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 September 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 November 1, 2017 was 79,549,080 shares. South Jersey Gas Company common stock ($2.50 par value) outstanding as of November 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
September 30,
 
2017
 
2016
Operating Revenues:
 
 
 
Utility
$
65,473

 
$
60,983

Nonutility
161,654

 
158,099

Total Operating Revenues
227,127

 
219,082

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
28,217

 
25,353

 - Nonutility
140,598

 
117,635

Operations
82,521

 
34,796

Maintenance
4,615

 
4,150

Depreciation
24,914

 
23,109

Energy and Other Taxes
1,517

 
1,449

Total Operating Expenses
282,382

 
206,492

Operating (Loss) Income
(55,255
)
 
12,590

 
 
 
 
Other Income and Expense
2,253

 
2,223

Interest Charges
(10,567
)
 
(7,355
)
(Loss) Income Before Income Taxes
(63,569
)
 
7,458

Income Taxes
24,765

 
(2,807
)
Equity in Earnings of Affiliated Companies
1,256

 
5,013

(Loss) Income from Continuing Operations
(37,548
)
 
9,664

Loss from Discontinued Operations - (Net of tax benefit)
(45
)
 
(29
)
Net (Loss) Income
$
(37,593
)
 
$
9,635

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.47
)
 
$
0.12

Discontinued Operations

 

Basic Earnings Per Common Share
$
(0.47
)
 
$
0.12

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
79,549

 
79,478

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.47
)
 
$
0.12

Discontinued Operations

 

Diluted Earnings Per Common Share
$
(0.47
)
 
$
0.12

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
79,549

 
79,635

 
 
 
 
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

 
 
 
 
 
Nine Months Ended
September 30,
 
2017
 
2016
Operating Revenues:
 
 
 
Utility
$
343,180

 
$
312,925

Nonutility
554,150

 
393,594

Total Operating Revenues
897,330

 
706,519

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
131,927

 
110,067

 - Nonutility
503,715

 
284,236

Operations
160,621

 
109,843

Maintenance
14,268

 
12,793

Depreciation
73,793

 
66,106

Energy and Other Taxes
5,139

 
4,617

Total Operating Expenses
889,463

 
587,662

Operating Income
7,867

 
118,857

 
 
 
 
Other Income and Expense
10,235

 
8,787

Interest Charges
(38,291
)
 
(24,744
)
(Loss) Income Before Income Taxes
(20,189
)
 
102,900

Income Taxes
8,439

 
(34,885
)
Equity in Earnings of Affiliated Companies
4,337

 
5,038

(Loss) Income from Continuing Operations
(7,413
)
 
73,053

Loss from Discontinued Operations - (Net of tax benefit)
(122
)
 
(176
)
Net (Loss) Income
$
(7,535
)
 
$
72,877

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.09
)
 
$
0.97

Discontinued Operations

 

Basic Earnings Per Common Share
$
(0.09
)
 
$
0.97

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
79,539

 
75,316

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.09
)
 
$
0.97

Discontinued Operations

 

Diluted Earnings Per Common Share
$
(0.09
)
 
$
0.97

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
79,539

 
75,411

 
 
 
 
Dividends Declared per Common Share
$
0.81

 
$
0.78



2

Table of Contents


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
September 30,
 
2017
 
2016
Net (Loss) Income
$
(37,593
)
 
$
9,635

 
 
 
 
Other Comprehensive Income, Net of Tax:*
 

 
 

 
 
 
 
Unrealized Gain on Available-for-Sale Securities

 
154

Unrealized Gain on Derivatives - Other
7

 
49

 
 
 
 
Other Comprehensive Income - Net of Tax*
7

 
203

 
 
 
 
Comprehensive (Loss) Income
$
(37,586
)
 
$
9,838

 
 
 
 
 
Nine Months Ended
September 30,
 
2017
 
2016
Net (Loss) Income
$
(7,535
)
 
$
72,877

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

 
258

Unrealized Gain on Derivatives - Other
1,529

 
149

 
 
 
 
Other Comprehensive Income - Net of Tax*
1,529

 
407

 
 
 
 
Comprehensive (Loss) Income
$
(6,006
)
 
$
73,284

* Determined using a combined average statutory tax rate of approximately 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)
 
 
Nine Months Ended
September 30,
 
2017
 
2016
Net Cash Provided by Operating Activities
$
127,081

 
$
196,433

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures (See Note 1)
(205,604
)
 
(189,466
)
Proceeds from Sale of Property, Plant & Equipment
3,547

 

Investment in Long-Term Receivables
(6,670
)
 
(8,085
)
Proceeds from Long-Term Receivables
7,468

 
7,528

Notes Receivable
3,000

 
9,919

Purchase of Company-Owned Life Insurance
(8,765
)
 
(1,755
)
Investment in Affiliate
(22,434
)
 
(8,307
)
Return of Investment in Affiliate

 
4,750

Net Repayment of Notes Receivable - Affiliate
41

 
1,378

 
 
 
 
Net Cash Used in Investing Activities (See Note 1)
(229,417
)
 
(184,038
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net Repayments of Short-Term Credit Facilities
(16,000
)
 
(201,500
)
Proceeds from Issuance of Long-Term Debt
446,000

 
61,000

Principal Repayments of Long-Term Debt
(292,400
)
 
(48,457
)
Payments for Issuance of Long-Term Debt
(3,744
)
 
(7
)
Net Settlement of Restricted Stock (See Note 1)
(751
)
 

Dividends on Common Stock
(43,353
)
 
(39,752
)
Proceeds from Sale of Common Stock

 
214,426

 
 
 
 
Net Cash Provided by (Used in) Financing Activities
89,752

 
(14,290
)
 
 
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash
(12,584
)
 
(1,895
)
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)
$
19,326

 
$
50,740


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












4

Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
September 30,
2017
 
December 31,
2016
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
2,591,246

 
$
2,424,134

Accumulated Depreciation
(489,755
)
 
(471,222
)
Nonutility Property and Equipment, at cost
780,131

 
821,942

Accumulated Depreciation
(183,475
)
 
(151,084
)
 
 
 
 
Property, Plant and Equipment - Net
2,698,147

 
2,623,770

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
32

 
32

Restricted
5,645

 
13,628

Investment in Affiliates
54,137

 
28,906

 
 
 
 
Total Investments
59,814

 
42,566

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
13,681

 
18,282

Accounts Receivable
150,607

 
222,339

Unbilled Revenues
19,172

 
59,680

Provision for Uncollectibles
(13,765
)
 
(12,744
)
Notes Receivable
1,107

 
1,454

Notes Receivable - Affiliate
2,421

 
2,461

Natural Gas in Storage, average cost
55,502

 
53,857

Materials and Supplies, average cost
6,594

 
6,753

Prepaid Taxes
12,145

 
17,471

Derivatives - Energy Related Assets
42,068

 
72,391

Other Prepayments and Current Assets
33,931

 
31,369

 
 
 
 
Total Current Assets
323,463

 
473,313

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
477,457

 
410,746

Derivatives - Energy Related Assets
7,650

 
8,502

Notes Receivable - Affiliate
13,275

 
13,275

Contract Receivables
28,515

 
29,037

Notes Receivable
19,088

 
25,271

Goodwill
4,838

 
4,838

Identifiable Intangible Assets
14,973

 
15,820

Other
92,846

 
83,429

 
 
 
 
Total Regulatory and Other Noncurrent Assets
658,642

 
590,918

 
 
 
 
Total Assets
$
3,740,066

 
$
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)
 
September 30,
2017
 
December 31,
2016
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
99,436

 
$
99,347

Premium on Common Stock
709,448

 
706,943

Treasury Stock (at par)
(266
)
 
(266
)
Accumulated Other Comprehensive Loss
(25,852
)
 
(27,381
)
Retained Earnings
438,584

 
510,597

 
 
 
 
Total Equity
1,221,350

 
1,289,240

 
 
 
 
Long-Term Debt
1,180,319

 
808,005

 
 
 
 
Total Capitalization
2,401,669

 
2,097,245

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
280,100

 
296,100

Current Portion of Long-Term Debt
10,909

 
231,909

Accounts Payable
208,021

 
243,669

Customer Deposits and Credit Balances
58,098

 
48,068

Environmental Remediation Costs
57,406

 
46,120

Taxes Accrued
2,467

 
2,082

Derivatives - Energy Related Liabilities
26,910

 
60,082

Derivatives - Other
798

 
681

Dividends Payable
21,677

 

Interest Accrued
6,841

 
6,231

Pension Benefits
2,463

 
2,463

Other Current Liabilities
8,480

 
15,219

 
 
 
 
Total Current Liabilities
684,170

 
952,624

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities:
 

 
 

Deferred Income Taxes - Net
335,420

 
343,549

Pension and Other Postretirement Benefits
91,708

 
95,235

Environmental Remediation Costs
120,123

 
108,893

Asset Retirement Obligations
59,206

 
59,427

Derivatives - Energy Related Liabilities
4,359

 
4,540

Derivatives - Other
10,479

 
9,349

Regulatory Liabilities
23,485

 
49,121

Other
9,447

 
10,584

 
 
 
 
Total Deferred Credits and Other Noncurrent Liabilities
654,227

 
680,698

 
 
 
 
Commitments and Contingencies  (Note 11)


 


 
 
 
 
Total Capitalization and Liabilities
$
3,740,066

 
$
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
September 30,
 
 
2017
 
2016
Operating Revenues
$
66,755

 
$
62,025

 
 
 
 
Operating Expenses:
 
 
 
Cost of Sales (Excluding depreciation)
29,499

 
26,395

Operations
23,178

 
21,360

Maintenance
4,615

 
4,150

Depreciation
13,226

 
11,735

Energy and Other Taxes
865

 
838

 
 
 
 
Total Operating Expenses
71,383

 
64,478

 
 
 
 
Operating Loss
(4,628
)
 
(2,453
)
 
 
 
 
Other Income and Expense
1,606

 
1,189

 
 
 
 
Interest Charges
(6,437
)
 
(4,058
)
 
 
 
 
Loss Before Income Taxes
(9,459
)
 
(5,322
)
 
 
 
 
Income Taxes
3,688

 
2,007

 
 
 
 
Net Loss
$
(5,771
)
 
$
(3,315
)


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



7

Table of Contents


 
 
 
 
 
Nine Months Ended
September 30,
 
 
2017
 
2016
Operating Revenues
$
346,820

 
$
318,553

 
 
 
 
Operating Expenses:
 
 
 
Cost of Sales (Excluding depreciation)
135,567

 
115,695

Operations
70,966

 
69,954

Maintenance
14,268

 
12,793

Depreciation
38,813

 
34,435

Energy and Other Taxes
3,032

 
2,425

 
 
 
 
Total Operating Expenses
262,646

 
235,302

 
 
 
 
Operating Income
84,174

 
83,251

 
 
 
 
Other Income and Expense
4,845

 
3,104

 
 
 
 
Interest Charges
(18,392
)
 
(13,397
)
 
 
 
 
Income Before Income Taxes
70,627

 
72,958

 
 
 
 
Income Taxes
(27,654
)
 
(26,812
)
 
 
 
 
Net Income
$
42,973

 
$
46,146





8

Table of Contents


SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Net Loss
$
(5,771
)
 
$
(3,315
)
 
 
 
 
Other Comprehensive Income - Net of Tax: *
 
 
 
 
 
 
 
Unrealized Gain on Available-for-Sale Securities

 
38

Unrealized Gain on Derivatives - Other
7

 
7

 
 
 
 
Other Comprehensive Income - Net of Tax *
7

 
45

 
 
 
 
Comprehensive Loss
$
(5,764
)
 
$
(3,270
)
 
 
 
 

 
 
 
 
 
Nine Months Ended
September 30,
 
2017
 
2016
Net Income
$
42,973

 
$
46,146

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

 
45

Unrealized Gain on Derivatives - Other
21

 
21

 
 
 
 
Other Comprehensive Income - Net of Tax *
21

 
66

 
 
 
 
Comprehensive Income
$
42,994

 
$
46,212

 
 
 
 
* Determined using a combined average statutory tax rate of approximately 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)

 
Nine Months Ended
September 30,
 
 
2017
 
2016
Net Cash Provided by Operating Activities
$
73,186

 
$
108,690

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Capital Expenditures
(183,875
)
 
(161,690
)
Note Receivable

 
9,919

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

Investment in Long-Term Receivables
(6,670
)
 
(8,085
)
Proceeds from Long-Term Receivables
7,468

 
7,528

 
 
 
 
Net Cash Used in Investing Activities (See Note 1)
(187,952
)
 
(152,328
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Net Repayments of Short-Term Credit Facilities
(104,300
)
 
(53,400
)
Proceeds from Issuance of Long-Term Debt
396,000

 
61,000

Principal Repayments of Long-Term Debt
(215,000
)
 
(27,000
)
Payments for Issuance of Long-Term Debt
(2,030
)
 
(7
)
Additional Investment by Shareholder
40,000

 
65,000

 
 
 
 
Net Cash Provided by Financing Activities
114,670

 
45,593

 
 
 
 
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash
(96
)
 
1,955

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)
$
1,295

 
$
9,499

 
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)
 
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
2,591,246

 
$
2,424,134

Accumulated Depreciation
(489,755
)
 
(471,222
)
 
 
 
 
Property, Plant and Equipment - Net
2,101,491

 
1,952,912

 
 
 
 
Investments:
 
 
 
Restricted Investments
891

 
32

 
 
 
 
Total Investments
891

 
32

 
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
404

 
1,359

Accounts Receivable
67,091

 
69,651

Accounts Receivable - Related Parties
1,083

 
1,355

Unbilled Revenues
6,004

 
41,754

Provision for Uncollectibles
(13,577
)
 
(12,570
)
Natural Gas in Storage, average cost
18,618

 
11,621

Materials and Supplies, average cost
890

 
914

Prepaid Taxes
11,599

 
16,428

Derivatives - Energy Related Assets
7,608

 
5,434

Other Prepayments and Current Assets
14,592

 
13,853

 
 
 
 
Total Current Assets
114,312

 
149,799

 
 
 
 
Regulatory and Other Noncurrent Assets:
 
 
 
Regulatory Assets
477,457

 
410,746

Long-Term Receivables
25,539

 
25,758

Derivatives - Energy Related Assets
58

 
373

Other
17,027

 
12,303

 
 
 
 
Total Regulatory and Other Noncurrent Assets
520,081

 
449,180

 
 
 
 
Total Assets
$
2,736,775

 
$
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)
 
 
September 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
(14,913
)
 
(14,934
)
Retained Earnings
576,253

 
533,159

 
 
 
 
Total Equity
922,931

 
839,900

 
 
 
 
Long-Term Debt
807,694

 
423,177

 
 
 
 
Total Capitalization
1,730,625

 
1,263,077

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable

 
104,300

Current Portion of Long-Term Debt
10,909

 
215,909

Accounts Payable - Commodity
31,396

 
23,815

Accounts Payable - Other
37,015

 
45,370

Accounts Payable - Related Parties
5,901

 
11,216

Derivatives - Energy Related Liabilities
4,467

 
1,372

Derivatives - Other Current
398

 
386

Customer Deposits and Credit Balances
56,149

 
45,816

Environmental Remediation Costs
57,092

 
45,018

Taxes Accrued
1,524

 
855

Pension Benefits
2,428

 
2,428

Interest Accrued
5,571

 
5,369

Other Current Liabilities
4,012

 
8,011

 
 
 
 
Total Current Liabilities
216,862

 
509,865

 
 
 
 
Regulatory and Other Noncurrent Liabilities:
 

 
 

Regulatory Liabilities
23,485

 
49,121

Deferred Income Taxes - Net
497,139

 
469,408

Environmental Remediation Costs
119,225

 
108,029

Asset Retirement Obligations
58,431

 
58,674

Pension and Other Postretirement Benefits
79,183

 
81,800

Derivatives - Energy Related Liabilities
69

 

Derivatives - Other Noncurrent
6,881

 
6,979

Other
4,875

 
4,970

 
 
 
 
Total Regulatory and Other Noncurrent Liabilities
789,288

 
778,981

 
 
 
 
Commitments and Contingencies (Note 11)
 
 
 
 
 
 
 
Total Capitalization and Liabilities
$
2,736,775

 
$
2,551,923

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


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 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) serviced residential and small commercial HVAC systems, installed small commercial HVAC systems, provided plumbing services and serviced appliances under warranty via a subcontractor arrangement as well as on a time and materials basis. On September 1, 2017, SJESP sold certain assets of its residential and small commercial HVAC and plumbing business to a third party. SJESP will receive commissions paid on service contracts from the third party on a go forward basis. This transaction did not have a material impact on the condensed 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 September 30, 2017 and 2016, and $0.8 million and $0.7 million for the nine months ended September 30, 2017 and 2016, respectively.
 
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate carrying values may not be recoverable. Such reviews are performed in accordance with ASC 360. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded within Operating Expenses on the condensed consolidated statements of income. Fair values can be determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques.

SJI recorded an impairment charge of $0.3 million during the first quarter of 2017 due to a reduction in the expected cash flows to be received from a solar generating facility. During the three months ended September 30, 2017, SJI had reason to believe that due to a significant decline in the market prices of Maryland solar renewable energy credits (SRECs), combined with an increase of operating expenses, the full carrying value of SJI’s Maryland solar facilities may not be recoverable. As a result, SJI performed an impairment test on the respective assets which led to an impairment charge of $43.9 million. These impairment charges are recorded within Operating Expenses on the condensed consolidated statements of income and are included within the on-site energy production segment. The fair values of the facilities were determined using an income approach by applying a discounted cash flow methodology to the future estimated cash flows, which were Level 3 fair value measurements and include key inputs such as forecasted revenues, operating expenses and discount rates. For the three and nine months ended September 30, 2017, SJI had impairment charges of $43.9 million and $44.2 million, respectively. No impairments were identified at SJG for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, no impairments were identified at SJI or SJG. See Note 13.

Marina’s solar energy projects rely on returns from electricity and SRECs.  A decrease in the value of electricity and SRECs impacted by market conditions and/or legislative changes may negatively impact Marina's return on its investments as well as lead to impairment of the respective assets. 

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 nine months ended September 30, 2017 or 2016. As of September 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 September 30, 2017 and December 31, 2016, SJI held 213,061 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.


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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 nine months ended September 30, 2017. Goodwill totaled $4.8 million on the condensed consolidated balance sheets of SJI as of both September 30, 2017 and December 31, 2016.

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 formed an implementation team that evaluated the impact that adoption of this guidance will have on the financial statements of SJI and SJG. This evaluation included 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 will include for periods beginning after December 15, 2017 as per the ASU. 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.


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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.

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. Consistent with the requirements of the standard, SJI and SJG will both transition to the new guidance using the modified retrospective approach.

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.


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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.

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.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU is intended to improve the financial reporting of hedging relationships so that it represents a more faithful portrayal of an entity’s risk management activities (i.e. to help financial statement users understand an entity’s risk exposures and the manner in which hedging strategies are used to manage them), as well as to further simplify the application of the hedge accounting guidance in GAAP. The standard is effective for annual periods beginning after December 15, 2018, 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.
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 nine months ended September 30, 2017 and 2016No stock appreciation rights have been issued under the plans. During the nine months ended September 30, 2017 and 2016, SJI granted 167,734and 193,670 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 nine months ended September 30, 2017 and 2016, Officers and other key employees were granted 53,058 and 58,101 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.


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Table of Contents

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.

During the nine months ended September 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 September 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
 
33,449

 
$
26.31

 
16.0
%
 
1.10
%
 
2015 - EGR, ROE, Time
 
61,357

 
$
29.47

 
N/A

 
N/A

 
2016 - TSR
 
65,544

 
$
22.53

 
18.1
%
 
1.31
%
 
2016 - CEGR, Time
 
102,616

 
$
23.52

 
N/A

 
N/A

 
2017 - TSR
 
56,644

 
$
32.17

 
20.8
%
 
1.47
%
 
2017 - CEGR, Time
 
109,107

 
$
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 nine months ended September 30, 2017 and 2016 (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
2016
 
2017
 
2016
Officers & Key Employees
$
1,087

$
781

 
$
3,274

 
$
2,396

Directors
256

210

 
767

 
630

Total Cost
1,343

991

 
4,041

 
3,026

 
 
 
 
 
 
 
Capitalized
(96
)
(77
)
 
(288
)
 
(289
)
Net Expense
$
1,247

$
914

 
$
3,753

 
$
2,737


As of September 30, 2017, 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 1.8 years.


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The following table summarizes information regarding restricted stock award activity for SJI during the nine months ended September 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
167,734

 
30,394

 
$
33.24

  Cancelled/Forfeited
(3,891
)
 

 
$
28.70

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

Nonvested Shares Outstanding, September 30, 2017
428,717

 
30,394

 
$
28.53


During the nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months of 2017 and 2016, SJI made net investments in unconsolidated affiliates of $22.4 million and $2.2 million, respectively.  As of both September 30, 2017 and December 31, 2016, the outstanding balance of Notes Receivable – Affiliate was $15.7 million. As of September 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 $2.0 million of these notes are unsecured and accrue interest at variable rates.
    

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SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of September 30, 2017, SJI had a net asset of approximately $54.1 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 September 30, 2017, is limited to its combined equity contributions and the Notes Receivable-Affiliate in the aggregate amount of $69.8 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 (see Note 11).

Summarized operating results of the discontinued operations for the three and nine months ended September 30, 2017 and 2016, were (in thousands, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Loss before Income Taxes:
 
 
 
 
 
 
 
Sand Mining
$
(17
)
 
$
(20
)
 
$
(49
)
 
$
(184
)
Fuel Oil
(53
)
 
(24
)
 
(139
)
 
(86
)
Income Tax Benefits
25

 
15

 
66

 
94

Loss from Discontinued Operations — Net
$
(45
)
 
$
(29
)
 
$
(122
)
 
$
(176
)
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
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Operating Revenues/Affiliates:
 
 
 
 
 
 
 
SJRG
$
1,210

 
$
977

 
$
3,421

 
$
5,399

Marina
72

 
65

 
219

 
229

Other
21

 
21

 
63

 
63

Total Operating Revenue/Affiliates
$
1,303

 
$
1,063

 
$
3,703

 
$
5,691



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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
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Costs of Sales/Affiliates (Excluding depreciation)
 
 
 
 
 
 
 
SJRG
$
1,453

 
$
490

 
$
12,399

 
$
9,993

 
 
 
 
 
 
 
 
Operations Expense/Affiliates:
 
 
 
 
 
 
 
SJI
$
4,316

 
$
4,632

 
$
15,354

 
$
14,502

Millennium
717

 
703

 
2,137

 
2,098

Other
(173
)
 
(48
)
 
(253
)
 
(154
)
Total Operations Expense/Affiliates
$
4,860

 
$
5,287

 
$
17,238

 
$
16,446


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
71,025

Ending Balance, September 30
79,549,080


The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $2.5 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 September 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 156,673 and 94,997 for the three and nine months ended September 30, 2016, respectively. For the three and nine months ended September 30, 2017, incremental shares of 138,346 and 137,003 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 nine months ended September 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.


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5.
FINANCIAL INSTRUMENTS:

RESTRICTED INVESTMENTS — Marina is required to maintain escrow accounts related to ongoing capital projects. As of September 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 September 30, 2017 and December 31, 2016, SJI's balances in these accounts totaled $5.3 million and $11.7 million, respectively, held by the counterparty, which is recorded in Restricted Investments on the condensed consolidated balance sheets. As of September 30, 2017, SJG's balance held by the counterparty totaled $0.9 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 September 30, 2017 and December 31, 2016, which would be included in Level 1 of the fair value hierarchy (see Note 13).


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 September 30, 2017
Balance Sheet Line Item
 
SJI
SJG
Cash and Cash Equivalents
 
$
13,681

$
404

Restricted Investments
 
5,645

891

   Total cash, cash equivalents and restricted cash shown in the statement of cash flows
 
$
19,326

$
1,295


 
 
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.


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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 September 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.

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 $7.4 million and $9.5 million as of September 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 September 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 September 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 September 30, 2017, SJI had approximately $8.8 million, or 17.7%, 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 September 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 September 30, 2017 and December 31, 2016, were $1,161.6 million and $1,080.8 million, respectively.  The carrying amounts of SJI's long-term debt, including current maturities, as of September 30, 2017 and December 31, 2016, were $1,191.2 million and $1,039.9 million, respectively. SJI's carrying amounts as of September 30, 2017 and December 31, 2016 are net of unamortized debt issuance costs of $9.9 million and $7.6 million, respectively.
The estimated fair values of SJG's long-term debt, including current maturities, as of September 30, 2017 and December 31, 2016, were $833.2 million and $673.1 million, respectively. The carrying amount of SJG's long-term debt, including current maturities, as of September 30, 2017 and December 31, 2016, was $818.6 million and $639.1 million, respectively. The carrying amounts as of September 30, 2017 and December 31, 2016 are net of unamortized debt issuance costs of $7.5 million and $6.0 million, respectively.

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OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's and SJG's other financial instruments approximate their fair values at September 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 serviced residential and small commercial HVAC systems, installed small commercial HVAC systems, provided plumbing services and serviced appliances under warranty via a subcontractor arrangement as well as on a time and materials basis. On September 1, 2017, SJESP sold certain assets of its residential and small commercial HVAC and plumbing business to a third party. SJESP will receive commissions paid on service contracts from the third party on a go forward basis.
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.
 
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
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Operating Revenues:
 
 
 
 
 
 
 
Gas Utility Operations
$
66,755

 
$
62,025

 
$
346,820

 
$
318,553

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
70,741

 
67,926

 
274,667

 
131,691

Retail Gas and Other Operations
18,156

 
11,865

 
76,793

 
63,903

Retail Electric Operations
45,316

 
51,585

 
136,893

 
134,141

     Subtotal Energy Group
134,213

 
131,376

 
488,353

 
329,735

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
29,942

 
31,034

 
74,689

 
70,398

Appliance Service Operations
1,552

 
1,812

 
5,190

 
5,750

Subtotal Energy Services
31,494

 
32,846

 
79,879

 
76,148

Corporate and Services
9,577

 
7,059

 
32,186

 
24,352

Subtotal
242,039

 
233,306

 
947,238

 
748,788

Intersegment Sales
(14,912
)
 
(14,224
)
 
(49,908
)
 
(42,269
)
Total Operating Revenues
$
227,127

 
$
219,082

 
$
897,330

 
$
706,519


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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Operating (Loss) Income:
 

 
 

 
 
 
 
Gas Utility Operations
$
(4,628
)
 
$
(2,453
)
 
$
84,174

 
$
83,251

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
(11,346
)
 
8,014

 
(41,163
)
 
15,109

Retail Gas and Other Operations
(574
)
 
(2,520
)
 
(3,801
)
 
2,971

Retail Electric Operations
(344
)
 
1,223

 
2,117

 
4,085

     Subtotal Energy Group
(12,264
)
 
6,717

 
(42,847
)
 
22,165

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
(38,351
)
 
8,077

 
(35,216
)
 
12,549

Appliance Service Operations
(392
)
 
277

 
(398
)
 
579

  Subtotal Energy Services
(38,743
)
 
8,354

 
(35,614
)
 
13,128

Corporate and Services
380

 
(28
)
 
2,154

 
313

Total Operating (Loss) Income
$
(55,255
)
 
$
12,590

 
$
7,867

 
$
118,857


 
 
 
 
 
 
 
Depreciation and Amortization:
 

 
 

 
 
 
 
Gas Utility Operations
$
17,751

 
$
15,954

 
$
52,559

 
$
47,368

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
31

 
39

 
92

 
447

Retail Gas and Other Operations
80

 
85

 
247

 
253

     Subtotal Energy Group
111

 
124

 
339

 
700

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
11,731

 
11,274

 
34,998

 
32,088

Appliance Service Operations
43

 
73

 
153

 
248

  Subtotal Energy Services
11,774

 
11,347

 
35,151

 
32,336

Corporate and Services
448

 
373

 
1,267

 
856

Total Depreciation and Amortization
$
30,084

 
$
27,798

 
$
89,316

 
$
81,260


 
 
 
 
 
 
 
Interest Charges:
 

 
 

 
 
 
 
Gas Utility Operations
$
6,437

 
$
4,058

 
$
18,392

 
$
13,397

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
(162
)
 

 
3,031

 
32

Retail Gas and Other Operations
55

 
86

 
204

 
296

     Subtotal Energy Group
(107
)
 
86

 
3,235

 
328

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
3,549

 
3,032

 
13,240

 
9,936

Corporate and Services
5,055

 
2,896

 
15,237

 
9,206

Subtotal
14,934

 
10,072

 
50,104