
Discounted Cash Flow
Fixed electric load profile (on-peak)
8.47% - 100.00% [56.83%]
(B)
Fixed electric load profile (off-peak)
0.00% - 91.53% [43.17%]
(B)


28

Table of Contents

Type
Fair Value at December 31, 2015
Valuation Technique
Significant Unobservable Input
Range [Weighted Average]
 
 
Assets
Liabilities
 
 
 
 
Forward Contract - Natural Gas
$29,459
$31,733
Discounted Cash Flow
Forward price (per dt)

$(0.77) - $10.00 [$(2.15)]
(A)
Forward Contract - Electric


$29,136
$27,494
Discounted Cash Flow
Fixed electric load profile (on-peak)
8.47% - 100.00% [56.20%]
(B)
Fixed electric load profile (off-peak)
0.00% - 91.53% [43.80%]
(B)

(A) Represents the range, along with the weighted average, of forward prices for the sale and purchase of natural gas.

(B) Represents the range, along with the weighted average, of the percentage of contracted usage that is loaded during on-peak hours versus off-peak.

The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities for the three months ended March 31, 2016 and 2015, using significant unobservable inputs (Level 3), are as follows (in thousands):

 
Three Months Ended
March 31, 2016
 
Three Months Ended
March 31, 2015
Balance at beginning of period
$
(632
)
 
$
(5,608
)
Other changes in fair value from continuing and new contracts, net
10,015

 
(16,438
)
Settlements
3,858

 
4,735

 
 
 
 
Balance at end of period
$
13,241

 
$
(17,311
)
 
 
Total gains included in earnings for the three months ended March 31, 2016 that are attributable to the change in unrealized gains relating to those assets and liabilities included in Level 3 still held as of March 31, 2016, are $10.0 million.  These gains are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.

14.
LONG-TERM DEBT:

In January 2016, the Company paid $12.7 million to retire outstanding debt for ACB.

In January 2016, SJG issued $61.0 million of long-term debt at an average interest rate of 1.37% under a $200.0 million aggregate syndicated bank term facility. The facility is now fully drawn. The total outstanding amount under this facility as of March 31, 2016 is $200.0 million.

The Company did not issue or retire any other long-term debt during the three months ended March 31, 2016.


29

Table of Contents

15.
ACCUMULATED OTHER COMPREHENSIVE LOSS:

The following tables summarize the changes in accumulated other comprehensive loss (AOCL) for the three months ended March 31, 2016 (in thousands):

 
 
 
 
 
 
 
 
 
 
 
Postretirement Liability Adjustment
 
Unrealized Gain (Loss) on Derivatives-Other
 
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Other Comprehensive Income (Loss) of Affiliated Companies
 
Total
Balance at January 1, 2016 (a)
$
(22,145
)
 
$
(2,129
)
 
$
(128
)
 
$
(97
)
 
$
(24,499
)
   Other comprehensive loss before reclassifications

 

 
63

 

 
63

   Amounts reclassified from AOCL (b)

 
51

 
(14
)
 

 
37

Net current period other comprehensive income (loss)

 
51

 
49

 

 
100

Balance at March 31, 2016 (a)
$
(22,145
)
 
$
(2,078
)
 
$
(79
)
 
$
(97
)
 
$
(24,399
)
 
 
 
 
 
 
(a) Determined using a combined average statutory tax rate of 40%.

(b) See table below.


30

Table of Contents

The following table provides details about reclassifications out of AOCL for the three months ended March 31, 2016:

 
Amounts Reclassified from AOCL (in thousands)
 
Affected Line Item in the Condensed Consolidated Statements of Income
Three Months Ended
March 31, 2016
 
Unrealized Gain on Derivatives-Other - interest rate contracts designated as cash flow hedges
$
86

 
Interest Charges
   Income Taxes
(35
)
 
Income Taxes (a)
 
$
51

 
 
 
 
 
 
Unrealized Loss on Available-for-Sale Securities
$
(25
)
 
Other Income
   Income Taxes
11

 
Income Taxes (a)
 
$
(14
)
 
 
 
 
 
 
Losses from reclassifications for the period net of tax
$
37