Document
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 June 30, 2017

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
Exact name of registrant as
specified in its charter and principal
office address and telephone number
State of
Incorporation
I.R.S.
Employer
Identification No.
1-6364
South Jersey Industries, Inc.
1 South Jersey Plaza
Folsom, NJ 08037
(609) 561-9000
New Jersey
22-1901645
000-22211
South Jersey Gas Company
1 South Jersey Plaza
Folsom, NJ 08037
(609) 561-9000
New Jersey
21-0398330
Indicate by check mark whether each 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 such 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 each 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 such registrant was required to submit and post such files). Yes x   No o

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
South Jersey Industries, Inc.:
 
Large accelerated filer   x
Accelerated filer      o
Non-accelerated filer     o 
Smaller reporting company      o
Emerging growth company      o
 
 
 
 
South Jersey Gas Company:
 
Large accelerated filer   o
Accelerated filer      o
Non-accelerated filer     x 
Smaller reporting company      o
Emerging growth company      o
 

If an emerging growth company, indicate by check mark if either registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
South Jersey Industries, Inc. common stock ($1.25 par value) outstanding as of August 1, 2017 was 79,549,014 shares. South Jersey Gas Company common stock ($2.50 par value) outstanding as of August 1, 2017 was 2,339,139 shares. All of South Jersey Gas Company's outstanding shares of common stock are held by South Jersey Industries, Inc.
South Jersey Gas Company is a wholly-owned subsidiary of South Jersey Industries, Inc. and meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q. As such, South Jersey Gas Company files its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.




TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
Page No.
 
 
 
Item 1.
Financial Statements (Unaudited)
 
South Jersey Industries, Inc.
 
 
 
 
 
 
 
 
 
South Jersey Gas Company
 
 
 
 
 
 
 
 
 
 
  South Jersey Industries, Inc. and South Jersey Gas Company - Combined
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
Item 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 6.
 
 
 




INTRODUCTION

FILING FORMAT

This Quarterly Report on Form 10-Q is a combined report being filed separately by two registrants: South Jersey Industries, Inc. (SJI) and South Jersey Gas Company (SJG). Information relating to SJI or any of its subsidiaries, other than SJG, is filed by SJI on its own behalf. SJG is only responsible for information about itself.

Except where the content clearly indicates otherwise, any reference in the report to "SJI," "the Company," "we," "us" or "our" is to the holding company or SJI and all of its subsidiaries, including SJG, which is a wholly-owned subsidiary of SJI.

Part 1 - Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e., balance sheets, statements of income, statements of comprehensive income and statements of cash flows) for SJI and SJG. The Notes to Unaudited Condensed Consolidated Financial Statements are presented on a combined basis for both SJI and SJG. Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) included under Item 2 is divided into two major sections: SJI and SJG.



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
June 30,
 
2017
 
2016
Operating Revenues:
 
 
 
Utility
$
81,938

 
$
68,273

Nonutility
162,436

 
86,129

Total Operating Revenues
244,374

 
154,402

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
32,331

 
19,508

 - Nonutility
147,354

 
78,832

Operations
38,474

 
36,250

Maintenance
4,672

 
4,259

Depreciation
24,556

 
22,296

Energy and Other Taxes
1,551

 
1,243

Total Operating Expenses
248,938

 
162,388

Operating Loss
(4,564
)
 
(7,986
)
 
 
 
 
Other Income and Expense
2,317

 
4,361

Interest Charges
(10,979
)
 
(8,229
)
Losses Before Income Taxes
(13,226
)
 
(11,854
)
Income Taxes
5,544

 
7,189

Equity in Earnings (Losses) of Affiliated Companies
70

 
(133
)
Loss from Continuing Operations
(7,612
)
 
(4,798
)
Loss from Discontinued Operations - (Net of tax benefit)
(47
)
 
(29
)
Net Loss
$
(7,659
)
 
$
(4,827
)
 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.10
)
 
$
(0.06
)
Discontinued Operations

 

Basic Earnings Per Common Share
$
(0.10
)
 
$
(0.06
)
 
 
 
 
Average Shares of Common Stock Outstanding - Basic
79,549

 
75,298

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.10
)
 
$
(0.06
)
Discontinued Operations

 

Diluted Earnings Per Common Share
$
(0.10
)
 
$
(0.06
)
 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
79,549

 
75,298

 
 
 
 
Dividends Declared Per Common Share
$
0.27

 
$
0.26


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

1

Table of Contents

 
 
 
 
 
Six Months Ended
June 30,
 
2017
 
2016
Operating Revenues:
 
 
 
Utility
$
277,707

 
$
251,942

Nonutility
392,496

 
235,495

Total Operating Revenues
670,203

 
487,437

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
103,710

 
84,714

 - Nonutility
363,117

 
166,601

Operations
78,100

 
75,047

Maintenance
9,653

 
8,643

Depreciation
48,879

 
42,997

Energy and Other Taxes
3,622

 
3,168

Total Operating Expenses
607,081

 
381,170

Operating Income
63,122

 
106,267

 
 
 
 
Other Income and Expense
7,982

 
6,564

Interest Charges
(27,724
)
 
(17,389
)
Income Before Income Taxes
43,380

 
95,442

Income Taxes
(16,326
)
 
(32,078
)
Equity in Earnings of Affiliated Companies
3,081

 
25

Income from Continuing Operations
30,135

 
63,389

Loss from Discontinued Operations - (Net of tax benefit)
(77
)
 
(147
)
Net Income
$
30,058

 
$
63,242

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.38

 
$
0.86

Discontinued Operations

 

Basic Earnings Per Common Share
$
0.38

 
$
0.86

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
79,534

 
73,213

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.38

 
$
0.86

Discontinued Operations

 

Diluted Earnings Per Common Share
$
0.38

 
$
0.86

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
79,670

 
73,506

 
 
 
 
Dividends Declared per Common Share
$
0.54

 
$
0.52



2

Table of Contents


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
June 30,
 
2017
 
2016
Net Loss
$
(7,659
)
 
$
(4,827
)
 
 
 
 
Other Comprehensive Income, Net of Tax:*
 

 
 

 
 
 
 
Unrealized Gain on Available-for-Sale Securities

 
55

Unrealized Gain on Derivatives - Other
7

 
49

 
 
 
 
Other Comprehensive Income - Net of Tax*
7

 
104

 
 
 
 
Comprehensive Loss
$
(7,652
)
 
$
(4,723
)
 
 
 
 
 
Six Months Ended
June 30,
 
2017
 
2016
Net Income
$
30,058

 
$
63,242

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

 
104

Unrealized Gain on Derivatives - Other
1,522

 
100

 
 
 
 
Other Comprehensive Income - Net of Tax*
1,522

 
204

 
 
 
 
Comprehensive Income
$
31,580

 
$
63,446

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

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



3

Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
 
Six Months Ended
June 30,
 
2017
 
2016
Net Cash Provided by Operating Activities (See Note 1)
$
123,658

 
$
158,099

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures (See Note 1)
(142,029
)
 
(119,905
)
Proceeds from Sale of Property, Plant & Equipment
3,058

 

Investment in Long-Term Receivables
(4,602
)
 
(5,702
)
Proceeds from Long-Term Receivables
4,948

 
5,195

Notes Receivable
3,000

 
(74
)
Purchase of Company-Owned Life Insurance
(8,074
)
 
(652
)
Investment in Affiliate
(19,461
)
 
(5,820
)
Net Repayment of Notes Receivable - Affiliate
243

 
1,266

 
 
 
 
Net Cash Used in Investing Activities (See Note 1)
(162,917
)
 
(125,692
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net Borrowings from (Repayments of) Short-Term Credit Facilities
200

 
(286,300
)
Proceeds from Issuance of Long-Term Debt
321,000

 
61,000

Principal Repayments of Long-Term Debt
(277,400
)
 
(13,078
)
Payments for Issuance of Long-Term Debt
(2,060
)
 

Net Settlement of Restricted Stock (See Note 1)
(751
)
 

Dividends on Common Stock
(21,676
)
 
(18,790
)
Proceeds from Sale of Common Stock

 
214,463

 
 
 
 
Net Cash Provided by (Used in) Financing Activities
19,313

 
(42,705
)
 
 
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash
(19,946
)
 
(10,298
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period (See Note 1)
31,910

 
52,635

 
 
 
 
Cash, Cash Equivalents and Restricted Cash at End of Period (See Note 1)
$
11,964

 
$
42,337


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)
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
2,536,251

 
$
2,424,134

Accumulated Depreciation
(480,248
)
 
(471,222
)
Nonutility Property and Equipment, at cost
824,775

 
821,942

Accumulated Depreciation
(173,009
)
 
(151,084
)
 
 
 
 
Property, Plant and Equipment - Net
2,707,769

 
2,623,770

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
32

 
32

Restricted
1,842

 
13,628

Investment in Affiliates
49,979

 
28,906

 
 
 
 
Total Investments
51,853

 
42,566

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
10,122

 
18,282

Accounts Receivable
180,551

 
222,339

Unbilled Revenues
25,124

 
59,680

Provision for Uncollectibles
(12,218
)
 
(12,744
)
Notes Receivable
1,107

 
1,454

Notes Receivable - Affiliate
2,218

 
2,461

Natural Gas in Storage, average cost
47,521

 
53,857

Materials and Supplies, average cost
6,965

 
6,753

Prepaid Taxes
14,841

 
17,471

Derivatives - Energy Related Assets
46,361

 
72,391

Other Prepayments and Current Assets
33,870

 
31,369

 
 
 
 
Total Current Assets
356,462

 
473,313

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
445,312

 
410,746

Derivatives - Energy Related Assets
7,248

 
8,502

Notes Receivable - Affiliate
13,275

 
13,275

Contract Receivables
28,873

 
29,037

Notes Receivable
19,374

 
25,271

Goodwill
4,838

 
4,838

Identifiable Intangible Assets
15,255

 
15,820

Other
91,601

 
83,429

 
 
 
 
Total Regulatory and Other Noncurrent Assets
625,776

 
590,918

 
 
 
 
Total Assets
$
3,741,860

 
$
3,730,567

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

5

Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
June 30,
2017
 
December 31,
2016
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
99,436

 
$
99,347

Premium on Common Stock
708,082

 
706,943

Treasury Stock (at par)
(264
)
 
(266
)
Accumulated Other Comprehensive Loss
(25,859
)
 
(27,381
)
Retained Earnings
497,854

 
510,597

 
 
 
 
Total Equity
1,279,249

 
1,289,240

 
 
 
 
Long-Term Debt
1,066,680

 
808,005

 
 
 
 
Total Capitalization
2,345,929

 
2,097,245

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
296,300

 
296,100

Current Portion of Long-Term Debt
15,909

 
231,909

Accounts Payable
246,688

 
243,669

Customer Deposits and Credit Balances
48,792

 
48,068

Environmental Remediation Costs
59,706

 
46,120

Taxes Accrued
2,358

 
2,082

Derivatives - Energy Related Liabilities
23,082

 
60,082

Derivatives - Other
787

 
681

Dividends Payable
21,677

 

Interest Accrued
4,836

 
6,231

Pension Benefits
2,463

 
2,463

Other Current Liabilities
11,521

 
15,219

 
 
 
 
Total Current Liabilities
734,119

 
952,624

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities:
 

 
 

Deferred Income Taxes - Net
360,179

 
343,549

Pension and Other Postretirement Benefits
89,474

 
95,235

Environmental Remediation Costs
103,214

 
108,893

Asset Retirement Obligations
59,443

 
59,427

Derivatives - Energy Related Liabilities
4,660

 
4,540

Derivatives - Other
10,559

 
9,349

Regulatory Liabilities
24,655

 
49,121

Other
9,628

 
10,584

 
 
 
 
Total Deferred Credits and Other Noncurrent Liabilities
661,812

 
680,698

 
 
 
 
Commitments and Contingencies  (Note 11)


 


 
 
 
 
Total Capitalization and Liabilities
$
3,741,860

 
$
3,730,567

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


6

Table of Contents

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Operating Revenues
$
83,251

 
$
68,762

 
 
 
 
Operating Expenses:
 
 
 
Cost of Sales (Excluding depreciation)
33,644

 
19,997

Operations
23,034

 
22,525

Maintenance
4,672

 
4,259

Depreciation
12,873

 
11,490

Energy and Other Taxes
872

 
560

 
 
 
 
Total Operating Expenses
75,095

 
58,831

 
 
 
 
Operating Income
8,156

 
9,931

 
 
 
 
Other Income and Expense
1,618

 
1,079

 
 
 
 
Interest Charges
(6,077
)
 
(4,552
)
 
 
 
 
Income Before Income Taxes
3,697

 
6,458

 
 
 
 
Income Taxes
(1,431
)
 
(1,415
)
 
 
 
 
Net Income
$
2,266

 
$
5,043



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



7

Table of Contents


 
 
 
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
Operating Revenues
$
280,065

 
$
256,528

 
 
 
 
Operating Expenses:
 
 
 
Cost of Sales (Excluding depreciation)
106,068

 
89,300

Operations
47,788

 
48,594

Maintenance
9,653

 
8,643

Depreciation
25,587

 
22,700

Energy and Other Taxes
2,167

 
1,587

 
 
 
 
Total Operating Expenses
191,263

 
170,824

 
 
 
 
Operating Income
88,802

 
85,704

 
 
 
 
Other Income and Expense
3,239

 
1,915

 
 
 
 
Interest Charges
(11,955
)
 
(9,339
)
 
 
 
 
Income Before Income Taxes
80,086

 
78,280

 
 
 
 
Income Taxes
(31,342
)
 
(28,819
)
 
 
 
 
Net Income
$
48,744

 
$
49,461





8

Table of Contents


SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Net Income
$
2,266

 
$
5,043

 
 
 
 
Other Comprehensive Income - Net of Tax: *
 
 
 
 
 
 
 
Unrealized Gain on Available-for-Sale Securities

 
3

Unrealized Gain on Derivatives - Other
7

 
7

 
 
 
 
Other Comprehensive Income - Net of Tax *
7

 
10

 
 
 
 
Comprehensive Income
$
2,273

 
$
5,053

 
 
 
 

 
 
 
 
 
Six Months Ended
June 30,
 
2017
 
2016
Net Income
$
48,744

 
$
49,461

 
 
 
 
Other Comprehensive Income - Net of Tax: *
 
 
 
 
 
 
 
Unrealized Gain on Available-for-Sale Securities

 
7

Unrealized Gain on Derivatives - Other
14

 
14

 
 
 
 
Other Comprehensive Income - Net of Tax *
14

 
21

 
 
 
 
Comprehensive Income
$
48,758

 
$
49,482

 
 
 
 
* Determined using a combined average statutory tax rate of 40%.
 
The accompanying notes are an integral part of the unaudited condensed financial statements.



9

Table of Contents

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)

 
Six Months Ended
June 30,
 
 
2017
 
2016
Net Cash Provided by Operating Activities
$
75,514

 
$
97,394

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Capital Expenditures
(127,209
)
 
(107,676
)
Note Receivable

 
(74
)
Purchase of Company-Owned Life Insurance
(4,875
)
 

Investment in Long-Term Receivables
(4,602
)
 
(5,702
)
Proceeds from Long-Term Receivables
4,948

 
5,195

 
 
 
 
Net Cash Used in Investing Activities (See Note 1)
(131,738
)
 
(108,257
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Net Repayments of Short-Term Credit Facilities
(101,500
)
 
(121,100
)
Proceeds from Issuance of Long-Term Debt
321,000

 
61,000

Principal Repayments of Long-Term Debt
(200,000
)
 

Payments for Issuance of Long-Term Debt
(2,029
)
 

Additional Investment by Shareholder
40,000

 
65,000

 
 
 
 
Net Cash Provided by Financing Activities
57,471

 
4,900

 
 
 
 
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
1,247

 
(5,963
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period (See Note 1)
1,391

 
7,544

 
 
 
 
Cash, Cash Equivalents and Restricted Cash at End of Period (See Note 1)
$
2,638

 
$
1,581

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


10

Table of Contents


SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
2,536,251

 
$
2,424,134

Accumulated Depreciation
(480,248
)
 
(471,222
)
 
 
 
 
Property, Plant and Equipment - Net
2,056,003

 
1,952,912

 
 
 
 
Investments:
 
 
 
Restricted Investments
1,542

 
32

 
 
 
 
Total Investments
1,542

 
32

 
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
1,096

 
1,359

Accounts Receivable
76,400

 
69,651

Accounts Receivable - Related Parties
738

 
1,355

Unbilled Revenues
11,343

 
41,754

Provision for Uncollectibles
(12,010
)
 
(12,570
)
Natural Gas in Storage, average cost
12,728

 
11,621

Materials and Supplies, average cost
947

 
914

Prepaid Taxes
14,129

 
16,428

Derivatives - Energy Related Assets
7,998

 
5,434

Other Prepayments and Current Assets
15,349

 
13,853

 
 
 
 
Total Current Assets
128,718

 
149,799

 
 
 
 
Regulatory and Other Noncurrent Assets:
 
 
 
Regulatory Assets
445,312

 
410,746

Long-Term Receivables
25,794

 
25,758

Derivatives - Energy Related Assets

 
373

Other
16,374

 
12,303

 
 
 
 
Total Regulatory and Other Noncurrent Assets
487,480

 
449,180

 
 
 
 
Total Assets
$
2,673,743

 
$
2,551,923

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


11

Table of Contents

SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)
 
 
June 30, 2017
 
December 31, 2016
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
5,848

 
$
5,848

Other Paid-In Capital and Premium on Common Stock
355,743

 
315,827

Accumulated Other Comprehensive Loss
(14,920
)
 
(14,934
)
Retained Earnings
582,024

 
533,159

 
 
 
 
Total Equity
928,695

 
839,900

 
 
 
 
Long-Term Debt
742,525

 
423,177

 
 
 
 
Total Capitalization
1,671,220

 
1,263,077

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
2,800

 
104,300

Current Portion of Long-Term Debt
15,909

 
215,909

Accounts Payable - Commodity
30,635

 
23,815

Accounts Payable - Other
49,464

 
45,370

Accounts Payable - Related Parties
7,663

 
11,216

Derivatives - Energy Related Liabilities
1,881

 
1,372

Derivatives - Other Current
382

 
386

Customer Deposits and Credit Balances
46,845

 
45,816

Environmental Remediation Costs
59,320

 
45,018

Taxes Accrued
1,392

 
855

Pension Benefits
2,428

 
2,428

Interest Accrued
3,889

 
5,369

Other Current Liabilities
3,946

 
8,011

 
 
 
 
Total Current Liabilities
226,554

 
509,865

 
 
 
 
Regulatory and Other Noncurrent Liabilities:
 

 
 

Regulatory Liabilities
24,655

 
49,121

Deferred Income Taxes - Net
500,913

 
469,408

Environmental Remediation Costs
102,362

 
108,029

Asset Retirement Obligations
58,676

 
58,674

Pension and Other Postretirement Benefits
77,384

 
81,800

Derivatives - Energy Related Liabilities
297

 

Derivatives - Other Noncurrent
6,915

 
6,979

Other
4,767

 
4,970

 
 
 
 
Total Regulatory and Other Noncurrent Liabilities
775,969

 
778,981

 
 
 
 
Commitments and Contingencies (Note 11)
 
 
 
 
 
 
 
Total Capitalization and Liabilities
$
2,673,743

 
$
2,551,923

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


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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 significant wholly-owned subsidiaries of Marina are:

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. In May 2017, SJESP entered into an agreement to sell certain assets of its residential and small commercial HVAC and plumbing business to a third party. This transaction, which is expected to be completed by August 31, 2017, is not expected to have a material impact on the consolidated financial statements.

SJI Midstream, LLC (Midstream) invests in infrastructure and other midstream projects, including a current project to build an approximately 118-mile natural gas pipeline in Pennsylvania and New Jersey.

BASIS OF PRESENTATION - SJI's condensed consolidated financial statements include the accounts of SJI, its wholly-owned subsidiaries (including SJG) and subsidiaries in which SJI has a controlling interest. SJI eliminates all significant intercompany accounts and transactions. In management’s opinion, the unaudited condensed consolidated financial statements of SJI and SJG reflect all normal and recurring adjustments needed to fairly present their respective financial positions, operating results and cash flows at the dates and for the periods presented. SJI’s and SJG'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 of SJI and SJG 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 and SJG's Annual Reports on Form 10-K for the year ended December 31, 2016 for a more complete discussion of the accounting policies and certain other information.


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Certain reclassifications have been made to SJI's and SJG's prior period condensed consolidated statements of cash flows to conform to the current period presentation. Restricted cash is now combined with cash and cash equivalents when reconciling the beginning and end of period balances on the condensed consolidated statements of cash flows of SJI, as well as the condensed statements of cash flows for SJG, to conform to ASU 2016-18, which is described below under "New Accounting Pronouncements." This combination of restricted cash and cash and cash equivalents caused Cash Flows from Investing Activities for both SJI and SJG to be adjusted in order to remove items relating to capital expenditures and proceeds from restricted investments (SJI only), as well as the sale of restricted investments in a margin account (SJI and SJG).

Certain reclassifications have been made to SJI's prior period condensed consolidated statements of cash flows to conform to the current period presentation. Cash paid by an employer when directly withholding shares for tax-withholding purposes is now classified as a financing activity in the condensed consolidated statements of cash flows to conform to ASU 2016-09, which is described below under "New Accounting Pronouncements." This caused SJI's prior period Cash Flows Provided by Operating Activities to increase by $0.4 million and Net Cash Flows from Financing Activities to decrease by the same amount. Adoption of this guidance did not effect SJG's condensed statements of cash flows.

REVENUE-BASED TAXES - SJG collects certain revenue-based energy taxes from its customers. Such taxes include the 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 $0.2 million for both the three months ended June 30, 2017 and 2016, and $0.6 million and $0.5 million for the six months ended June 30, 2017 and 2016, respectively.
 
IMPAIRMENT OF LONG-LIVED ASSETS - SJI and SJG review the carrying amount of long-lived assets for possible impairment whenever events or changes in circumstances indicate that such amounts may not be recoverable. For the six months ended June 30, 2017, SJI recorded an impairment charge of $0.3 million within Operating Expenses on the condensed consolidated statements of income due to a reduction in the expected cash flows to be received from a solar generating facility within the on-site energy production segment. No impairments were identified at SJI for the three months ended June 30, 2017 or at SJG for the three and six months ended June 30, 2017. For the three and six months ended June 30, 2016, no impairments were identified at SJI or SJG.

GAS EXPLORATION AND DEVELOPMENT - SJI 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 and six months ended June 30, 2017 or 2016. As of June 30, 2017 and December 31, 2016, $8.7 million and $8.8 million, respectively, related to interests in proved and unproved properties in Pennsylvania, net of amortization, is included with Nonutility Property and Equipment and Other Noncurrent Assets on SJI's condensed consolidated balance sheets.
 
TREASURY STOCK - SJI uses the par value method of accounting for treasury stock. As of June 30, 2017 and December 31, 2016, SJI held 211,217 and 212,617 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 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 and six months ended June 30, 2017. Goodwill totaled $4.8 million on the condensed consolidated balance sheets of SJI as of both June 30, 2017 and December 31, 2016.



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NEW ACCOUNTING PRONOUNCEMENTS - Other than as described below, no new accounting pronouncement issued or effective during 2017 or 2016 had, or are 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. In connection with this new standard, the FASB has issued several amendments to ASU 2014-09, as follows:

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 improves the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This standard clarifies identifying performance obligations and the licensing implementation guidance.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This standard provides additional guidance on (a) the objective of the collectibility criterion, (b) the presentation of sales tax collected from customers, (c) the measurement date of non-cash consideration received, (d) practical expedients in respect of contract modifications and completed contracts at transition, and (e) disclosure of the effects of the accounting change in the period of adoption.

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance, including the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.

The new guidance in ASU 2014-09, as well as all amendments discussed above, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Management has formed an implementation team that is currently evaluating the impact that adoption of this guidance will have on the financial statements of SJI and SJG. We are in the process of assessing the impact of the guidance on our contracts in all our revenue streams by reviewing current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts. We expect that the majority of SJI and SJG revenue streams will be in scope of the new guidance, which includes SJG’s regulated revenue under tariffs, for which no change in current revenue recognition practices is expected.  Revenues from contracts that SJI and SJG have with customers are currently recorded as gas or electricity is delivered to the customer, which is consistent with the new guidance under ASC 606.  As a result, based on the review of customer contracts to date, SJI is not anticipating this guidance to have a material impact to SJI's or SJG's statements of consolidated income, cash flows or consolidated balance sheets upon adoption. The ASU does include expanded disclosure requirements, which we continue to analyze. We do not anticipate any significant changes to our business processes, systems or internal controls over financial reporting needed to support recognition and disclosure under the new guidance. We are continuing with our implementation plan and expect to transition to the new guidance beginning in 2018 using the modified retrospective approach.

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 financial statements of SJI and SJG.


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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 has formed an implementation team that is inventorying leases and evaluating the impact that adoption of this guidance will have on SJI's and SJG's financial statements, as well as the transition method that will be elected to adopt the guidance.

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 was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. Adoption of this guidance did not have a material impact on the financial statement results of SJI or SJG; however, cash flow presentation was modified for SJI to conform to this guidance, as described under “Basis of Presentation” above.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires recognition of the current and deferred income tax effects of an intra-entity asset transfer, other than inventory, when the transfer occurs, as opposed to current GAAP, which requires companies to defer the income tax effects of intra-entity asset transfers until the asset has been sold to an outside party. The income tax effects of intra-entity inventory transfers will continue to be deferred until the inventory is sold. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. The standard is required to be adopted on a modified retrospective basis with a cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This standard is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. This ASU requires that the statement of cash flows explain the change in total cash and cash equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This ASU also requires a reconciliation between the total of cash and cash equivalents and restricted cash presented on the statement of cash flows and the cash and cash equivalents balance presented on the balance sheets. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. Both SJI and SJG early adopted this ASU in the first quarter of 2017. Accordingly, cash flow presentations were modified for both entities to conform to this guidance, as described under “Basis of Presentation” above.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard provides amended and clarifying guidance regarding whether an integrated set of assets and activities acquired is deemed the acquisition of a business (and, thus, accounted for as a business combination) or the acquisition of assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The amendments in this update are effective for annual and any interim impairment tests performed in periods beginning after December 31, 2019. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to improve guidance related to the presentation of defined benefit costs in the income statement. In particular, this ASU requires an employer to report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.


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In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU clarifies and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, to a change to the terms and conditions of a share-based payment award. This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
2.
STOCK-BASED COMPENSATION PLAN:

On April 30, 2015, the shareholders of SJI approved the adoption of SJI'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 six months ended June 30, 2017 and 2016No stock appreciation rights have been issued under the plans. During the six months ended June 30, 2017 and 2016, SJI granted 167,444 and 193,184 restricted shares, respectively, to Officers and other key employees under the Plan. 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 shares granted.

In 2015, SJI began granting time-based shares of restricted stock, one-third of which vest annually over a three-year period and which are limited to a 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 six months ended June 30, 2017 and 2016, Officers and other key employees were granted 52,971 and 57,955 shares of time-based restricted stock, respectively, 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 growth rate per share (EGR) relative to a peer group to measure performance. In 2015, earnings-based performance targets included pre-defined EGR and ROE goals to measure performance. Beginning in 2016, performance targets include pre-defined compounded earnings annual growth rate (CEGR) for SJI. As EGR-based, ROE-based and CEGR-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.


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Table of Contents

During the six months ended June 30, 2017 and 2016, SJI granted 30,394 and 35,197 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 for SJI at June 30, 2017 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 -
2015 - TSR
 
33,537

 
$
26.31

 
16.0
%
 
1.10
%
 
2015 - EGR, ROE, Time
 
61,586

 
$
29.47

 
N/A

 
N/A

 
2016 - TSR
 
66,101

 
$
22.53

 
18.1
%
 
1.31
%
 
2016 - CEGR, Time
 
103,650

 
$
23.52

 
N/A

 
N/A

 
2017 - TSR
 
57,237

 
$
32.17

 
20.8
%
 
1.47
%
 
2017 - CEGR, Time
 
110,207

 
$
33.69

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
Directors -
2017
 
30,394

 
$
33.64

 
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.

The following table summarizes the total stock-based compensation cost to SJI for the three and six months ended June 30, 2017 and 2016 (in thousands):

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
2016
 
2017
 
2016
Officers & Key Employees
$
1,117

$
798

 
$
2,187

 
$
1,615

Directors
256

227

 
512

 
420

Total Cost
1,373

1,025

 
2,699

 
2,035

 
 
 
 
 
 
 
Capitalized
(104
)
(106
)
 
(192
)
 
(212
)
Net Expense
$
1,269

$
919

 
$
2,507

 
$
1,823


As of June 30, 2017, there was $7.9 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 2.0 years.

The following table summarizes information regarding restricted stock award activity for SJI during the six months ended June 30, 2017, excluding accrued dividend equivalents:

 
Officers &Other Key Employees
 
Directors
 
Weighted
Average
Fair Value
Nonvested Shares Outstanding, January 1, 2017
295,515

 
35,197

 
$
24.96

  Granted
167,444

 
30,394

 
$
33.24

  Vested
(30,641
)
 
(35,197
)
 
$
24.75

Nonvested Shares Outstanding, June 30, 2017
432,318

 
30,394

 
$
28.53



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Table of Contents

During the six months ended June 30, 2017 and 2016, SJI awarded 65,628 shares to its Officers and other key employees at a market value of $2.2 million, and 13,247 shares at a market value of $0.3 million, respectively. During the six months ended June 30, 2017 and 2016, SJI also granted 30,394 and 35,197 shares to its Directors at a market value of $1.0 million and $0.8 million, respectively.

SJI 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.

South Jersey Gas Company - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the six months ended June 30, 2017 and 2016, SJG officers and other key employees were granted 24,001 and 32,732 shares of SJI restricted stock, respectively. The cost of outstanding stock awards for SJG during the six months ended June 30, 2017 and 2016 was $0.3 million and $0.2 million, respectively. Approximately one-half of these costs were capitalized on SJG's condensed balance sheets to Utility Plant.

3.
AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS:

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

PennEast Pipeline Company, LLC (PennEast) - Midstream has a 20% investment in PennEast, which is planning to construct an approximately 118-mile natural gas pipeline that will extend from Northeastern Pennsylvania into New Jersey, with construction to begin in 2018.

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

Millennium Account Services, LLC (Millennium) - SJI and a joint venture partner formed Millennium, in which SJI has a 50% equity interest. Millennium reads utility customers’ meters on a monthly basis for a fee.

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.

During the first six months of 2017 and 2016, SJI made net investments in unconsolidated affiliates of $19.2 million and $4.6 million, respectively.  As of June 30, 2017 and December 31, 2016, the outstanding balance of Notes Receivable – Affiliate was $15.5 million and $15.7 million, respectively. As of June 30, 2017, $13.7 million of these notes were secured by property, plant and equipment of the affiliates, accrue interest at 7.5% and are to be repaid through 2025. The remaining $1.8 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 June 30, 2017, SJI had a net asset of approximately $50.0 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 June 30, 2017, is limited to its combined equity contributions and the Notes Receivable-Affiliate in the aggregate amount of $65.5 million.


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Table of Contents

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 (see Note 11).

Summarized operating results of the discontinued operations for the three and six months ended June 30, 2017 and 2016, were (in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Loss before Income Taxes:
 
 
 
 
 
 
 
Sand Mining
$
(15
)
 
$
(18
)
 
$
(32
)
 
$
(164
)
Fuel Oil
(57
)
 
(27
)
 
(86
)
 
(62
)
Income Tax Benefits
25

 
16

 
41

 
79

Loss from Discontinued Operations — Net
$
(47
)
 
$
(29
)
 
$
(77
)
 
$
(147
)
Earnings Per Common Share from
 
 
 

 
 
 
 
Discontinued Operations — Net:
 
 
 

 
 
 
 
Basic and Diluted
$

 
$

 
$

 
$


SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2016. See Note 5 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended December 31, 2016 for a detailed description of the related parties and their associated transactions.

A summary of related party transactions involving SJG, excluding pass-through items, included in SJG's Operating Revenues were as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Operating Revenues/Affiliates:
 
 
 
 
 
 
 
SJRG
$
1,248

 
$
421

 
$
2,211

 
$
4,422

Marina
65

 
68

 
147

 
164

Other
21

 
21

 
42

 
42

Total Operating Revenue/Affiliates
$
1,334

 
$
510

 
$
2,400

 
$
4,628


Related-party transactions involving SJG, excluding pass-through items, included in SJG's Cost of Sales and Operating Expenses were as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Costs of Sales/Affiliates (Excluding depreciation)
 
 
 
 
 
 
 
SJRG
$
496

 
$
1,514

 
$
10,946

 
$
9,503

 
 
 
 
 
 
 
 
Operations Expense/Affiliates:
 
 
 
 
 
 
 
SJI
$
4,988

 
$
5,315

 
$
11,038

 
$
9,870

Millennium
712

 
701

 
1,420

 
1,395

Other
(41
)
 
(49
)
 
(80
)
 
(106
)
Total Operations Expense/Affiliates
$
5,659

 
$
5,967

 
$
12,378

 
$
11,159



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4.
COMMON STOCK:

The following shares were issued and outstanding for SJI:

 
2017
Beginning Balance, January 1
79,478,055

New Issuances During the Period:
 

Stock-Based Compensation Plan
70,959

Ending Balance, June 30
79,549,014


The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $1.1 million was recorded in Premium on Common Stock.

In May 2016, SJI issued and sold 8,050,000 shares of its common stock, par value $1.25 per share pursuant to a public offering, raising net proceeds of approximately $203.6 million. The net proceeds from this offering were or will be used for capital expenditures, primarily for regulated businesses, including infrastructure investments at its utility business.

There were 2,339,139 shares of SJG's common stock (par value $2.50 per share) outstanding as of June 30, 2017. SJG did not issue any new shares during the period. SJI owns all of the outstanding common stock of SJG.

SJI's EARNINGS PER COMMON SHARE (EPS) - SJI's 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 136,332 and 292,782 for the six months ended June 30, 2017 and 2016, respectively. For the three months ended June 30, 2017 and 2016, incremental shares of 150,852 and 297,061 were not included in the denominator for the diluted EPS calculation because they would have an antidilutive effect on EPS. These additional shares relate to SJI's restricted stock as discussed in Note 2.

DIVIDEND REINVESTMENT PLAN (DRP) - SJI offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. Prior to May 1, 2016 shares of common stock offered by the DRP had been issued directly by SJI from its authorized but unissued shares of common stock. SJI raised $10.8 million of equity capital through the DRP during the six months ended June 30, 2016. Effective May 1, 2016, SJI switched to purchasing shares on the open market to fund share purchases by DRP participants. SJI does not intend to issue any new equity capital via the DRP in 2017.

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 June 30, 2017 and December 31, 2016, the escrowed funds, including interest earned, totaled $0.3 million and $1.9 million, respectively, which are recorded in Restricted Investments on the condensed consolidated balance sheets.

SJI and SJG maintain margin accounts with selected counterparties to support their 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 June 30, 2017, SJI's balances in these accounts totaled $1.5 million held by the counterparty, which is recorded in Restricted Investments on the condensed consolidated balance sheets, and $2.8 million held by SJI as collateral, which is recorded in Other Current Liabilities on the condensed consolidated balance sheets. As of December 31, 2016, SJI's balances in these accounts totaled $11.7 million held by the counterparty and was recorded in Restricted Investments on the condensed consolidated balance sheets. As of June 30, 2017, SJG's balance held by the counterparty totaled $1.5 million and was recorded in Restricted Investments on the condensed balance sheets. As of December 31, 2016, SJG's balance held by SJG as collateral was $3.6 million which was recorded in Accounts Payable - Other on the condensed balance sheets.

The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at June 30, 2017 and December 31, 2016, which would be included in Level 1 of the fair value hierarchy (see Note 13).



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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows (in thousands):

 
 
As of June 30, 2017
Balance Sheet Line Item
 
SJI
SJG
Cash and Cash Equivalents
 
$
10,122

$
1,096

Restricted Investments
 
1,842

1,542

   Total cash, cash equivalents and restricted cash shown in the statement of cash flows
 
$
11,964

$
2,638


 
 
As of December 31, 2016
Balance Sheet Line Item
 
SJI
SJG
Cash and Cash Equivalents
 
$
18,282

$
1,359

Restricted Investments
 
13,628

32

   Total cash, cash equivalents and restricted cash shown in the statement of cash flows
 
$
31,910

$
1,391


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.

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. The Company entered into agreements with its insurance carrier and external legal advisors to recover, net of legal costs, approximately $7.0 million of costs associated with the bondholder settlement discussed above. The Company received $2.1 million in the second quarter of 2016, which is included in Other Income on the statements of consolidated income for the year ended December 31, 2016, and $5.3 million was received in the third quarter of 2016 and is included in Equity in Earnings of Affiliated Companies on the statements of consolidated income for the year ended December 31, 2016, as the loss recorded in the prior year was included in this line item on the statements of consolidated income for the year ended December 31, 2015.

As of June 30, 2017, SJI had approximately $13.7 million included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from Energenic, which is secured by its cogeneration assets for energy service projects. This note is subject to a reimbursement agreement that secures reimbursement for SJI, 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 cogeneration assets and will evaluate the carrying value of the investment and the note receivable as future events occur.


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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 periods ranging from five to ten years, with no interest.  The carrying amounts of such loans were $8.1 million and $9.5 million as of June 30, 2017 and December 31, 2016, 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 $0.8 million and $0.9 million as of June 30, 2017 and December 31, 2016, respectively.  The annualized amortization to interest is not material to SJI’s or SJG's condensed consolidated financial statements. The carrying amounts of these receivables approximate their fair value at June 30, 2017 and December 31, 2016, which would be included in Level 2 of the fair value hierarchy (see Note 13).

CREDIT RISK - As of June 30, 2017, SJI had approximately $9.2 million, or 17.1%, of the current and noncurrent Derivatives – Energy Related Assets transacted with two counterparties. One 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. The second counterparty is investment-grade rated with a rating of Baa1.

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 and SJG's financial instruments approximate their fair values at June 30, 2017 and December 31, 2016, except as noted below.
For Long-Term Debt, in estimating the fair value, SJI and SJG use the present value of remaining cash flows at the balance sheet date. SJI and SJG based the estimates on interest rates available 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 (which includes SJG and all consolidated subsidiaries), including current maturities, as of June 30, 2017 and December 31, 2016, were $1,106.7 million and $1,080.8 million, respectively.  The carrying amounts of SJI's long-term debt, including current maturities, as of June 30, 2017 and December 31, 2016, were $1,082.6 million and $1,039.9 million, respectively. SJI's carrying amounts as of June 30, 2017 and December 31, 2016 are net of unamortized debt issuance costs of $8.5 million and $7.6 million, respectively.
The estimated fair values of SJG's long-term debt, including current maturities, as of June 30, 2017 and December 31, 2016, were $777.1 million and $673.1 million, respectively. The carrying amount of SJG's long-term debt, including current maturities, as of June 30, 2017 and December 31, 2016, was $758.4 million and $639.1 million, respectively. The carrying amounts as of June 30, 2017 and December 31, 2016 are net of unamortized debt issuance costs of $7.6 million and $6.0 million, respectively.

OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's and SJG's other financial instruments approximate their fair values at June 30, 2017 and December 31, 2016.
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. The result of SJG are only included in this operating segment.
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.
Appliance service operations includes SJESP, which 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. In May 2017, SJESP entered into an agreement to sell certain assets of its residential and small commercial HVAC and plumbing business to a third party. This transaction is expected to be completed by August 31, 2017.
Midstream was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey. The activities of Midstream are a part of the Corporate and Services segment.
 

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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.

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Operating Revenues:
 
 
 
 
 
 
 
Gas Utility Operations
$
83,251

 
$
68,762

 
$
280,065

 
$
256,528

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
76,409

 
(1,309
)
 
203,926

 
63,765

Retail Gas and Other Operations
21,759

 
22,305

 
58,637

 
52,038

Retail Electric Operations
42,620

 
43,065

 
91,577

 
82,556

     Subtotal Energy Group
140,788

 
64,061

 
354,140

 
198,359

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
25,135

 
23,043

 
44,747

 
39,364

Appliance Service Operations
1,980

 
2,050

 
3,638

 
3,938

Subtotal Energy Services
27,115

 
25,093

 
48,385

 
43,302

Corporate and Services
11,013

 
8,417

 
22,609

 
17,293

Subtotal
262,167

 
166,333

 
705,199

 
515,482

Intersegment Sales
(17,793
)
 
(11,931
)
 
(34,996
)
 
(28,045
)
Total Operating Revenues
$
244,374

 
$
154,402

 
$
670,203

 
$
487,437


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Table of Contents


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Operating (Loss) Income:
 

 
 

 
 
 
 
Gas Utility Operations
$
8,156

 
$
9,931

 
$
88,802

 
$
85,704

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
(18,191
)
 
(31,149
)
 
(29,817
)
 
7,095

Retail Gas and Other Operations
(1,560
)
 
6,250

 
(3,227
)
 
5,491

Retail Electric Operations
1,155

 
2,277

 
2,461

 
2,862

     Subtotal Energy Group
(18,596
)
 
(22,622
)
 
(30,583
)
 
15,448

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
5,104

 
4,561

 
3,135

 
4,472

Appliance Service Operations
66

 
258

 
(6
)
 
302

  Subtotal Energy Services
5,170

 
4,819

 
3,129

 
4,774

Corporate and Services
706

 
(114
)
 
1,774

 
341

Total Operating (Loss) Income
$
(4,564
)
 
$
(7,986
)
 
$
63,122

 
$
106,267


 
 
 
 
 
 
 
Depreciation and Amortization:
 

 
 

 
 
 
 
Gas Utility Operations
$
17,446

 
$
15,788

 
$
34,808

 
$
31,414

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
33

 
204

 
61

 
408

Retail Gas and Other Operations
84

 
83

 
167

 
168

     Subtotal Energy Group
117

 
287

 
228

 
576

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
11,674

 
10,895

 
23,267

 
20,814

Appliance Service Operations
56

 
91

 
110

 
175

  Subtotal Energy Services
11,730

 
10,986

 
23,377

 
20,989

Corporate and Services
418

 
260

 
819

 
483

Total Depreciation and Amortization
$
29,711

 
$
27,321

 
$
59,232

 
$
53,462


 
 
 
 
 
 
 
Interest Charges:
 

 
 

 
 
 
 
Gas Utility Operations
$
6,077

 
$
4,552

 
$
11,955

 
$
9,339

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
134

 
1

 
3,193

 
65

Retail Gas and Other Operations
64

 
78

 
149

 
210

     Subtotal Energy Group
198

 
79

 
3,342

 
275

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
3,877

 
3,442

 
9,691

 
6,904

Corporate and Services
4,941

 
2,858

 
10,182

 
6,310

Subtotal
15,093

 
10,931

 
35,170

 
22,828

Intersegment Borrowings
(4,114
)
 
(2,702
)
 
(7,446
)
 
(5,439
)
Total Interest Charges
$
10,979

 
$
8,229

 
$
27,724

 
$
17,389



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